Coles, Woolworths need to end fresh food supply inefficiencies

There are intense investigations trying to prove price gouging by supermarkets. But, there is a deeper issue.

The inefficiencies in the Woolworths and Coles fresh food handling procedures boost costs by creating immense waste.

The cost of this waste becomes a burden to farmers via lower farm gate prices and sometimes store prices.

Instead of investing sufficient funds to reduce waste, supermarkets invest in procedures to distribute waste among the needy.

Unless the boards of Woolworths and Coles stop being distracted by their personal “woke” style beliefs and start looking at what’s not performing in their businesses, the parliament will consider forcing them to sell stores.

There is a great community desire to create more competition, but those competitors must have the economies of scale necessary to run fresh food properly and create real competition.

These are controversial words which will be vigorously denied by Woolworths and Coles, but what’s needed to quell community frustrations and anger is action rather than words.

Let me take you on the journey which led me, with reluctance, to reach the above conclusions.

The journey started on Sunday, March 24, when a senior executive of one of our two major supermarkets sent me a friendly email containing these words: “Fruit and Vegetables is a relatively low-margin business for retailers (in fact, red meat is even lower) but it is an incredibly important part of our customer offer and a key way to impact the health of the nation”.

Similar remarks have been made by other supermarket executives to the recent parliamentary supermarket inquiries. I soon discovered, while the sentiments were not totally wrong, they oversimplified the facts to the point of arguably being misleading.

There is a great community desire to create more competition and end the hold of duopoly Coles and Woolworths. Picture: Gaye Gerard

Freely available industry figures show the produce and meat sales typically account for around 20 per cent of the total store sales, with a 40-45 per cent gross margin for produce and 28-30 per cent for meat.

Calculating gross margins is not simply a question of a base add-on for each product, but involves taking into account the speed of stock turnover.

Margins are increased by faster stock turnover and it’s simply misleading to quote margins unadjusted for stock turn rates.

What we don’t know is just how far those quite healthy gross margins are reduced by waste. But, the impact is substantial.

If the supermarkets continue to pursue the “low-margin community benefit” argument in parliamentary inquiries, they are going to be called out.

The political pressure to split up the giants will intensify as the election approaches, particularly as there is community distrust of both major supermarket chains, particularly Woolworths.

Sadly for the community, corporate executives often don’t take parliamentary hearings sufficiently seriously because for a quarter of century they have watched defence officials rarely tell the truth in parliamentary inquiries.

So if defence officials can get away with it, why not corporations?

There are two reasons:

First, there is much greater community awareness of food issues, and secondly, the Australian Competition and Consumer Commission (ACCC) has initiated a very detailed inquiry into the supermarkets, the equivalent of a royal commission without the legal trappings.

The ACCC knows when organisations tell half-truths in one area, it usually means there’s a lot more to find in other areas.

Nevertheless, it’s important both the politicians and the ACCC not be overwhelmed by details of margin figures, because they are merely a sign which leads to underlying inefficiencies which have not been given enough attention.

McDonald’s keeps its meat and produce costs low because it controls the whole supply chain and monitors the temperatures in their supply chain, which are vital to the shelf-life of produce.

While there are exceptions, the supermarkets in Australia don’t control their full fresh food supply chain.

They use a series of operators, which boosts costs and waste.

Worse still, unbelievably, there is not sufficient monitoring of the temperature of fresh produce as it moves down the supply chain.

This is one of the reasons why there is a huge amount of fresh food waste in Australia. And this waste brings down the final margins from the gross figures above.

As overseas supermarkets have shown, waste can be greatly reduced with proper supply chain investment and management plus modern fresh food display techniques.

If global tech giant Amazon decides to enter the fresh food business in Australia, it will show Woolworths and Coles how to do it properly.

More efforts by the supermarkets could help reduce food wastage and reduce costs.

One of the complexities of the fresh food business is not only does demand fluctuate wildly, but, because of the vagaries of farming, so does the supply.

If longer shelf-life is achieved via better supply-chain management, it can help offset some of those farm vagaries.

Sadly, what the supermarkets tend to do is take their base food quantities from the larger farming groups and use the small producers as “swing hitters”, causing devastation among smaller farmers.

Clearly, smaller farmers need to be of sufficient size to play in the large supermarket game and consolidation is needed.

But, so is an attitude change needed among some supermarket buyers to help smaller suppliers.

When you have massive market share and use your power to badly damage small suppliers, you are inviting and will get a political backlash.

Accordingly, the National Party are insisting Woolworths and Coles be broken up.

Sadly, the farmers have not invoked the unfair contracts law designed to protect them against bad behaviour by supermarkets.

Hard groceries are much easier to manage than fresh food, which deteriorates quickly.

Perhaps because the hard grocery area is dominated by large producers (for example, cereal, biscuits and soft drink makers), more effort and investment has been directed into establishing an efficient supply chain and stock management process.

The same investment has not been put into fresh food and in the end, it’s the farmers, particularly smaller farmers, who suffer.

The sharemarket is not taking this situation seriously.

And there is a side issue. The concentration of management on waste distribution has created an industry designed to distribute this waste among those in need.

An investment in proper waste management might help farmers and supermarket prices, but could create a shortage of food for those in need.