Farmers are pressuring supermarkets to raise produce prices, and shoppers want shelf prices lowered. Can both win?
As inflation eases, supermarkets would typically lean on suppliers to cut prices, with some of those savings passed on to frustrated shoppers to dissuade them from buying less or switching grocery stores in search of a better deal.
But in a period marked by a Senate inquiry and year-long pricing investigation by the competition regulator, every major supermarket pricing decision is being scrutinised, making any attempt to reduce prices paid to farmers a potential flashpoint for legislative reform.
During the first public Senate hearing held in Hobart, farming groups made the committee aware that a major supermarket was trying to fund a promotional fruit campaign by cutting prices for growers, sparking criticism.
Supermarkets have fiercely protected their margins, the chief gauge of profitability, throughout the pandemic and inflationary period, by more than offsetting increased costs with higher prices.
Coles is slightly more profitable than it was before the pandemic, while Woolworths is significantly more profitable. Combined, the two chains control two-thirds of the market, representing a much more concentrated sector than in most comparable economies.
Meanwhile, fruit and vegetable growers have told the Senate inquiry the industry is collapsing, while households also grapple with a severe increase in the cost of food.
Sanjoy Paul, an associate professor in the UTS Business School who works on supply chain risk, says supermarkets are leveraging their dominant position over those with the least negotiating power.
“Giant supermarkets have different strategies for different types of suppliers,” he says.
“There is a big mismatch between supermarkets and small farmers.
“They have strong negotiating powers over farmers, but when they deal with big food manufacturers, the relationship is different.”
While fruit and vegetable growers have reported widespread financial pressure, some of the world’s biggest packaged food makers which also supply to supermarkets have increased profit margins.
The American cereal maker WK Kellogg has enjoyed a 17% lift in its share price since the start of the year after raising prices for well-known products such as Corn Flakes and Froot Loops.
Other multinational food companies such as Kraft Heinz and Mondelez, owner of Cadbury, have also disclosed in financial results they have increased prices to retain or bolster margins.
The perishable nature of fruit and vegetables, compared with the longer shelf life of packaged goods, means growers often have to accept a low offer or risk a wasted crop.
As the Senate inquiry was told: “Baby spinach is only baby spinach for a day or two.”
Many parts of Australia’s agricultural sector also lack significant size or cooperatives that could better negotiate with the major supermarkets.
The inquiry’s committee members have been discussing how reforms could help level the playing field, including mechanisms to increase competition, which would also give farmers more ability to reject poor offers.
Paul says it is possible for both farmers and shoppers to win, although the margin would need to come from somewhere.
This could entail the supermarkets getting a better deal from multinationals, improving productivity or accepting narrower profit margins, rather than leaning on the parts of the market with the least ability to negotiate – smaller farmers and shoppers.
Paul says: “Supermarkets say they are improving their operations, then why not pass on those savings?
“They need to really justify and provide transparency in terms of pricing decisions.”
In its submission to the Senate inquiry, Woolworths said it was aware of its responsibilities at the “front end” of the fresh food sector.
“As such we are very mindful of our responsibility to balance providing value for our customers, paying our suppliers fairly for the goods they supply to us, providing security and meaningful employment for our team and delivering adequate returns for our shareholders,” Woolworths said.
In its submission, Coles said it paid $32.3bn to more than 8,000 suppliers and service partners last year.
“A key driver of supermarket price increases has been cost price increase requests from our suppliers and farmers,” Coles said.
Without reforms, fresh food suppliers will probably continue to find themselves under pressure from major retailers.
Bronwyn Thompson, a sales strategist who has worked for major household brands, says supermarkets view their fresh food sections as a growth area as they try to entice shoppers away from speciality sellers and farmers’ markets.
She says the power imbalance between fresh produce suppliers and the supermarkets can be huge, and that the big retailers will always try to extract the best prices out of that sector.
This focus on pricing, and of rejecting produce with slight blemishes, has prompted fruit and vegetable farmers to warn there will be no family farms left within a decade as corporate farms take over.
“The place that’s going to be the battleground of visible pricing is always going to be that fresh area,” Thompson says.
“If you get people in to buy fresh produce, then you’ve got them shopping in the rest of the store.”
