Australian Competition and Consumer Commission chairman Rod Sims says Woolworths has one of the highest profit margins of any large supermarket chain in the world, and while the chain’s plan to cut grocery prices should be a win for shoppers, with the regulator to use the extra clout of the new code of conduct to help protect suppliers.

Mr Sims says the high profit margins of Woolworths and its rival Coles were largely a result of a “very cosy duopoly” which expanded for decades, but which is now being reined in somewhat by the success of the German discount chain Aldi, with its core focus on dry groceries.

He says compared with overseas operators, the Australian duo have high profit margins and while the Woolworths pledge to cut prices is likely to hit shareholders in the company, it will be a plus for overall competition and for supermarket shoppers.

“They have very high margins businesses compared with overseas,” Mr Sims says.

ACCC chairman Rod Sims says Woolworths has very high profit margins but suppliers should be protected from the price cuts being planned.The ACCC will be closely monitoring the market, armed with a new food industry code of conduct, enabling it to do audits and demand documents and which has been drawn up with the support of Coles and Woolworths.

But large food suppliers in the $88 billion food and grocery market in Australia are nervous about the impact on them of Woolworths’ plan to find $500 million of cost savings from its own business and use it to fund price cuts.

Terry O’Brien, the chairman of the Australian Food and Grocery Council, the umbrella body for more than 100 food and grocery manufacturers and suppliers including Arnott’s Biscuits, George Weston Foods, Kellogg Australia, McCain Foods, Nestle Australia, and Unilever Australasia, says suppliers are concerned about the impact on overall profits.

“It means there’s less profit in the profit pool,” Mr O”Brien says. “To me, it just shifts profits from one store to another. Everyone just ends up with a lower profit.”

“It just puts everyone on a downward spiral”.

But Mr O’Brien, who is the chief executive of Simplot Australia, a food maker with brands including Edgell, Birds Eye and John West, says food manufacturers are pleased that Woolworths has promised to fund the price cuts by pulling $500 million in costs out of its own business.

“That’s a bit of a relief,” he says.

Coles may fight back

The likelihood of a retaliation by Coles, which has been been highly successful in gaining market share and momentum in supermarkets through its “Down Down” supermarket marketing, is high. This has led to fears of a full-blown price war.

“I’d prefer it wasn’t happening,” Mr O’Brien says. Simplot Australia has annual revenues of $1.24 billion and is one of the country’s biggest suppliers to both Woolworths and Coles.

Mr Sims says there will always be “robust” negotiations between the big chains and their suppliers, but it will be watching carefully for instances where the mark is overstepped.

“We don’t mind robust negotiations. Our problem is when there’s arbitrary demands made mid-contract and threats made,” he says.

The two big chains had become too powerful and a duopoly was able to form over the past few decades. But the expansion of Aldi has gained it more critical mass and started to make a difference.

“We’ve had a very costly duopoly until recent years,” Mr Sims says.

Late last year, Coles agreed to settle an unconscionable conduct court action brought by the ACCC. Coles managing director John Durkan admitted Coles had “crossed the line”, with five suppliers not treated with transparency and respect in relation to Coles demanding payments to help reach profit targets.

Woolworths chief executive Grant O’Brien has promised that his company will act in a “rational and disciplined” way and says while Woolworths is competitive in the supermarket sector, it needs to be cheaper.

Woolworths says the $500 million in cost savings will come from savings in supply chain, information technology, logistics and store support services, and not from suppliers’ profits.

The company, already under pressure because of ballooning losses of $103 million at its struggling hardware operations led by Masters in the first half of 2014-15, was sparked into action by a sharp drop in sales growth at the supermarket operations in the December quarter of 2014.

Woolworths’ food and liquor sales growth on a like-for-like basis, which strips out the impact of new store openings, slumped to 1.2 per cent in the December quarter, compared with 4 per cent at rival Coles.

Profit margins in Woolworths’ food, liquor and petrol operations reached a record 7.43 per cent on an earnings before interest and tax basis in the first half of 2014-15, compared with 7.02 per cent a year earlier.

Extracted in full from the Sydney Morning Herald.