Suppliers on edge as Foodstuffs delays dreaded product cull

Many suppliers argue that, in practice, centralisation is a thinly veiled way of squeezing more profit for Foodstuffs and achieving a lower price. Photo / 123RF

In a first meeting with suppliers since the release of a damaging draft report on his industry, Foodstuffs North Island CEO, Chris Quin, argued his grocery chain isn't as extraordinarily profitable as it's made out to be, and said he would be saying so in a further submission to the Commerce Commission.

At the gathering on August 11th which predated the current Covid-19 lockdown, Quin also told the group that the company will delay announcing what is expected to be a cull of products and suppliers in its first "range review" to centralise buying across its three main banners: New World, Pak'nSave, and Four Square stores.

Foodstuffs was scheduled to announce the results of this review and reduction of the products it stocks across its frozen food category on July 30th, the day after the Commerce Commission delivered a draft report that called for greater competition in the grocery sector.

However, at the meeting, held in Auckland at the company's vast new headquarters and distribution centre, Dave Stewart, Foodstuffs N.I. general manager merchandise, said the announcement will not be made until "September-ish".

Such is the level of distrust between Foodstuffs and its suppliers that some believe the timing is part of the supermarket's "damage control" calculus in dealing with the Commerce Commission.

"If they don't announce the results until September, then that takes them past the August cut-off for making submissions on the commission's draft report. And past the time when a bunch of snubbed suppliers can complain to the commission," one supplier said.

The commission is accepting submissions on its draft report until August 26th. However, because of the current Covid outbreak and level 4 lockdown a spokesperson said extensions will be entertained for stakeholders who cannot meet the deadline.

Suppliers who spoke to Herald have been given anonymity; they fear that speaking out will invite repercussions from Foodstuffs.

In a written response to the Herald's questions Quin said that the company's "next range reviews" remain on track "for completion by the end of September as per our original timeframes".

"Over the initial period we have reviewed the range on 23 out of 97 categories," Quin said.

Foodstuffs North Island chief executive Chris Quin. Photo / Supplied

He didn't respond to a question about the delay in announcing the review results.

The grocery sector is a duopoly, controlled by Foodstuffs NI and Foodstuffs South Island -the two co-operate together and do not compete, and each is co-operatively owned by its member stores - and Woolworths New Zealand, whose banners include Countdown and Fresh Choice.

Foodstuffs intends to apply its new centralised buying model to most other product categories, so this first step is being watched closely.

It is also playing out against the highly charged backdrop of Government scrutiny. Last month the Commerce Commission made a preliminary finding that profits for New Zealand's two supermarket players are anomalously large by international comparison, and that the state of competition is deficient, and failing both consumers and supermarket suppliers.

Among its draft solutions for the Government to consider is the break-up of the current market structure, including the possibility of creating or mandating a third player.

The "range review" is part of a contentious process of centralisation by Foodstuffs, which rolls up a range of costs to suppliers - for promotion pricing, and displays and marketing in stores for example - and bundles them into a single price at which they sell to the company. Across Pak'nSave stores in particular, many of these costs are still negotiated with individual stores.

Foodstuffs maintains that centralising creates a more simplified process for suppliers. And while its range review will reduce the number of products it sells, the company says the cull is driven by customer preference, including the desire for more new products.

Many suppliers, however, say that, in practice, centralisation is a thinly veiled way of squeezing more profit for Foodstuffs and achieving a lower price. They say that the retailer has so much market power that it is difficult for them to resist new, and often objectionable contract terms.

Meanwhile, there remains considerable friction between suppliers and some individual stores. Earlier this month Pak'nSave Manukau City owner Stephen Lockie issued a letter to suppliers to address what he described as "the challenging environment we are currently experiencing with the recruitment of merchandisers and staff".

The letter was issued before the current Covid outbreak exacerbated already acute staff shortages, which are largely the result of the country's very tight labour market.

"Often a dissatisfied performance with a merchandisers [sic] attendance or execution can affect the relationship at the rep and buyer level, and rightly or wrongly impact how we deal with each other until a solution is meet [sic]..." the letter said.

Foodstuffs is planning a "range review" to centralise buying across its three main banners: New World, Pak'nSave, and Four Square stores. Photo / NZME

Lockie asked suppliers to either provide a roster for merchandisers' visits to his store (merchandisers work for suppliers and typically ensure suppliers' products are stocked and displayed as they should be) or, alternatively, to contract the job of merchandising to the store itself at a cost of "a 2.5 per cent term on purchases".

Nick Hogendijk is a Melbourne-based consultant and managing partner at Hexis Quadrant and works for a number of New Zealand supermarket suppliers.

He said his clients object to Lockie's letter for a variety of reasons, but chiefly because they see it as another way that the store is trying to foist its costs on to suppliers.

"Here's the burning issue, he's [Lockie's] struggling to find staff and get people working for him at the moment, and he wants his suppliers to help cover that bill. Essentially he is asking suppliers to help recover his labour costs for the store to further improve his profit margins," Hogendijk said.

Lockie redirected questions about the letter to Foodstuffs' head office.

In a written reply, Quin said some suppliers are keen to dispense with merchandising and to have stores do the job.

"To ensure their [suppliers'] products are on shelf and presented well for customers, a number of suppliers had decided, or wanted to discuss further, that it is easier for the supplier if the store completes the merchandising service on behalf of the supplier, and the parties have agreed a mutually beneficial arrangement which enables the store to deliver the service the supplier had normally delivered," he said.