Every time I go through a supermarket checkout, I find myself surprised at the total of the bill. Should be used to it by now, but no, I’m not!
The two supermarket gorillas, Coles and Woolworths have both released their annual results in the last month, and shareholders, which via superannuation is most of us, should be very happy.
Woolworths pocketed $1.6 billion on significantly increased margins, and Coles managed $1.1 billion on similarly better margins. The percentages are way above those generated by peers in developed countries, for the simple reason that they are an oligopoly and leverage that power to generate profit. Aldi has made an impact and continues to do a good job of ‘keeping the bastards honest’ but the fact remains, profit comes from market power. It is also fair to acknowledge that both have done a pretty good job of optimising their current operations, which also contributes to those juicy profit numbers.
Supermarket retailers, and other retailers in a position to exercise market power, are in two businesses that together make a powerful business model:
The first is renting retail real estate to their suppliers.
The second is selling products to consumers.
Both are transactional, with constant negotiation between the retailers and their suppliers. Sadly, there is an unequal distribution of power between the retailer and the supplier, so the use of price on both sides of the equation by retailers has become ubiquitous.
They extract maximum ‘rental’ for the shelf space, while being relatively unconstrained at the checkout by competitive pressure.
As a result, suppliers are screwed down so hard that even the very best of them have trouble returning the cost of capital, and price competition that benefits the consumer is a myth.
The price-based promotion programs deeply embedded in the psyche of both retailers and their ever-decreasing pool of suppliers destroys brands. Over the time I have been watching, the supplier margins from which springs the innovation that keeps categories fresh and interesting to consumers, has disappeared.
Retailers are lousy marketers. Ask one to explain the drivers of purchase and they have only one answer: price. Anyone who has ever bought anything knows that is rubbish.
For long term commercial sustainability of both retailers and their pool of suppliers, there must be a balance between tactical promotion and the innovation investment that generates category and brand growth, and there must be serious competition.
That no longer exists. Marketing and behavioural research over many years is unequivocal. Healthy markets need both.
Retailers have used price as their only tool because they can. In the process they have killed off almost all proprietary brands, replacing them with house brands, which are no more than carbon copies. There is no longer category or product innovation, and no suppliers willing to invest in brands, just a conga line of copycats.
The cost-of-living crisis facing many consumers today will become a strategic crisis for the retail gorillas as they fail to evolve their business model.
