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Goodman Fielder set to benefit from latest agreement with Coles and Woolworths

As reported here, the Australian Food and Grocery Council (AFGC) has reached agreement with Australia’s two largest supermarket retailers, Coles, which is owned by Wesfarmers (ASX: WES), and Woolworths (ASX: WOW), on the terms of a food and grocery code of conduct.

The code is expected to improve the trading relationship between retailers and suppliers and should be a positive for food suppliers, including the $1.4 billion Goodman Fielder (ASX: GFF). Goodman Fielder owns many of Australia’s best known brands across a wide range of product groups including bread, biscuits, sauces, small goods and spreads. The firm has found its business under increasing pressure over the past few years, as it has dealt with increased competition from private label goods, price deflation and increasingly onerous demands from retailers.

According to a report in the Australian Financial Review, the CEO of the AFGC stated that “the new regime would help limit the $4 billion suppliers handed over to retailers each year in the form of rebates, discounts and shelf and listing fees.” Goodman Fielder shareholders will no doubt be hoping some of that $4 billion finds its way back into their pockets.

Other listed food manufacturers that also stand to benefit from the new code include frozen food producer Patties Foods (ASX: PFL) and health food producer Freedom Foods (ASX: FNP). Indeed, given their much smaller size, they may in fact benefit even more from the code than large suppliers such as Goodman Fielder or Coca-Cola Amatil (ASX: CCL), which should in theory enjoy a stronger bargaining position.

Foolish takeaway

Historically, branded food manufacturers have often been profitable businesses and a good sector for investors to search for opportunities. Indeed it’s one of the reasons billionaire investor Warren Buffett has owned a number of these types of businesses over the years. Branded food businesses owned by Buffett at different stages of his career include The Coca-Cola Company, Kraft, See’s Candies, Wrigley’s and PepsiCo.

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Motley Fool contributor Tim McArthur owns shares in Goodman Fielder.

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