Under duress, supermarkets discuss using their warehouses and fleets of refrigerated trucks to provide competitor The Warehouse a wider and cheaper range of fresh and frozen food
The Warehouse Group is expressing frustration at slow negotiations with the big supermarket chains – not the monopoly-busting grocery move consumer groups have been breathlessly awaiting in this week's financial results.
The Warehouse has made much of its interest to make a re-entry into the grocery space in the vein of an Aldi or Lidl, offering a restricted range of good value essentials.
The wider group, which also includes Noel Leeming, The Market, Warehouse Stationery and Torpedo 7, recorded total income just shy of $3.3 billion.
And, presumably following its viral $4 butter and other promotions earlier in the year, grocery sales at the NZX-listed retail group’s namesake rose 40 percent in the 12 months to July 31.
The loss-leading butter stunt (labelled as part of a marketing investment in grocery in its annual report) was reminiscent of the company’s stab at the grocery space 15 years ago, which it had hoped would lead to a wider uplift in sales.
The official line at the time was grocery had failed to bring a 10 percent hike in general merchandise. In reality, Foodstuffs and Countdown’s former owner Progressive each bought up a 10 percent stake in the business (which have since been divested) and exercised their voting power in line with their interests.
"The Government’s indication is if they don’t do so voluntarily, then they will be belted. I think that’s in the back of their mind.” – Nick Grayston, The Warehouse
In a statement alongside the result yesterday, chief executive Nick Grayston said The Warehouse would continue to expand its value range and offer grocery essentials at “NZ’s best prices”.
“We continue to be hopeful that the Government’s ongoing actions to make grocery retailing a more level playing field, and access to equitable prices, will enable us to do more. Equal access to supply and distribution continues to be a challenge that is not yet solved.”
At the behest of Government, Foodstuffs (Four Square, New World, Pak'nSave) and Woolworths (Countdown, Super Value, Fresh Choice) have both made moves to break down their duopoly and open up their wholesale operations to competing retailers.
Abnormal circumstances
Newsroom asked why the annual report and investor presentation had little in the way of an update on supply agreements.
Grayston said, "I'd love to be able to tell you that we've reached an agreement with either or both members of the duopoly to get access to the same rates as their supermarket products and we had use of their supply chain. Unfortunately, I cannot tell you that. We are in discussions and negotiation with them per the Government's intent.”
"The grocery sector needs to change, so that competing retailers – whether they are independent dairies, smaller chains, or a new entrant – can offer a wider selection of products at competitive prices." – David Clark, Commerce Minister
Grayston seemed to think pressure was key: “We’re hopeful that the Government’s code of conduct and the appointment of a grocery commissioner will have the desired effect and make them want to do this.
“The Government has said it's trying to get legislation through before Christmas. I think that's going to turn up the pressure, we’re ready to go, we’re waiting for it.”
He recognised the difficult nature of what was trying to be achieved.
“Clearly it’s an odd thing for them to be doing because talking to their competitors about supply them because the Government is telling them to do so, and odd for us to be asking as well, so we recognise it is an abnormal circumstance. However, they know that they are required to and the Government’s indication is if they don’t do so voluntarily, then they will be belted.
“I think that’s in the back of their mind.”
Commerce Minister David Clark said if the major players did not deliver what would be expected in a competitive wholesale market, the Commerce Commission would be able to use powerful new tools to make them do so.
"With each retailer, there will be different challenges to work through including the size of the retailer, reaching agreement on the pricing, range and term details with both our suppliers and interested retailers, and also ensuring our distribution centres are set up to handle the volume that wholesale will generate.” – Steve Sexton, Woolworths NZ
"The grocery sector needs to change, so that competing retailers – whether they are independent dairies, smaller chains, or a new entrant – can offer a wider selection of products at competitive prices," Clark said.
"Supermarkets are well advised to lock in good-faith wholesale arrangements on their own terms, or we will have no problem stepping in to make it happen."
Woolworths NZ grocery wholesale and local director Steve Sexton said the company had two “really positive” conversations with The Warehouse Group. “These are ongoing, but there are understandably quite a number of things we need to work through ahead of any formal Wholesale agreement being reached.
“We don’t have wholesale as part of our existing business model, so we’re really starting from scratch. With each retailer, there will be different challenges to work through including the size of the retailer, reaching agreement on the pricing, range and term details with both our suppliers and interested retailers, and also ensuring our distribution centres are set up to handle the volume that wholesale will generate,” Sexton said.
“We’re really committed to setting up the systems, processes and partnerships required to support wholesale supply and we’ve already been able to successfully establish an agreement with Huckleberry. We’re looking forward to continuing to chat to The Warehouse Group and other retailers over the coming months.”
Infrastructure
Other constraints to grocery competition identified by Government, including land availability and restrictive property covenants, are not as applicable to The Warehouse as they would be to another new entrant, as it has an existing network of 89 stores, all of which already contain a grocery element.
According to Grayston, the logistics infrastructure to enable grocery is also on the table in negotiations.
“There are two sides to it. The first is the access to not just the commodity prices and products at prices commensurate with the duopoly, but there’s also the access to their frozen and fresh supply chain. So that is part of what we are looking for.”
He said The Warehouse could potentially build up a network for refrigerated delivery, but it was unlikely it would have the demand for that to stack up.
The first Costco Wholesale opened in New Zealand this week, selling bulk groceries for something like 30 percent cheaper than the supermarkets marking the entry of another grocery competitor in New Zealand, albeit with just one location in north-west Auckland.
Earlier this month Costco was granted a five-year exemption from supplying other grocery retailers
Speaking beyond just grocery, Grayston said it was surprised at how long the American giant had taken to open in New Zealand, and that The Warehouse had plenty of time to prepare for it and its scale would be difficult to compete with.
He said the business welcomed competition, but that it wasn’t being complacent. “You write off a maybe $200 billion US retailer at your peril.”
