Suppliers concerned as Foodstuffs presses ahead with centralisation

Foodstuffs North Island will press ahead with a contentious plan to further centralise the process by which it buys and decides the range of products it stocks on its supermarket shelves.

In April, the heavyweight grocer will begin to centralise buying and ranging for all three of its grocery store banners (North Island New World, Pak’nSave and Four Square stores), signalling one of the retailer’s biggest moves yet in its push for greater coordination and efficiency.

In a letter emailed to suppliers last month, Foodstuffs NI’s general manager, David Stewart, said the company intended to begin the process of greater standardisation in the frozen food department (excluding lines within butchery and seafood).

Stewart’s letter said Foodstuffs would begin with the single department and “learn and adjust as we go”. The company is expected to extend the centralised model to more categories thereafter.

The change will mark the first time Foodstuffs has taken such a central role in the business operations of its individual supermarket banners, and it comes at a time of heightened scrutiny of the market power wielded by New Zealand’s large supermarket players. The Commerce Commission is currently undertaking a market study of the grocery landscape and is due to report its findings on the state of competition in November.

Wholesale suppliers to Foodstuffs said they were concerned the more centralised model would further diminish their negotiating power with the retailer.

Katherine Rich, chief executive of the New Zealand Food & Grocery Council, a supplier industry group, said Foodstuffs “aims to increase retail margins and reduce choice for consumers”.

“It will increase market power and reduce competition even further.”

Historically, suppliers have had considerable scope for pitching their products to individual Foodstuffs’ stores. However early last year, Foodstuffs’ New World and Four Square banners brought in a more centralised model that covered purchasing, promotions and ranging.That process is ongoing.

Foodstuffs CEO Chris Quin described the company’s changes as “a customer and insight business transformation to become one of the most customer-driven retailers in the world”.

Foodstuffs was working with global retail consultancy Dunnhumby to analyse large quantities of customer data and, Quin said, it was adjusting its commercial decisions -including what products remain on its shelves to how they are displayed and promoted -against the patterns that have emerged.

He said the changes would simplify business and lower costs for suppliers, and, “with less complexity on shelf, remaining suppliers can strengthen their market share and get the best possible return”.

Some suppliers involved in New World’s centralising process said they believed they were being asked to lower the price at which they sell their products to Foodstuffs under threat of reduced ranging of their products or even deletion from store shelves. They said that effect would be magnified when centralising was extended across all three of Foodstuffs’ banners.

Suppliers who spoke to the NZ Herald were granted anonymity; they fear speaking up will invite repercussions from the grocer.

One supplier described Foodstuffs’ transformation as a “seismic shift in the relationship between suppliers and Foodstuffs” that “greatly boosts Foodstuffs’ margins, reduces SKU count, reduces store level management costs, [and] cynically monetises range rationalisation and deletions”.

Under ordinary competitive circumstances, a retailer adding and deleting products from its shelves and renegotiating prices is standard business. However, just two big players account for roughly three quarters of New Zealand’s grocery retail sales: Foodstuffs NI and Foodstuffs South Island (which co-operate together) and Woolworths New Zealand (previously Progressive Enterprises).

Foodstuffs NI is an owner co-operative, jointly owned by otherwise independent stores across the Foodstuffs network. Foodstuffs SI has not been part of the centralising process.

Rich said New Zealand’s duopoly (and duopsony) grocery retail market was the most concentrated in the world and Foodstuffs’ latest move “gives even greater [market] control to one of the two grocery teams”.

In an interview with the Herald last month, Quin maintained that independent store ownership across the Foodstuffs’ network meant there was competition between stores. However, to the degree that competition exists between Foodstuffs’ stores it is diminished by centralised business operations and co-operation.

In a paper published last month by the Commerce Commission, which laid out the scope of the current market study, the body said it would pay particular attention to the power dynamic between grocery retailers and their suppliers.

“Major grocery retailers’ and suppliers’ relative bargaining power, and the impact this has on outcomes for customers, is likely to be a particular area of focus,” it said.

The Commission’s recommendations could range from an acceptance of the status quo to legal prosecution; but many observers expect they will, at least, include an industry code of conduct for grocery retailers and suppliers. Australia adopted a code of conduct to govern the sector in 2015; it is enforced by the Australian Competition and Consumer Commission.

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