Supermarket discounts 'a race to the bottom'

Photo / Sarah Ivey

It's a costly business to make sure Kiwis keep eating their Weet-Bix.

A cut-throat market means the cereal's manufacturer, Sanitarium, has seen its promotional costs - in-store discounting, rather than advertising and sponsorship - almost double in the past 10 years.

New Zealand shoppers like getting a deal, with 52 per cent of supermarket sales thought to be made on promotion, rather than at full-price.

And much wheeling and dealing takes place behind the scenes to decide which products get those fluorescent labels announcing a mark-down.

Sanitarium New Zealand general manager Pierre van Heerden says agreements are reached between suppliers and retailers to decide what goes on promotion and at how much of a discount.

Suppliers will then reimburse the supermarkets for the money they lose through discounting.

Retailers may then mark down that price even further, wearing the additional cost themselves.

Van Heerden says Kiwi food manufacturers pay higher promotional costs than those in any other country.

"If you talk to Nielsen [a market research firm] they'll tell you that New Zealand is called 'the new promo-land' because sales on promotion are the highest in the world," he says. "It's not good for the long term because the more you sell on promotion the more you are giving money away and the less you've got to spend on innovation and getting new products and initiatives out there."

Van Heerden says the onset of the recession only made promotional demand stronger as food manufacturers fought hard for market share.

Sanitarium's slice of the breakfast cereal market fluctuates between 40 and 45 per cent, he says, with its nearest rival, Kellog's, holding about 22 per cent.

"Everyone wanted to make sure they remained in business, which is a fair thing to do while you're in a recession. But now that we're getting out of the downturn we really need to focus on something much bigger than that - that's the long-term survival of the industry."

Van Heerden says it's only the discounting that he considers problematic, while other promotional spending like advertising and sponsorship are "brand building" exercises.

"Yes, advertising is a cost, however it is good for consumers to understand what the options are in the market."

Katherine Rich, chief executive of the Food & Grocery Council, which represents manufacturers, describes the level of discounting in this country's supermarkets as a "race to the bottom".

"I was speaking with one [food] industry insider recently and he remarked that New Zealand was the most brand-destructive market in the world," she says.

Rich says the intense competition between the duopoly of supermarket operators Progressive Enterprises and Foodstuffs fuels the rampant discounting.

Progressive owns Foodtown, Woolworths and Countdown stores, while Foodstuffs operates Pak'nSave, Four Square and New World.

"We expect absolutely no sympathy from shoppers because they benefit from these terrific bargains, of course, but the issue in the long term is that [the discounting] is to the detriment of food manufacturing in this country."

Van Heerden, who is also deputy chairman of the Food & Grocery Council, says the rising costs facing local food suppliers could force many to shift manufacturing abroad to stay competitive.

Asked if that includes Sanitarium, he says moving overseas is not currently on the horizon but it's an option the company cannot discount.

"We wouldn't like to do that because we're a Kiwi company and I think that is why we are very strong," he says. "But at the same time, you have to be able to make some profit and we've got to make sure we remain competitive."

But would New Zealanders accept their Weet-Bix being made in the Philippines or Thailand, rather than this country?

"I don't think Sanitarium going offshore would be accepted well at all," says van Heerden, who remembers all too well the fuss that was kicked up when his company sourced Chinese-made peanut butter a few years back.

"[Consumers] expect everyone else to go to China but not Sanitarium."

After the outcry the firm listened to its customers and changed its peanut butter source back to Australia.

Rob Chemaly, general manager of retail for Foodstuffs (Auckland), says his firm aims to support food suppliers "wherever possible if it is of benefit to our customers".

Companies choosing to manufacture overseas is hardly a new phenomenon, Chemaly adds.

Van Heerden believes weaning New Zealanders off their reliance on promotion to drive their purchasing decisions is a possibility.

"It's a bit like going off drugs, you've got to do it slowly," he says. "You can't overnight change the buying patterns of consumers."

Tim Morris of retail analysts Coriolis Research says there are issues around the high level of discounting. "We've created a Frankenstein monster - a population of people who buy everything on special, and if it's not on special they're not buying it," Morris says.

Van Heerden says food manufacturers need to work closely with the supermarkets to cut down on promotions.

"We've already indicated [to the supermarkets] that we can't keep spending at those levels," he says. "It's unsustainable in the long term."

Chemaly says Kiwis love "shopping for value", and Foodstuffs strives to provide great deals.

"As the economy continues to tighten, Foodstuffs remains committed to getting the best possible deals so that we can pass on these savings to our customers," he says.

Progressive Enterprises did not have a representative available for comment.

Doug Paulin, chief executive of Auckland cereal-maker Hubbards, says that while his firm's promotional spending may not be as high as Sanitarium's, it still poses challenges.

"It takes a lot of margins out," Paulin says. "Particularly as raw materials have increased in price."

He says supermarket chains and food manufacturers are collectively responsible for training consumers to buy on promotion. But it's in the best interests of New Zealand for food manufacturers to remain profitable, Paulin says.

"You want to have a good level of manufacturing in New Zealand because there are jobs that go with it and if the profits are not there you'll start to see companies shut their doors and move their manufacturing offshore."