Wednesday, July 22, 2009

Supermarkets to squeeze farmers as margins fall

Australia's big two supermarkets will safeguard their huge profits by paying farmers less for their produce in coming years, experts have warned.

After years of growth, retail margins - the difference between prices paid for goods by shops and the prices they are sold for - are expected to fall from around 4 percent to between 2 and 3 percent, according to a leading economic forecaster.

"The spending binge is over and now retailing is on a lower margin, lower growth basis," said Dr Frank Gelber, chief economist at BIS Shrapnel.

This means supermarket profits will be under threat and farmers and other producers will be forced to make up the shortfall, avoiding the need for price rises on the shelves.

Charles Bird, vice president of the National Farmers Federation (NFF) told ninemsn farmers were bracing for a battle with supermarkets.

"We know from history that retailers won't bear that cost and they'll do everything within their power to make up that margin elsewhere - that rings the alarm bells for us," he said.

"Most of the time, and history has proven [this] to be the case, the farmer is the one that gets squeezed at the bottom."

A combination of booming retail sales, debt-fuelled spending and a strong Australian dollar, which lowered the cost of imports, created a retail boom in recent years, allowing retailers to increase margins and profits.

The two supermarkets have used the wider margins to fund aggressive discounting that has, in some instances, made it impossible for other retailers to compete. Lower margins would make it more difficult for the big supermarkets to undercut rivals.

The two major supermarkets have enjoyed steadily rising EBIT (earnings before interest and tax) margins in their food and liquor divisions since 2000, with Woolworths' margin peaking at close to 6 percent in 2006-07.

A spokesman for Coles denied the company was selling producers short, but admitted there could be issues for farmers.

"Coles' EBIT-to-sales margin is barely 3 percent compared to EBIT-to-sales margins among food processors and manufacturers of between 10 and 20 per cent," the spokesman said.

"This confirms that Coles is not ripping off farmers or customers - if that is occurring, it is happening in other parts of the food supply chain."

A source who works for a company that supplies one of the big supermarkets with poultry products told ninemsn the big players' market dominance forced suppliers to cave in to price demands.

"One big supermarket came to us demanding we supply at a very low set price and my initial response was to say no," the source said.

"I was informed their response was: 'If you don't supply at this price we will simply take the business to other suppliers who will gladly fill the gap'. It was pure and simple blackmail."

Experts believe the only suppliers immune to these tactics are very large corporate suppliers with all others being forced to accept lower prices for their produce when retail margins shrink.

"Yes indeed, that is how it works," said Geoff Cutler, a retail consultant with detailed knowledge of the subject. "Only a very strong supplier like Coca Cola can withstand this margin pressure."

A spokesman for Woolworths denied the claims and added that an enquiry by the Australian Consumer and Competition Commission found that major supermarkets do not buy enough produce to control the market price.

The Coles spokesman added that price pressure on farmers was not solely due to the supermarkets' desire to keep retail prices low.

"Some farmer margins have been squeezed because of drought, rising input prices, excessive debt, rising processing and distribution costs, and not just pressure from consumers to keep prices low during the recession," he said.

But Mr Bird disagreed, saying farmers were being squeezed while others profited. Woolworths made a profit of $1.29 billion last year, while Coles' profit was $792 million.

"What we have seen in the past few years is that prices were going up in the retail sector — the cause was quoted as being the drought, fuel costs or the margins getting skinnier," he said.

"But the fact was that the farm gate prices were going down even when the retail price was going up, so there's no relationship between the retail price and the farm gate price. Somewhere in the middle is where the profit is being made and the farmers aren't sharing in that."

Sources backed Mr Bird's claims, adding that most suppliers have no option but to deal with the supermarkets.

"The supplier has no choice but to supply and suffer the financial loss themselves while Coles increased the shelf price and kept the profits," said one source, speaking on condition of anonymity. "It was supply or die."

"The suppliers had no choice but to supply and suffer the financial loss themselves while Coles increased the shelf price and kept the profits," said one source, speaking on condition of anonymity. "It was supply or die."

Dr Gelber said many primary producers that supplied Woolworths and Coles were less than happy, despite the supermarkets' use of farmers in mass media advertising.

"You've seen the adverts with happy farmers in them - they must be actors because there's no happy farmer I know that sells to the big supermarkets."

When asked what NFF members made of the ads, Mr Bird told ninemsn: "They would view it as advertising for convenience".

The NFF has been lobbying for more transparency between the retail pricing of goods and the prices paid to producers at the farm gate.

"There's a lot of smoke and mirrors about how costs are apportioned after goods leave the farm gates. We understand that there are costs - we have those costs too," Mr Bird said.

"But at the pointy end of the retail chain the retailers say they are getting squeezed and put the price up but they're not paying us any more at the farm gate."

Mr Bird said he did not believe the supermarkets were open to more transparent pricing.

Neither Coles nor Woolworths responded to the question of whether they would consider more transparent pricing.

Stuart Fagg, money.ninemsn.com.au 22 Jul 2009