Suppliers have been complaining bitterly about the dominant position of Woolworths and Coles in Australian supermarkets, which has led to price reductions for branded goods and increased shelf space for private label products.
In Cliffing Goodman Fielder, I explained how the brands have been making a fortune at our expense for years. So I don't have much sympathy for them. Sure, Coles and Woolies are using their dominance to drive down prices but they are passing some of the benefits to us.
But enough of that rant, back to the current argument. The standard mantra is that to be safe from the supermarkets these days you need to ‘be number 1 or 2 in your category’ and ‘to have a strong brand’.
Major bread suppliers George Weston Foods and Goodman Fielder are pretty clear examples that the standard mantra just doesn’t cut it. They have strong brands and together virtually own the mass bread industry, yet they have both been smashed by price declines and the introduction of $1 private label bread.
It’s been my view that in order to have a reasonable negotiating position against the supermarkets you need to i) be willing to withhold supply of product, and ii) actually be able to hurt the supermarkets by doing so. That’s not something most suppliers are able to do, the most recent example I can think of is when Foster's withheld supply to the supermarket liquor outlets.
But yesterday’s news that Goodman Fielder secured a price rise for its private label contract with Coles shows there is another way to get a reasonable deal. You just need to have too much debt at a time when the supermarkets are trying to appease the ACCC. The last thing the supermarkets want is the banks pulling the plug on a major supplier, and I’m sure that’s the only reason Goodman Fielder have been able to buck the trend. Had they had no debt they would not have stood a chance.
The lesson is clear. Before you enter into the next round of negotiations with the supermarkets, make sure you are on shaky financial ground. And that you have enough employees to make it on to the front page of the Terrorgraph. Then, perhaps, you will be able to extract a price rise.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.