Woolworths boss trips up at grocery prices inquiry: Gottliebsen

Coles is much smaller than Woolworths, so yesterday’s Coles grocery inquiry evidence was not the main game. The key action was a week earlier when Australia’s largest retailer Woolworths gave evidence. The transcript recently posted on the ACCC web site shows that Woolworths chief executive Michael Luscombe struggled during an exhausting grilling by ACCC boss Graeme Samuel and his people.

If you are going to be grilled by Graeme Samuel and the ACCC people in an inquiry that goes to the heart of your business then you need to spend several days preparing and covering every possible question. I suspect Luscombe did not do that, and it showed.

The Woolworths CEO had a key powerful point – that Woolworths had invested heavily in systems, better stock management and house brands and that had enabled it to lift returns and yet lower prices to consumers. Luscombe came to the inquiry to make that point and he did it well.

But in other areas he either ended up line ball with Samuel’s people or was ambushed. To illustrate, with regard to price setting, after a long set of questions and answers this following exchange took place:

Graeme Samuel: “I’m sure you will check me or correct me if I have got it wrong, but what we’ve now got is Woolworths pricing to match. Independents pricing… well at best to match but probably above. ALDI being complementary in a few select areas… I think their total number of items is less than eight hundred compared to your tens of thousands, offering some competitive pricing but mainly in respect to the generics or the home brands… We’ve got to find out from Coles. They’d better be pricing below or else we’ve got some really interesting tests in coordination, haven’t we?”

Michael Luscombe: “I wouldn’t know, I wouldn’t… you know… The other thing, chairman, is that shelf pricing is but one element of the basket for the customer. So you have roll-backs.”

Samuel: “Yes.”

Luscombe: “You have promotions, in any one week we would have normally about four thousand… four thousand individual items on special in a Woolworths/Safeway’s supermarket…”

The exchange then continued but whether Samuel is right or wrong on the facts he had established – probably to his satisfaction – how supermarkets don’t really compete. Evidence from Coles may change the game but that’s highly unlikely. Samuel established that although there was purchasing harmonisation with Australia, Woolworths had lower margins in New Zealand. And while Luscombe denied it, the ACCC believed that this was a result of greater competition.

Samuel and the ACCC also showed that they believe that the Woolworths “Select” brand might work to curb price competition. Luscombe had proudly stated – perhaps unwisely – that Woolworths Select House brands were of equal or better quality that the competing leading name brands. That lead to this exchange:

Damien O’Donovan, ACCC lawyer: “So in terms of management of a category, by the introduction of Select, Woolworths now has a positive disincentive for allowing the leading brand to reduce price. Would you agree with that?”

Luscombe: “No, because one of the things that typically has happened is the market leaders come back with an improved promotional program so that actually means we have those leading products on special more often or maybe they give us money to have a sharper price. So that actually increases our overall attractiveness to our customers because not only do they get a wonderful offer product label but other products that they might consider to be alternatives, such as the branded market leader, is more frequently on special.”
O’Donovan: “Sure, but if they came back to you with an offer of reducing – actually reducing the wholesale price to flow into the retail price – that would be unattractive to you in terms of…”

Luscombe: “No, not necessarily. No, not at all.”

O’Donovan: “All right. Well, let’s look at that. If they lower their price, that…”

Luscombe: “Yes.”

O’Donovan: “For Select to maintain that same position in the market as offering a lower price but the same quality, it would push down…”

Luscombe: “We might, we might…”

O’Donovan: “…push down margins in Select?”

Luscombe: “We might take the Select price down again, yes.”

O’Donovan: “Right. That’s a possibility.”

Luscombe: “That’s possible.”

O’Donovan: “An unattractive one, from your point of view?”

Luscombe: “Yes, of course.”

O’Donovan: “Yes. Of course. That’s right. So that at least makes it unattractive to them from Woolworths’ point of view in terms of passing on that benefit.”

Luscombe: “Sorry. I just…”

O’Donovan: “So if it’s… because of necessary reaction within the Select category whenever a branded product’s price is reduced, it makes it less attractive for Woolworths to pass onto consumers, the lower wholesale price?”

Luscombe: “Yes. Well, I might just defer here to James Aylen (the general manager Woolworths Long Life division) because he would be in a position… has that happened?”

James Aylen: “No.”

From Woolworths shareholders’ point of view, perhaps the most dangerous conversation was the long exchange over the 50% increase in Woolworths EBIT returns on funds employed since 2001-02 – from 51.2% to 76%.

Luscombe claimed that the increase was achieved because the funds employed figure was based on accounting standards and because of Woolworths ongoing investments in systems and house brands.

Samuel pointed out that the Woolworths returns were among the best in the world. Of course part of the reason for the high returns is that Woolworths sells most of its stock before it pays for it – a point that with more preparation Woolworths could have used to provide a much better evidence before the tribunal, I have no doubt during the “in camera” sessions Woolworths will detail the price reductions that have taken place as a result of greater efficiency. But it will start on the back foot.

I have no idea what Graeme Samuel will come up to reduce grocery prices – his stated aim. But Luscombe has given him the opportunity to do something nasty to Woolworths shareholders given the high margins. What Woolworths really needs is for Coles to wake up and provide competition. But that’s a way off and the new Coles CEO is a long term player.

This story first appeared in Business Spectator


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