Grocer shows size matters

By SIMON HENDERY

On Birkenhead's busy Mokoia Rd an army of workers wasted no time gutting and rebuilding what had been the North Shore suburb's Foodtown supermarket.

This week, just 15 days after Foodtown closed, a gleaming New World store opened in its place - a fitting reminder that time is money in the grocery game.

An average supermarket might take $500,000 a week, so New World operator Foodstuffs lost no time in opening on what was competitor Progressive Enterprises' patch.

Foodstuffs' arrival in Birkenhead follows last year's supermarket industry shakedown due to Progressive's $690 million acquisition of Woolworths, which gave it 40 per cent of the market against Foodstuffs' 55 per cent.

Commerce Commission approval for the deal required Progressive to divest supermarkets in two areas where it had market dominance: Birkenhead and Te Awamutu.

Last week, nine months after the merger, the first evidence of Progressive's new-found muscle emerged, when its Perth-based parent company, Foodland Associated, said in its half-year result that Progressive sales were up 117 per cent and pre-tax earnings were up 151 per cent in Australian dollar terms.

These numbers were buoyed by the New Zealand dollar's strength against the Aussie, but Progressive said it was winning market share from Foodstuffs, reversing a slide in Woolworths' share before the merger.

"It's a battle out there. We have become very competitive against our major competitor," says Progressive managing director Ted van Arkel.

Progressive had forecast it would save $10 million in the first year from merging Woolworths and Progressive, but it now expects that figure to be $26 million, rising to $50 million a year within three years.

Savings have come from stripping away duplicated layers of management and tightening buying terms with suppliers. The Woolworths/Progressive "support office" headcount has been cut from 660 to 590.

More job losses will follow this year when Progressive closes its Wiri distribution centre and centralises its Auckland logistics and management operations at Mangere, where it is spending more than $23 million doubling the size of its distribution centre.

On both sides of the Tasman, Foodland is getting smarter with its buying, a development which has alarmed some of its suppliers.

Last July van Arkel and Foodland managing director Trevor Coates summoned hundreds of suppliers to Auckland's Sky City, where they were told that "best terms" would apply to their dealings with the merged Progressive/Woolworths. In other words, the cheaper of the deals they had with the two supermarket groups would apply to both.

"Suppliers have virtually been forced into supplying additional discount to Progressive to be ratified as a preferred supplier," says one supplier, who asked not to be identified.

"What that means is that the trade have provided more discount - although only small at this stage - and the trade will be looking to recoup that discount by raising prices later."

In Australia, Foodland has moved its buying office to Melbourne and begun to examine discrepancies between the prices transtasman suppliers are charging in New Zealand and Australia.

"Where they can they will source out of Australia and supply into New Zealand," the disgruntled supplier says.

"What that means is that some New Zealand manufacturing base will be affected."

But van Arkel says it is a chance for New Zealand suppliers to sell more in Australia.

He says the growth of Progressive's in-house Signature label into Foodland's Action supermarkets and about 250 independent stores shows the increased market opportunities for New Zealand suppliers.

He says ongoing discussions with multinational suppliers such as Unilever on pricing are part of a drive to lower operating costs.

"It would be remiss of us not to ensure that there is a very compelling reason why there is a difference in price between one [country] and the other.

"Nobody likes giving anything away but it's a tough world out there - just as it is a tough world between [New Zealand competitor] Foodstuffs and ourselves."

Shoppers are already seeing savings, he says, particularly in Woolworths, whose prices had become uncompetitive under former owner Dairy Farm International.

"They really had ratcheted up prices and were obviously making a reasonable bottom line on that but market share was declining and volumes were dropping."

The Consumers Institute, an opponent of the Progressive/Woolworths merger, agrees shoppers appear to be benefiting so far.

"Our worst fears don't seem to have happened," says the watchdog group's chief executive, David Russell. The institute will continue to monitor the market through its annual price surveys.

For shoppers, the most noticeable evidence of the Progressive/Woolworths merger has been the combining of Foodtown/Woolworths advertising - the two chains now offer identical prices.

"We're comfortable with the way that's positioned at the moment," van Arkel says.

"Certainly here in Auckland the Foodtown brand is the stronger brand of the two but that doesn't mean we will do away with the Woolworths brand - far from it.

"We just want to assess that a bit further down the track.

"Foodtown is an Auckland brand and whilst we have several stores outside the greater Auckland area, the decision hasn't been made to rebrand those at this stage."

THE GROCERY MARKET

New Zealanders spend about $9.7 billion a year at the supermarket:

FOODSTUFFS

(a grouping of three co-operatives based in Auckland, Wellington and Christchurch)

Market share: 55 per cent

Major brands: New World, Pak 'N Save

PROGRESSIVE ENTERPRISES

(subsidiary of ASX-listed Foodland Associated, Australia's third-largest supermarket group)

Market share: 40 per cent*

Major brands: Foodtown, Woolworths, Countdown, Big Fresh

* Progressive also supplies SuperValue and Fresh Choice, two mainly South Island-based independent chains with a combined 5 per cent market share.