Shelf life to shelf rife: Why private supermarket brands could kill suppliers

Friday, 8 October 2021

Commerce Commission chairwoman Anna Rawlings presents the commission's draft report into the grocery sector in July.

It was 1937 and on the wooden shelves of Four Squares an inconspicuous tin of Pam’s baking powder heralded the birth of a new age of private labelled supermarket brands.

Originally designed to be a low-cost consumer option that delivered higher margins to big retailers, data undertaken on behalf of Woolworths NZ suggests 15 per cent of edible goods and 10 per cent non-edible goods now have a private supermarket label.

With just two main players in the industry under the duopoly of Woolworths NZ (Countdown) or Foodstuffs (New World and Pak ‘n Save) banners suppliers have little choice with private labels offering them another route in a competitor starved market.

But recent reports indicate labels consumers like to think deliver a bargain like Essentials and Value, might well be creating a longer term headache that costs our export economy and our back pocket.

* An end to pain at the check-out?

* Supermarkets face real threat of a break-up if they back regulator into a corner

A culture of fear

Two women have been summonsed to court in relation to an assault at a Christchurch supermarket.

For 20 years food and beverage manufacturer Kelvin (not his real name) has been at the coal face of private label supermarket politics.

Intimidated by the fear of being black listed by the duopoly, Kelvin could not afford to publicly reveal anything that may personally identify him including the name of his business.

And he’s not alone.

It’s a state of play that has held many unhappy supermarket suppliers in check until a Commerce Commission draft report unleashed their previously suppressed voices.

Kelvin believes the “traditional” role of private labels has changed.

“It used to be there to keep the brands honest and to keep costs down.”

But supermarkets have spotted the opportunities to cash in on their labels, causing a slow-down in new products to market, he claims.

“It’s compromising launching new products because they are just putting them ahead of the manufacturers, so we will stifle innovation and end up with less choice.”

What Kelvin revealed to Stuff contradicted the idea of private labels being a budget option for shoppers. Instead, he says he knows of suppliers who have offered branded products to supermarkets at a lower retail price than the current private label product only to be turned away because it would “embarrass” the retailer.

But more alarming according to Kelvin and backed up by a recent Food and Grocery Council report was the effect the duopoly’s private labels were having on innovation.

Suppliers have told Kelvin stories of doing the market research and innovation on an existing or new product, only to have it snaffled by a supermarket for their private label. In effect, he alleges, the intellectual property has been paid for by a supplier but utilised for profit by the supermarket.

“It lowers the incentive to innovate.”

Kelvin said suppliers have also shared with him their frustration of paying for research which gave important insights from consumers, only to have a supermarket private label demand they share the findings with no guarantees it would lead to the retailer picking up the product.

“And if they don’t share, the supermarket has said they will not let the business supply them, so they end up getting arm wrestled for information.”

The alleged bullying tactics has led to many of his suppliers shying away from supplying private labels unless they have to for economic survival, he says.

The problem has serious implications for the New Zealand economy, he says, because businesses that may have expanded and became exporters have no incentive to innovate.

A grocery code of conduct needs to be implemented immediately but that alone will not solve the issue, he warns.

“I do think having two supermarkets is very limiting, and we should do what we can to create a third competitor.”

Commerce Minister David Clark says Kiwis aren’t getting a fair deal from their supermarkets.

Duopoly power

Kelvin and other suppliers are not alone in wanting to see radical change to the duopoly supermarket model.

The recent comprehensive draft Commerce Commission market study into the retail and grocery sector found many suppliers have few options and were reliant on large grocery retailers to sell their products.

Limited competition created an imbalance in bargaining power and meant large grocery retailers could use buying power to shift costs and risks onto suppliers, insist on uncertain terms of supply and limit suppliers dealings with other grocery retailers.

“This includes the threat of delisting their products from supermarket shelves if a supplier does not agree.”

Ultimately the lack of competition could reduce suppliers’ incentives to invest and innovate and lead to lower quality goods and reduced choice being available to consumers.

The study looked at the impact private label products were having on the market and said concerns were raised about retailers promoting their private labels in preference to supplier brands.

The supermarket labels also lowered consumer awareness of suppliers’ brands which in turn reduced the incentive to invest and innovate.

Suppliers also reported retailers were leveraging information obtained through private label tenders when negotiating with suppliers.

Overall the report found it was difficult to predict the impact of private label products, but it noted some retailers appeared to be placing greater emphasis on their own labels through consolidation of the range of grocery products they stock.

Battle lines

Food and Grocery council boss Katherine Rich doesn’t pull any punches when it comes to advocating for suppliers.

Rich has been vocal about supermarket intimidation tactics and has set her sights on pushing through a grocery code of conduct.

A recent report on private labels commissioned by the council found use of the labels could alter the balance of bargaining power between retailers and suppliers and were highly likely to have a net negative long-term effect for consumers.

Food and Grocery Council chief executive Katherine Rich – was called “perky” by the MC after delivering a major business speech

The report states mechanisms were required to effectively address buyer power abuse and to address strategic barriers to entry, including restrictions on access to sites that may be suitable for supermarkets and retailers acting to restrict rivals’ access to suppliers’ products.

“A mandatory code of conduct that is overseen, monitored, and enforced by an independent body is necessary to reduce the harm that results from high retail market concentration.”

Rich says the use of pirate labels has changed as the power of supermarkets have increased.

“There are certainly benefits … but it’s not all rosy.”

Rich has heard of cases where suppliers have developed a new innovation and established the market only to have the supermarket demand the product for their private label.

“The supplier thinks they have no choice and this has been particularly noticeable in fresh produce.”

Effectively the supermarket receives higher price margins because the supplier bears the front cost of the products' investment.

“First hand I’ve heard vegetable producers say why bother? There’s actually no incentive to develop new and interesting things.”

Some suppliers were leaving the market because of the tactics supermarkets were using with private labels.

“Particularly with the reduction of choice that is happening in New World. When you are reducing a category from 12 options down to four, other suppliers fall off the shelf.”

A code of conduct would set out clear rules about business behaviour, give certainty in contracts and how to deal with private label products to ensure sellers' intellectual property (IP) could not be “swiped”, she said.

“Supermarkets will never ask the supplier to hand over their IP but like a lot of things in the industry asks are never written down and are implied and delivered as veiled threats.”

Long term the industry needed more retail competitors, Rich believed, saying that could be achieved by separating supermarket chains and buying groups.

The Government could also rule out supermarkets using covenants to buy land before on selling with a restriction it could not be sold to an opposing retailer, she said.

Getting access to goods at wholesale prices is vital to allow new operators to compete.

“Some people will say why do you need special rules for the grocery industry. I say it’s because extreme power happens behind closed doors, and it’s not written down.”

Overseas success

Initially the United Kingdom introduced a voluntary code in 2002 but found it made no difference.

Eight years later a legally binding code was introduced along with an adjudicator, enabling supermarkets to be fined up to 1 per cent of turnover.

First adjudicator Christine Tacon found a collaborative approach with retailers helped decrease negative behaviours substantially.

Through continuous engagement with suppliers and with survey input she was able to share with retailers what suppliers were experiencing, and explain how those issues could breach the code.

Tacon found front footing problems was hugely successful. In seven-and-a-half years she conducted only two investigations which cost Tesco and Co-op almost $2 million in adjudicator costs.

Neither led to a fine, but the costs involved in getting to that point proved an incentive to supermarkets to treat suppliers fairly.

Tacon believes if New Zealand had a code and a regulator it would be effective.

“The United Kingdom code doesn’t cover price nor fairness in the supply chain, but it does prohibit many practices that are unfair.”

The code has enabled suppliers to have confidence in placing a large share of their business with one retailer and be confident that they couldn’t be delisted without reasonable notice,

It also assured them they would be paid on time, she said.

Closer to home, Australia has had limited success with the introduction of their voluntary Food and Grocery Code.

Professor Graeme Samuel was purposed with investigating if the code had made a positive contribution to improving the relationship between retailers and suppliers three years after its inception in 2015.

Up to 15 per cent of all supermarket goods are thought to be private labels.

“The broad industry feedback was that the major retailers were treating their suppliers much better now under the Grocery Code.”

Samuel said it helped drive cultural change in supermarkets and had been effective in addressing harmful behaviours that had been reported by suppliers in the past.

However, there still remained room for improvement, he said.

The future

Groceries remain a significant expense for most households with $22 billion spent at supermarket and grocery stores last year, with private labels making up a significant portion of that spend.

Supermarkets argue the development and supply of private label products enhance competition at the supplier level.

In a response to the Commerce Commission draft report Foodstuffs South Island said supply of private label products was an important way in which they could respond to the market power of major global suppliers in items like carbonated beverages.

Foodstuffs South Island said it was not in supermarkets’ interests to damage branded suppliers.

It claimed branded suppliers in relevant categories insisted on promotional pricing being passed on to the consumer in the form of lower retail pricing as opposed to being retained by the supermarket to promote their own private label products.

But it remains clear that times will be changing for the duopoly with Commerce Minister David Clark stating Kiwis were not getting a fair deal.

For Katherine Rich that change can’t come soon enough.

“At the moment the industry is so vertically integrated… Supplier’s have no choice but to be a price taker.”