Shane Jones is demanding an investigation into supermarket practices amidst claims of extortion. But the food business in New Zealand isn't a simply matter of good supplier vs evil supermarkets; what's more, the story begins and ends in your wallet.

Shane Jones' performance in parliament yesterday slamming Countdown supermarkets owner Progressive Enterprises for blackmailing New Zealand suppliers has certainly tipped the corn flakes all over the floor, so to speak. Progressive has rejected the claims, but former National MP turned suppliers rep Katherine Rich has backed the Labour man.

It all paints the supermarkets as the bad guys, a prejudice New Zealanders will be quick to embrace given that Progressive (Countdown) and Foodstuffs (Pak 'n' Save and New World) combined reported revenue of $14 billion in 2012. There's money in them thar aisles. And lots of it. And most of it goes to those Aussies. And did you see the price of cheese? Grrr.

But the picture is much more complex than it looks. I did a bit of digging around this issue last year and the first thing you find out that the food business is a brutal one. The industry adages are full of distrust. Suppliers say "never trust a retailer" and retailers say "suppliers are liars". Competition is ruthless.

The supermarkets work to exacting formulas and push their suppliers hard to cut costs. There's no doubt, Progressive and Foodstuffs have almost all the power to set the price and demand fruit, meat and veges how they want them, when they want them and where they want them.

When Jones was running for the Labour leadership, his complaint against the supermarkets was that "the brown shirts of the food industry" needed to be reviewed, and even regulated, to get food prices down. He wanted to investigate pricing. Now he's critical of them for brutalising suppliers.

But he can't have it both ways. In short, if the supermarkets weren't so ruthless with their suppliers, we'd be paying more at the checkout. We can't say just how much of those savings are passed on to consumers - so let's not let the supermarkets off scot-free just yet - but the supermarkets' cuthroat approach to their suppliers undoubtedly means cheaper food bills.

Those who understand supermarket pricing talk of how the supermarkets make their money in the aisles around the edges. Fruit, veges, milk, bread, meat etc are where they have decent - sometimes sizeable - margins. With the dry food in the middle of the supermarket, the margins can be as low as one or two percent.

It's important to note that many of products in the middle of the supermarket are supplied by multi-nationals and frankly, the Coca-Colas and Proctor & Gambles of the world are bigger and meaner than the supermarkets. So in this brutal grocery business, supermarkets are the bullied as well as the bullies. What's more, they've got huge bricks and mortar costs in an increasingly online shopping world, so it's not as easy owning a big box grocery store as it used to be.

But at the bottom of this ruthless food pyramid are the local growers. To maximise those margins round the edges, supermarkets push local suppliers hard. One grower angrily told me of selling his produce for 60c/kilo and the same day seeing it on sale in his local for $3.49/kilo.

The squeeze on their own margins have pushed many growers out of business. One grower told me that in less than a generation we've gone from 7000 vegetable growers in New Zealand to around 1000. There are no small growers left as supermarkets have demanded specific quality, certain colours, quantity and so on. So you either expand or die. One grower said that to set up a vege growing business to supply supermarkets today, he'd need start-up capital of $5-10 million.

That's meant slightly bigger suppliers, who can fight back a little. But not much. And one grower of small volume produce told me that they feared if they complained too loudly their produce would simply be removed from the shelves as uneconomical, and that would kill the whole industry.

I've heard reports today about how outrageous it is that suppliers only get paid for the fruit the supermarkets sell; the growers pay the price for wasted produce. And they pay for transporting the goods. And for meeting ever-higher hygeine standards on the farm or orchard. And so on. But I was told that's been the case for years and suppliers have accepted that and adapted.

"Whatever happens in this industry, it's the grower that pays for everything", sighed one grower with resignation.

So while talk of retrospective payments crosses a new and unacceptable line, it's only the latest in a long list of merciless supermarket expectations. If it's true.

All of which might make you angry and ready to shake your fists at the supermarkets. But before you do, consider that - in part - they're doing it for you. Former supermarket folk and even some suppliers pointed out to be that the price of everything from lettuces to toilet paper has hardly moved in years. Food is about as cheap as anyone can remember. That's because the supermarkets are so tough on costs. Hey, said one grower, that's business. Everyone's trying to cut costs.

Look at what they've done to alcohol prices - driven them to points lower than ever before. If Jones is worried about the price of fish... and meat and milk and cheese and beer and anything else the supermarket sells, he'd better be careful what he wishes for.

As one former supermarket staffer said to me, "It’s actually not bad for consumers if supermarkets are putting pressure on the suppliers to become more efficient and cheaper... Yes supermarkets do put their supply base under pressuee, but that’s the commercial reality".

And it's not just on price. I mentioned colour standards earlier, and again that's because that's what consumers demand. There's a whole other debate about how food is produced just to please our visual tastes - a different debate, but the same principle.

And what about the duopoly? Some say the only way to get the supermarkets to be nicer is more competition. Let a third chain in and then we'd see better prices, service, more quality and healthier produce and happier suppliers.

Except that not all of those things can be true at once.

Said one grower: "An extra player could make it worse. If Walmart, Aldi or Costco come here it’d just get ugly, blood on the ground and it’d be suppliers spilling the blood".

That's because another competitor would mean further competition on price. Better for our hip-pocket, but more pressure on the supermarkets, which will be passed onto the suppliers. If Jones' allegations of Progressive demanding retrospective payments for last year's losses are true, then just imagine what might happen if Aldi came to town.

Said the former supermarket guy: "Try working with Tescos if you want to really be screwed down on price... And remember supermarkets don’t want a supplier base that can’t supply them".

So by all means let's have a Commerce Commission investigation. And perhaps we do need to stand beside the small Kiwi supplier and help them find a more sustainable business model. One of the off-shoots of this supermarket pressure is that we ge the cheap produce while the growers send the good stuff offshore where they can make a decent profit. Arguably, it means we're growing the best food in the world, but not getting to eat it.

So yes, there's a lot rotten in all this. But if you buy according to price, as most of us do, then the supermarkets are only doing what we're asking of them. And if you want the investigation and a kinder, fairer food business in this country, you'd better be prepared to pay for it.

Comments (10)

by william blake on February 13, 2014
william blake

I never buy fruit and veg at the stupidmarket. As your anecdote points out the 700% mark up on hydroponic produce. I shop at the local where the produce is a grown in soil and half the price. It suggests that some growers have become too big and need the big volume, chain outlets to make their gardens and orchards economically viable.

by Chris de Lisle on February 13, 2014
Chris de Lisle

Why do the various farmers' markets around the country (which are mostly not actually run by the suppliers who produce the food) manage to sell their product at cheaper prices and with greater variety? It seems unlikely that they are screwing the growers even more than the supermarkets - they have much less bargaining power.

It also seems unlikely that NZ supermarkets are under that much pressure from online food shopping, which is in its extreme infancy: there is no NZ equivalent of Ocado, for instance; another sign of this is the fact that many of the various supermarkets' websites still offer no online system of their own. Rather they build ever more bricks and mortar outlets.

by Tim Watkin on February 13, 2014
Tim Watkin

The farmers' markets? No middle man (distributors), no storage or transport costs, no marketing and none of the huge brick and mortat overheads... you get the drift. But it varies anyway. Some markets are very pricey.

Either way, farmers' markets are now a few percent of the vege market, but there's a little growth there – I believe – and also in the corner fruit and vege shops, which are also doing well at under cutting supermarkets.

by Frank Macskasy on February 14, 2014
Frank Macskasy

Progressive has rejected the claims, but former National MP turned suppliers rep Katherine Rich has backed the Labour man.

Yes, she most certainly did, Tim. But she looked decidely uncomfortable on the 6PM New Bulletin on 12 Feb. Maybe she had a cold virus ior something, but she certainly wasn't a happy lassie...

Perhaps criticising Big Business doesn't come naturally for an ex-National MP. Much like, I guess, socialists and communists were (generally) loathe to criticise the former-USSR back in the last century.

 

 

by Tim Watkin on February 14, 2014
Tim Watkin

I don't think the supermarkets are sending anyone to the gulags never to be seen again, Frank!

by Rich on February 14, 2014
Rich

Something not pointed out is that as a former chairman of Sealord Shane Jones has a bit of an axe to grind. 

Also, one of the main problems with any kind of farming (especially market gardens near cities) is that the price of land is increasingly set by what could be reached as a subdivision. There aren't many farms in NZ that make enough money to pay a mortgage on their current land value, but it doesn't matter to the owners, as they'll make a tax-free killing when they eventually give up and sell the land).

 

by Richard Aston on February 14, 2014
Richard Aston

Frank you are right about Katherine Rich , I have worked with her and what I saw was a very controlled , legally vetted statement read word for word , unsual for her.

Tim I don't think its as simple as Supermarkets screw down suppliers to give us cheap food. We don't actually know all their margins . As others have pointed out its been known for a while their fresh produce margins are really high.  They always talk about 2 % margins on dry goods but how do we know thats true. This new story tells us last year Progressive increased their profits by 29% to $288.5m when food prices were on the delcine.  One way to interpret those results is to say they forced their buy prices way down and dropped their retial price a little ie they are screwing nz suppliers to gain increased profits not to lower retial prices.

And yes its all business which is all about profit , but  when the endless hunt for profit growth starts having negative impacts outside the business, then its our business. 

 

 

by Phil Stewart on February 14, 2014
Phil Stewart

If supermarkets really cared what their customers wanted, they wouldn't stick those #*@!# little stickers on all their fruit. I think it''s clear they do manipulate prices of fresh produce to suit themselves, and also as a weapon to gouge market share when it suits them. Zucchinis at Pak'n'Save last Sunday $6+/kg. Same product at the growers' market: $1.50. At our local Chaffers New World the price of staples like apples, potatoes and (in season) summerfruit are consistently way higher than in the outdoor markets. If you don't mind carrots that aren't all a uniform size and colour, or apples with the odd blemish, outdoors beats the supermarkets every time.

by Rich on February 14, 2014
Rich

It's a convenience thing. Given that I've got to shop at the supermarket every week, I could maybe save $10 or $20 by going to the outside market at the weekend, but with parking, that's an hour out of my life, so a very poor hourly rate.

I do shop at Moore Wilson / Med Food Warehouse but that's a quality thing. 

by stuart munro on February 14, 2014
stuart munro

I worked in supermarketing for a while. Don't be fooled by the apparently low margins, it all comes down to turnover and payment cycles. There is a disconnect between the supermarket grinding suppliers down and low prices to consumers. Thanks to a lack of competition these are rarely if ever passed on.

I was also part of a couple of fruit and vege coops. By buying weekly or fortnightly at the actual market we could pay 30-40% of supermarket prices. That margin is not consumed by customer service - and that's with no supplier grinding at all.

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