Woolworths looks to Sainsbury’s for inspiration

It appears Australia’s largest retailer, Woolworths (ASX: WOW), may be drawing some of its inspiration from one of the UK’s largest supermarket chains Sainsbury’s.

According to report on Woolworths has been progressing plans to launch a label known as “W Local”, partially in response to the increasingly hostile reception both Woolies and Coles, owned by Wesfarmers (ASX: WES), have been receiving recently to what many have viewed as a heavy-handed approach to domestic food suppliers.

Having recently announced a deal with Coca-Cola Amatil’s (ASX: CCL) fruit and vegetable processing business, SPC Ardmona, to supply Woolworths with all its private label canned deciduous fruit from local sources, Woolworths appears to be aiming to capitalise on its perceived close relationship with farmers and local food suppliers by creating the option of branding goods with the “W Local” tag.

In the late 90s Sainsbury’s undertook a similar ‘local’ strategy by branding its convenience stores and petrol stations as ‘Sainsbury’s Local.’ Looking to overseas operations for inspiration is common amongst retailers and in some cases it also leads to co-operation. Woolworths’ decision to create the Masters chain and move into the home improvement space to take on Bunnings has been done in partnership with US-based giant Lowe’s.

The recent election of a Coalition government that has links to the farming community could create renewed pressure for supermarket owners. The National Party will no doubt be pushing for a better deal for farmers and domestic food manufacturers and a limiting of the power to squeeze margins that the supermarkets wield. It looks like Woolies and Coles are on the front foot in terms of improving their relationships with farmers, particularly with the dairy industry, and “W Local” is another strategic move.

Foolish takeaway

The food producers and food retailing industry are at interesting junctures. The recent takeover proposal by Bega Cheese (ASX: BGA) for Warrnambool Cheese & Butter Factory (ASX: WCB) not only makes sense from the potential synergies it could create but it also bulks the company up and gives it stronger bargaining power against the supermarket chains.

Companies with strong bargaining power are more likely to be solid dividend payers. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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