The backlash against the discounting of home brand products is growing, as the supermarket war on prices begins to heat up.

Independent Senator Nick Xenophon, a member of the Senate Economics Committe, says the big supermarket chains have undermined the grocery industry to benefit generic ranges because they are more profitable. Coles and Woolworths admit they make much better margins with home brand products.

Yesterday, as part of the Senate inquiry into dairy prices, he recommended the big two be broken up in order to rein in their power. Together the two giants control between 55% and 75% of the market share for grocery items.

“Generic brands are destroying real choice for consumers and destroying smaller suppliers,” he told Crikey. “With milk for example, the migration from branded milk to generic milk has the potential to devastate the dairy industry.”

Representatives from Coles and Woolworths faced often-hostile questioning from senators at the inquiry, particularly on the effects of the price cuts on milk, bread, eggs and other items on the food industry.

Coles CEO Ian McLeod said milk would continue to remain at $1 a litre for “at least six months, if not longer” but refused to say if the cuts would be permanent.

The discounts have angered farmers, manufacturers and suppliers who say lower prices for generic products will create an unsustainable food industry. Consumers and producers will be the losers, they say, as smaller players are forced out by the big chains.

But McLeod said the supermarket giant had made the decision to cut the price of its generic brand milk, after careful consideration, to assist with the “hardship facing many Australian families”. They believe the price cuts will have no long term effect on the dairy industry. Coles merchandise director John Durkan said his company believes in being “consumer focused”.

“This is all about bringing trust back to consumers, to Coles,” he told the inquiry.

Woolies supremos, meanwhile, stated cuts may be absorbed by farmers and producers in the long term. General manager of fresh foods Pat McEntee says Woolworths is absorbing discounts in the short term. “However,” he said, “there is every possibility that processors may look to recoup loss of profits through their negotiation with farmers.”

As Crikey reported yesterday, the price cuts come off the back of an increasing allocation of shelf space to cheaper house brand products, which industry sources say is hurting branded goods. They say consumers will be left with less choice on the shelves, while an ever-increasing amount of suppliers being forced out of business will result in higher grocery prices in the long term.

A Woolworths spokesperson rejects the claim. All products, branded or private label, earn their space on the shelves through sales, the spokesperson said.

“We deal with large multi-nationals and one man bands,” the spokesperson told Crikey. “In terms of private label, many products are made by small to medium sized manufacturers such as our Select chocolate which is produced by a family firm in western Sydney.”

Similarly, Stefan Kopp, ALDI’s managing director of buying, says private label shouldn’t be seen as anti-competitive. Almost 95% of products sold at Aldi are private label brands, except for the “must have” products like Milo and Vegemite.

“Private label brands enable ALDI to offer Australian consumers products of equivalent quality to branded products, but typically at lower prices,” he said in a submission to the Senate inquiry. Aldi says a focus on private labels means it provides customers with constant low prices for products rather than adopting the “high low” practices of its competitors.

But generic goods are more likely to be foreign made, says Xenophon, beause it is cheaper to source generic products overseas. Yesterday supply chain sources told Crikey that “billions of dollars” of products were being brought into Australia under generic branding.

“This hurts local farmers and food producers and is made possible by our pathetically week food labelling system,” Xenophon said. A Coles spokesman counters; suggestions of a push to generic branded products is “not correct”.

“What we have seen in the last couple of years is a push to make the quality of house brand products better and customers have responded to that,” they say.

Coles says there will always be a place for branded products on its shelves. It points to the GFC in tracking the rise in popularity of home brands, when many people tried the product for the first time and realised it was good quality.

“This is being driven by customers,” a spokesperson said. “You will not be successful if you try to force something on consumers.”

Independent grocers IGA and SA-based Foodland are not happy either — they say independent grocers could be forced out by the price war. IGA chairman Michael Daly says the push to home brand appeared to be part of a “major and sustained strategic attack” by the big supermarkets to replace premium brands and cut out smaller suppliers.

“If there is a significant move to house brands, the big self supply chains will be the winners,” Daly said in a submission to the Senate inquiry. “Further entrenching their buying power upstream and their retail and advertising power downstream.”

Foodland CEO Russell Markham has called for anti-competitive price discrimination legislation to be considered as a way of resisting the big supermarkets’ dominant market power.

He told the inquiry: “We believe that the strategy behind Coles discounting the value of the milk category is twofold. One is to gain market share and two is to grow the share of their private label brand. This will allow them to exercise more control of the supply chain.”

Markham urged the Senate Economics Committee to take action: “If the independent and small retail sector declines, then the Australian shopping public will be deprived of choice, local product range and convenience as is now the case in the UK where Tesco and Asda have decimated High Street retailers through similar strategies.”

In its submission to the Senate inquiry, the Australian Food and Grocery Council — representatives of a string of large food manufacturers — said product range at the big supermarkets had decreased because of home brands and consumers were being disadvantaged:

“The major retailers have developed their own private label brands that have replaced a number of branded products in various categories. This is particularly the case in the dairy sector where the number of branded products has reduced to the point where there is only a leading brand and the retailer brand on offer.”

Yesterday, supply chain sources told Crikey that supermarket shelves in the future could contain just three or four brands and a host of generic brands.

The AGFC says the ACCC needs to investigate the effects of generics, with a focus on the impact on prices paid by consumers, food security, economic and environmental sustainability, as well as the economic viability of farmers and processors.

Giving big supermarkets more power over supply chains will see smaller suppliers become the “real losers”, according to Xenophon: “Less choice means less innovation and less new products. While there are short-term price cuts, it will end up costing more in the longer term.”

*Do you have a story about operating within the supermarket environment? Send us an email or leave an anonymous comment.

Get more Crikey, for less

It’s more than a newsletter. It’s where readers expect more – fearless journalism from a truly independent perspective. We don’t pander to anyone’s party biases. We question everything, explore the uncomfortable and dig deeper.

Join us this week for 50% off a year of Crikey.

Peter Fray
Peter Fray
Editor-in-chief of Crikey
50% off