Australian supermarket operator Coles – owned by Wesfarmers Ltd (ASX: WES) – and rival Woolworths (ASX: WOW) have pushed suppliers to the breaking point with their focus on developing their own brands and making super profits.
According to the Australian Financial Review, in the manufacturing and consumables industry, export is not a viable option at the moment due to the strong Australian dollar, and with Woolies and Coles accounting for about 80% of the domestic market, they know you have to do business with them. The two corporations have also been criticised of pushing up prices for no reason other than to drive massive profit by "auditing" books to validate supplier cost price requests.
Introducing their own store-branded products has also reduced the opportunity for local suppliers to turn a profit. Many products, such as New Zealand-based Fonterra Limited's (ASX: FSF) Mainland cheese, have been a casualty of Coles' decision to place its own branded products on the shelves. Woolworths recently announced a push into the Australian dairy market, cutting out the middleman in a bid to save local farmers and gain a competitive advantage over its rival.
Gaining the competitive advantage is taking its toll on suppliers and smaller competitors alike. The Australian Competition and Consumer Commission (ACCC) has shown concern regarding the heavily discounted fuel prices that Cole's Express and Woolworth's Petrol offer consumers. Since the collapse of Franklins in 2001, the two have been in and out of court since 2003 regarding anti-competitive behaviour and bullying.
Foolish takeaway
It seems investors are not put off by the consistent pressure put on Australia's biggest grocery retailers, with Wesfarmers' and Woolworths' share prices skyrocketing 41.7% and 36.5%, respectively, this past year. The names we know and trust are slowly wreaking havoc on our local food and manufacturing industries. Prices are "down, down" but suppliers might be the only ones staying down.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz does not own shares in any of the companies mentioned in this article.
