National Interest

You've heard it before: Australia's two, large retailers have a stranglehold on groceries, primary producers are forced to sell for less and the mark-up between the farm gate and the supermarket shelf is massive. In fact, the Australian Competition and Consumer Commission - which has been inquiring into the cost of groceries since April - has been hearing such complaints directed against Australia's retailing quasi-duopoly, Coles and Woolworths. But if farmers want a better return on their agricultural investment, then they may be barking up the wrong tree. It all has to do with the mysterious art of supply chain management.

Transcript

This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.

Peter Mares: Since the beginning of April, The Australian Competition and Consumer Commission has been inquiring into the cost of groceries. And from the first day, the Commission's heard complaints about the market dominance of the two big retailers: Coles and Woolworths.

Primary producers have lamented the low prices that Coles and Woollies pay for their crops and the big mark-up between the farm gate and the supermarket shelf.

But if farmers want a better return on their agricultural investment, then Dr Andrew Fearne thinks they're barking up the wrong tree ... or perhaps that should be ploughing the wrong furrow.

Dr Fearne is Professor of Food Marketing in the Business School at the University of Kent in the United Kingdom and he's Adelaide's current Thinker in Residence. He's also an international expert in the mysterious art of supply chain management. Professor Fearne, welcome to The National Interest.

Andrew Fearne: Thank you.

Peter Mares: What is supply chain management?

Andrew Fearne: Supply chain management is what companies need to do to connect themselves from beginning to end. So rather than have primary producers, input suppliers, food manufacturers and retailers working in isolation, just trying to optimise what they do in their link in the chain, supply chain management requires stakeholders in the food chain top work more collaboratively.

Peter Mares: So it's about getting co-ordination across that path from say farm gate to supermarket shelf?

Andrew Fearne: Absolutely. And around the world - and it seems to me from my early reconnoitering in South Australia, it's no different here - around the world, that tends to be the exception rather than the rule in food chains.

Peter Mares: Co-operation is the exception?

Andrew Fearne: Absolutely.

Peter Mares: Now you're Thinker in Residence in Adelaide at the moment. That sounds like a pretty good job ... it conjures up images of sitting in an office, staring out the window and waiting for inspiration to strike. Is that what you're doing?

Andrew Fearne: If only. In my case the role of the Thinker in Residence is to engage. To engage with as many stakeholders in the value chain as possible, and to challenge the current way that they think and the way that they behave, and to expose them to things that I've observed and learnt from my research and travels around the world - from the value chain perspective. So, far from - in fact I probably haven't done enough thinking. I've been doing lots of talking: engaging in trying to understand what's going on in South Australia, and then to reflect on how we might improve things, and take my thoughts back to those stakeholders that want to go to a different place.

Peter Mares: Well let's come back to that issue of the supply chain for food, and how things get from the farm to our tables. For most Australians, they go to Coles or Woolworths to do their shopping. That's where power is concentrated as far as retail is concerned, and that does seem to be a key issue for farmers: that they are caught in this duopoly of the Coles and Woolworths and their dominance of the market.

Andrew Fearne: Yes, and Australia is slightly different from other parts of the world where generally speaking there are more than just two. So it's certainly an issue where arguably there's not as much motivation for retailers to be as innovative as they might be if there was more competition. However, and it's particularly the case in South Australia, I've learned, you still have a fairly vibrant and thriving independent sector.

Peter Mares: So when you say 'independent sector', you mean smaller supermarket firms and also High Street shops?

Andrew Fearne: Absolutely, which in the UK for example, have all but disappeared. We may have five or six, seven retailers, and four major ones, so it looks like there's more competition, but actually the independents have all but disappeared.

Peter Mares: That's fascinating. So we should hold on to and treasure what we've got still here in Australia with smaller greengrocers and so on?

Andrew Fearne: Yes, and recognise that there are opportunities, and also recognise that there are other channels. So it's not closing our minds to food service. So whilst currently the larger share of food expenditure goes on food that's consumed in the home (and the trend is for more and more of our food expenditure to be consumed out of the home) and yet we kind of ignore the channels into food service. So there's the abundance of -

Peter Mares: When you say 'food service' -

Andrew Fearne: That's catering. So restaurants, hotels, eating occasions outside of domestic, and that's a growing sector. So consumers are spending a growing share of their food expenditure out of the home. And those requirements, those food chains are distinctly different from the retail food chains. But we often end up just focusing on supermarkets and just focusing on retail. And yes, they're very important, but having an understanding that the food consumer is different: not only from one supermarket store to another, but whether they're eating at home, or out of the home, and what matters to them when they're making choices in a restaurant from a menu, is often very different from what matters to them when they're making choices at a supermarket checkout.

Peter Mares: How much do we know about the choices people make though? I mean how well do we understanding what motivates consumers to buy product A rather than product B?

Andrew Fearne: I guess that's a bit of a hobby horse of mine, that if you're talking about sophisticated global branded manufacturers, they may know a lot. They're large corporations, they have significant resources, people, information, data, and a portfolio of products that enable them to have a really good understanding of how different consumers choose one brand over another. But if you look at own label products, store brands, specifically fresh produce, fruit and vegetables, pretty much all of meat, and large parts of dairy, then these are categories that are significant in terms of the space allocation in supermarkets, and significant in terms of how people make choices about where they're going to shop. So I might drive past shop A ... supermarket store A, to go to store B, because their produce is so much better, or because their meat is so much better, and yet these are categories in supermarkets that are not dominated by brands, they tend to be supplied via relatively small, relatively unsophisticated companies working on relatively low levels of return on their investment. So unfortunately, my observation is that the understanding in those sectors (produce, meats, parts of dairy) is very, very poor. And we assume that supermarkets are not only all-powerful (and they're very important gatekeepers to the consumer) but we also assume that they know everything and they have an abundance of resources, so they just abuse their power. And the reality is, they have a significant number of issues of their own to deal with, you know: hundreds of stores, many thousands, 30,000 and more products to stock every day. Lots of kind of operational headaches. And the people buying your meat today were buying non-food products yesterday, so the expertise of specific sectors is not there. So in actual fact supermarkets have far less of an understanding of consumers, and the decisions that they make at the point of purchase than we assume they do. And very often suppliers ask the question: "What do you want of us, retailer?" and they're told "Well we want more of the same but lower prices please." And that's what they do, and then they wonder why six months, 12 months later, they haven't made very much money. And they wonder why we haven't got more consumers coming through the door and going somewhere else instead. Because we haven't really added very much value at all; we haven't really enticed the consumer, delighted the consumer, and convinced them to pay more for anything.

Peter Mares: What you're saying is that Australian farmers (South Australian farmers particularly, for your current residency) should actually be thinking more beyond the supermarket at what consumers want and attempting to deliver that to them?

Andrew Fearne: I really do think that primary producers are fundamentally disconnected from their markets, and for generations have assumed that it's someone else's job to dispose of what they produce. And of course, historically, in times of excess demand that was never an issue. There were people queuing up for their produce. In an era today of global competition (and in many cases oversupply) it's not like that any more. Add to that fundamental structural problems of scale of operation, add to that fundamental problems like the drought, which means: "Gosh, it's difficult to grow stuff. It's difficult to do what we're already doing at this level of the value chain. For you to tell me now that I have to understand how consumers behave it's almost like that's ridiculous." But my argument is if you don't understand the fundamental drivers behind what people buy, you will continue to make the wrong decisions. You will continue to allocate resources to produce products that fundamentally there isn't a demand for. You will continue to be a price taker, and the retailer (and in many cases the packer, the meat-processor or the dairy company) ... they don't have a fundamental understanding of the consumer either. So everyone's assuming that somebody else knows, and then everybody else assumes it's someone else's fault. Everybody in the value chain is blaming somebody else for getting it wrong, and so we do. And then the consumer (in this part of the world anyway) continues to get a pretty poor offer. So yes, I'm constantly struggling and fighting with primary producers who say "It's not our job." And I'm not saying it's exclusively the job of farmers and growers to be doing all the investment in consumer research. What I am saying is they have to have their fingers much more readily on the pulse.

Peter Mares: But the question is how to do that, because on the one hand it's easy enough to survey consumers and they'll tell you they want green and clean and etc. etc. But then they'll go into the shop and they'll buy something that's cheaper, or that's imported from Italy because it's got a nicer label. I mean it's not actually that straightforward is it, to find out what a consumer wants?

Andrew Fearne: No it's not, and if it was, then we'd all be doing it, except that if it was, we may not, if we think it's somebody else's job to do. So there are two things there. I think one is: there aren't any individual producers in the world that should be, or could be doing this by themselves. Which means investing and understanding better the complexity of the consumers of what we buy requires us to collaborate and share resources, and because after all ... think about supermarkets: people don't go into the store to buy cherries, they don't go into the store to buy cheese, they go into the store to solve a whole bunch of meal occasion problems.

Peter Mares: And they may see something and they think "That looks nice," and they buy it.

Andrew Fearne: Absolutely. They might have lists, they might have the very best intentions to buy local, and to pay more for organic or local regional value-added products, and then: "Ah, there's a promotion! I didn't expect that was going to be there!" And the environment of the store, all kinds of environmental factors, can intervene to change what they actually do. And you're right, that often when you survey consumers and you ask them what's important to them, they'll tell you they'll pay a fortune for all these attributes, and when it comes to it, they don't. So there is a big disconnect.

Peter Mares: So what's the poor grower supposed to do then? Because I mean on the other hand you say collaborate through the chain, but the supermarket is the one that's pushing down the price paid to the grower, the supermarket and the grower are actually in an antagonistic relationship, they're hardly likely to want to co-operate necessarily with that supermarket that keeps offering them less for more.

Andrew Fearne: Look, I'm not saying that supermarkets are angels, what I'm saying is that if the consumer doesn't see any benefit in paying more for product X then the retailer is responding quite rationally and saying, "Well we wouldn't expect you to either." And if we can import a substitute from another state or another country which is as good as, and you don't value it (it doesn't matter to you where it comes from) then what appears on the shelf is a lower priced, just as good as product. Which means the price that we're going to pay for the domestic alternative is reduced. So it's not simply the case that retailers squeeze the price upstream - and at times that may occur. It's often the case that consumers do not perceive the value that farmers and growers believe they need and have to have, in order to carry on in business.

Peter Mares: So does the value lie in fancier packaging, or cutting up the salad and washing it and putting it in a plastic box before you sell it to someone? How do you convince consumers that my lettuce is worth buying?

Andrew Fearne: In an efficient and effective supply chain, you identify as who, in which channels, in which stores and for which products, are willing to pay more for products A, B, C with attributes X, Y, and Z, (environmental, organic, large pack, small pack, water sensitive, environmentally sensitive, animal welfare friendly, local, regional, whatever the attributes are, that they are willing to pay more for). Who are they? Where do they shop? In which categories? And allocate resources to meet those needs, recognising that this other group of consumers over here (and sometimes it will be the same consumers, for different meal occasions, for different days of the week or times of the year) are not interested in paying any more for anything. And for them, we need value chains that are efficient. So we need to have information flowing from the consumer upstream that help all the links in the chain to recognise that for these products, for these markets, for these segments of consumers, we must be really efficient: they want a basic offer. And over here (and this segment is growing around the world) we've got consumers who do care: "Where does this stuff come from? How is it being produced? Is it sustainable? Is it destroying our rural infrastructure? Is enough of my dollar going back to growers?" And it's important that we understand: How many of them are there? Where are they? And then communicate effectively with them. Back home, Tesco ... everyone will have heard of Tesco, and they've been incredibly successful with their loyalty cards. So we've spent ... for the last three or four years now, working with getting that loyalty card data into the hands of very small primary producers ... a million miles away, if you like, in the value chain, far removed from the consumer. Opening their eyes to just who buys what and who doesn't. So it is possible to connect the value chain more effectively, provided that people are willing to listen, reflect and engage with the much more holistic view about how we compete long-term.

Peter Mares: Professor Fearne, thank you very much for joining me in The National Interest.

Andrew Fearne: Thank you.

Peter Mares: Andrew Fearne is Professor of Food Marketing and Director of the Centre for Supply Chain Research at the University of Kent. And he's currently Thinker in Residence in Adelaide.

Guests

Professor Andrew Fearne
Director Centre for Supply Chain Research University of Kent

Further Information

Adelaide thinker in residence

Presenter

Peter Mares

Producer

James Panichi

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