Retailers say multinational grocery companies are enjoying excessive profits by charging local Aussie retailers more than their international peers.
According to the Financial Review, Coles and Woolworths are preparing to take on suppliers in an effort to lower the price of internationally-branded groceries, as the industry closes in on a code of conduct aimed at fairer terms for manufacturers.
The retail price of identical grocery items such as painkillers and toothpaste in the United Kingdom and United States are at times lower than wholesale prices in Australia, according to the two supermarket giants.
Coles has called for an independent analysis of wholesale pricing on the basis that local and overseas prices differ so greatly that they cannot be blamed solely on distance, higher costs and the size of the Aussie market.
“Suppliers’ profit margins are certainly higher than retail margins and in many cases the prices on key products in many categories are higher than they are overseas,” said Coles spokesman, Robert Hadler.
“There are some obvious reasons why prices would be different, but some of the price differentials are so large you have to question whether geography and the cost of production in Australia are the sole determinants of the big pricing differences. It’s fair to have that discussion and to have an independent review of that without jumping to conclusions.”
Head of communications for Woolworths, Claire Kimball, also believes that the difference in prices needs to be reviewed.
“The difference in wholesale pricing on packaged goods between Australia and developed markets is one area that needs greater focus and increased transparency from the global suppliers,” she said.
Gary Dawson, chairman for the Australian Food and Grocery Council believes that the attack on suppliers by the retail giants is an attempt to divert attention away from current investigations of both companies by the ACCC, into allegation of misuse of power.
Dawson said that an analysis by Macquarie Equities and UBS refuted the claims by pointing out that over the past five years, suppliers’ margins had in fact been lower.
“(Suppliers’) gross margins have fallen over the last few years and there’s been a six percent margin transfer from suppliers to retailers. Supplier margins in Australia are well below their international peers.”
The Macquarie report found that suppliers’ gross margins on average fell by 15 to 37 percent between 2006 and 2011 and the UBS report found that Australian EBIT margins for multinational grocery suppliers were approximately 210 basis points lower than international averages.
Macquarie has said that the true level of profitability is difficult to estimate due to transfer pricing by suppliers who do not manufacture goods in Australia and differences such as cost of labour, population density and distance need to be taken into account.
Dawson does not believe that the renewed debate over supplier margins and grocery prices will be likely to impact on negotiations over the code of conduct.
“The negotiations have not been about price or margins but contractual certainty, along with issues like vertical integration and dispute regulations,” he said.