Former Kellogg chief executive Jean-Yves Heude has warned suppliers not to rely on the grocery industry code of conduct to protect them from tough retailer tactics as the battle for market share between Woolworths, Coles and Aldi intensifies.
The code of conduct, which was tabled in parliament last week, is aimed at curbing unfair treatment of suppliers by the major grocery retailers and wholesalers by laying down rules on supply agreements, payments, intellectual property and dispute resolution.
Small Business Minister Bruce Billson has heralded the code as “an important step to provide fairness and clarity in the grocery industry” and Australian Food & Grocery Council chief Gary Dawson hopes it will spur behavioural change in the $88 billion grocery sector after accusations of unconscionable conduct, unfair tactics and misuse of market power in recent years.
However, Mr Heude, who ran Kellogg’s Australian and New Zealand operations for five years, says the code of conduct is “not necessarily the answer” for suppliers under pressure from Coles and Woolworths to cut prices, fund deeper and more frequent promotions, fill profit gaps and fund supply chain changes.
“They shouldn’t rely on this to help them,” said Mr Heude, who now advises food and grocery suppliers. “Coles and Woolworths will use what ever levers they can to deliver their financial targets.”
Mr Heude, a 25-year veteran of the European grocery market, says suppliers need to adapt to a shift in the market from a “win win” model to a European style “balance of power” model, where the major chains exploit their market power to secure better deals from suppliers.
The only way suppliers can level the playing field, he says, is by ensuring their products are unique and relevant to consumers and to adapt their trading strategy to this model.
“If your product is unique and relevant then the retailer needs you as much as you need them,” he said. “The minute your product becomes a commodity you’re in trouble, price is the only differentiator and on price they will crush you.”
“Uniqueness drives loyalty and if consumers are loyal to your brand the retailer can’t touch you – loyal consumers will go to another store if they cannot find their preferred product, then the retailer runs the risk of losing the entire basket,” said Mr Heude.
“If you are small with very loyal consumers then you have the balance of power.”
The Australian Competition and Consumer Commission has promised to use its new powers under the code to enforce its provisions and take legal action for breaches of the code by retailers who sign up.
However, Mr Heude believes that retailers still have scope to demand lower prices and extra discounts and payments from suppliers without crossing the line of unconscionable conduct or breaching the code, as long as they have the right to buy the products they want at the price they want – “which is obviously the case in a liberal economy like Australia.”
“Suppliers need to understand what they are facing,” he added. “Don’t wait for the code to save you, but adapt your business to the balance of power model now.”
Extracted in full from the Sydney Morning Herald.