Suppliers rate Aldi above Woolworths and Coles
Suppliers have said they prefer dealing with Aldi over Coles and Woolworths. Photo: Peter Braig
Suppliers producing groceries ranging from fresh fruit and vegetables to household products have spoken out against Australia's two dominant supermarket chains, Woolworths and Coles, saying they prefer dealing with German-owned rival Aldi.
Businessday has revealed that Woolworths produced a dossier that claims Aldi's arrival in Australia has led to a rise in its private label products and a tough competitive environment for its business.
According to Woolworths, the dossier was produced "in response to the issues raised last year around store approvals and market caps" and "refers to the broader debate around regulating store approvals, prices, range and market share".
Several suppliers have spoken out about their experience supplying Australian supermarkets, but only on the condition of anonymity, fearing contracts would be cancelled as retribution.
They say they prefer dealing with Aldi because it pays invoices faster and is easier to deal with. One said it was "so much better and much more stable to do business with".
Another said Coles and Woolworths reduced supplier prices and took an extra 3 per cent to cover marketing costs when products go on sale, whereas Aldi would absorb the losses on sales into its own profit margin.
According to a company spokeswoman, Aldi's business model is based on simple, efficient and long-term relationships, eliminating overheads and using an efficient supply chain.
Woolworths enjoys some of the best profit margins in the world, according to Bank of America Merrill Lynch analyst David Errington.
"Within its Australian food and liquor business, Woolworths currently enjoys the highest margins of any retailer globally, at . . . 9.3 per cent [lease adjusted] compared to its nearest global competitor at 7.9 per cent," Mr Errington wrote in a note to clients recently.
"The cause of Woolworths' disappointing like-for-like sales growth is a focus on increasing its already world's best margin, which, in our opinion, supports short-term profit growth at the expense of long-term growth in sales. The key point is that Woolworths has spent heavily on new stores and refurbishments over the past five years."
In the dossier, Woolworths claims Aldi has forced it to introduce a range of private-label products to be competitive. But suppliers say Aldi's private-label policy still buys from local suppliers – "even pays a premium to buy Australian" – and only asks them to compete against other Australian suppliers. But the other supermarkets ask them to compete against suppliers from other countries.
A spokeswoman for Aldi said it has 1200 private-label items in its range.
"The majority of our sales come from products sourced from Australian manufacturers. One hundred per cent of fresh meat, 94 per cent of chilled dairy and 97 per cent of fruit and vegetables are all sourced from Australian farmers," the spokeswoman said.
A spokesman for Coles said it was standard retail practice for competitive tenders to include domestic and overseas suppliers.
"However, Coles has an Australian-first sourcing policy and we will stock an Australian product before we import. We will usually only import where the product is not available in Australia or we already stock an Australian brand and consumers want an alternative choice."
About 25 per cent of its stock is private label, he added.
He also said it was standard practice for suppliers to contribute in-store promotions and that Coles absorbed the cost of lower retail prices from its own profit margin.
"Wholesale prices have only been affected if a supplier has volunteered to contribute to a 'Down Down' campaign [to grow their sales]," the spokesman said.
However, research commissioned by Coles found a "dramatic turnaround in Coles' favourability with suppliers from a poor position in 2008 to a much stronger position in 2012", moving from second last to top four of 15 retailers.
Meanwhile, fresh fruit and vegetable suppliers complained that their produce was often rejected from all the big supermarkets – for being the wrong size or shape.
However, sources said Coles and Woolworths' pattern of rejection was inconsistent and suppliers suspected it had more to do with getting a better price than the quality of their produce.
Rejected fruit and vegetables were returned to the supplier, without any money changing hands, leaving the supplier to find a new buyer for fresh produce that was several days older.
Coles said it has well-established and documented quality standards with the right to reject, or dispose of, food that does not meet those standards. Woolworths said it has commercial contracts that deal with failed quality specifications.
"In our contracts Woolworths has commercial terms of trade that deal with issues such as price changes, failed quality specifications etc. These terms are agreed on a mutual basis, are transparent and reflective of the normal business demands in the fast moving consumer goods market," the spokeswoman said.
The federal government has been helping the supermarkets and the suppliers create a new industry code of conduct to improve these relationships.
The suppliers hope this new code will be mandated and enforceable by the competition watchdog, unlike existing codes.
A produce and grocery industry ombudsman was set up by the federal government in 2006 but can only mediate complaints from individual suppliers and not deal with industry-wide problems or impose any penalties.
"Virtually never, since 2007, have we had any complaints against a supermarket by an individual grower, because the supermarkets have their own internal dispute resolution processes," ombudsman David Newton said. He said he had received just 153 complaints in the past seven years. And the existing Horticultural Code of Conduct, which was enforceable by the Australian Competition and Consumer Commission, has been ineffective largely because it only applies to fruit and vegetable agents and merchants using contracts written since 2007.
ACCC chairman Rod Sims recently told the Senate estimates committee that Australia's existing Consumer Law, formerly the Trade Practices Act, was sufficient to deal with any complaints and there was no need to introduce more regulation over the supermarket industry.
"I think, by and large, we are satisfied with the framework . . . We think there is merit in a code of conduct, which is already under discussion with the industry," he said.
He also confirmed the ACCC was investigating potential breaches of the law after about 50 suppliers alleged supermarkets demand additional payments, impose penalties that are not part of contracts, fail to pay the agreed price and discriminate in favour of private labels.