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The Power Index: foodies, Coles boss Ian McLeod at #2

Shortly after Ian McLeod came down under from his United Kingdom homeland to take over as managing director at Coles in 2008, he and new director of merchandise John Durkan (a fellow UK import) took Frank Costa, the largest wholesaler of fruit and vegetables to the supermarket giant, out to dinner.

I was very curious to know what their strategy was coming in here,” Costa tells The Power Index. “I knew they were taking on a huge job.”

One remark made at that initial dinner won’t be forgotten by the produce king quickly. ”This country has got no idea what real competition is,” McLeod said, according to Costa. “It’s just easy come, easy go in Australia, that’s the Australian attitude … Compared to the UK, where I’ve just come from, this is really soft, easy. But it’s going to change. You’re going to see a difference.”

Costa appreciated the warning. “And he was right, it changed,” says the Costa Group chairman.

He’s not the only one who’s noticed a difference in the supermarket world, with food producers furious at the price war between the big two players — although customers and shareholders seem content.

Its prices might be “down and staying down” but Coles recently recorded a 16.6% growth in earnings  — worth $1.6 billion — on top of a 21% jump in 2011. Thanks to the strength of Coles, Wesfarmers’ profits have risen nearly 11% this year. Meanwhile, it’s a different story for its competitor Woolworths, with the company last week suffering its first decline in annual profits in 13 years.

McLeod’s appointment saw a re-ignition of a supermarket battle that has raged in Australia for the past four years. Coles has cut its product range by 30%. It’s greatly increased its house brands, a hugely successful technique from UK supermarkets. And it has fought a vicious price war — think $1 for a loaf of bread, $1 for a litre of milk — that saw the Australian Competition and Consumer Commission offer anonymity to suppliers willing to give evidence about “unconscionable conduct” in their dealings with Coles or Woolworths.

Last month dairy farmer Jane Burney posted on Coles’ Facebook page about the pressures that milk battles with the supermarket have put on Australian farmers. She wrote:

Dear Coles, your $1 per litre of milk deal is killing the lifeblood of our dairy industry. Your latest ad campaign sprouting that you support Aussie growers in insulting. You are misleading the public in how you support Aussie growers. Not only have you ruined the fresh milk market but you have also lowered the price on your cheese and butter. The only winner here is you …”

Milk and bread aren’t the only items feeling the price squeeze. “It’s the wine industry, but the stories are exactly the same,” wine writer Max Allen tells The Power Index, who points out the huge numbers of home-brand wines — and joint-venture labels — being produced by Australian winemakers for the big supermarkets. “On one hand, if I pick up a decent bottle for $10 at Coles, I’d be crazy not to recommend it. But I also know what someone’s had to do to put a bottle on the shelf at that price.”

The supermarket’s sponsorship of the food TV juggernaut MasterChef has also proved a boon, with recipe cards and display stands appearing in stores the day after the show is aired and constant advertising thanks to its sponsorship of the MasterChef pantry. “They’ll [Coles] know in advance that we’re doing a pheasant challenge. And then they can decide ‘do we get pheasants in or not?’,” explains MasterChef executive producer Margie Bashfield. “There are certainly things they now stock, like pork belly, that they didn’t stock before the show.”

When Wesfarmers purchased Coles in 2008 it was trailing in Woolies’ wake. Then the UK invasion began. McLeod, a Scotsman and former Halfords boss (shares fell when his departure was announced), arrived in May. Around the Coles executive conference table sits several Brits, including store development and operations manager Stuart Machin, formerly from Asda, and merchandise director Durkan, who spent 17 years at UK’s Safeway.

As well as his strong retail history — former CEO at Halfords, a car and cycling retailer, a former executive at Walmart Germany and a director of retailers Asda — McLeod loves his sport. Back in the UK he served as CEO of the Celtic Football Club, and here in Oz he’s on the board of Melbourne Victory and the St Kilda Football Club.

In May he agreed to stay on at Coles after his five-year contract expires next year (but he declined to speak to The Power Index). Like its supermarket prices, his pay packet is going down, down, down. But since his remuneration package is currently worth $15.6 million, that’s one price cut Aussie food producers are happy to embrace.

*To comment and for more visit The Power Index

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