Wartime Cookie Caught in Australia Grocery Crossfire
The Anzac Biscuit survived the D- Day landings and the jungle combat of Vietnam. Now it’s fighting for survival on a new front: a price war between Australia’s supermarkets as consumer spending stalls.
Unibic Australia Pty., the biggest maker of the sweet oat- and-coconut cookies and one of a small group with permits from the Department of Veterans’ Affairs to make them, came out of a 12-day bankruptcy process March 13, after struggles with rising costs and price competition had pushed it to the brink.
Weak consumer spending and intensifying competition between Woolworths Ltd. (WOW) and Wesfarmers Ltd. (WES)’s Coles chain, which together account for about 80 percent of Australian grocery sales, has squeezed suppliers. HJ Heinz Co. (HNZ), Campbell Soup Co. (CPB), and Kirin Holdings Co. have all cited the impact on earnings since November of pressure from retailers in the A$108 billion ($114 billion) food and grocery market.
“Consumers are more price conscious,” said Kate Carnell, chief executive officer of the Australian Food and Grocery Council, the nation’s biggest food manufacturers’ lobby. “To keep their profitability up at a time when they’re pushing retail prices down,” supermarkets have been pressing suppliers to cut prices and introducing their own brands to compete, Carnell said by telephone from Canberra.
For Unibic, rising grain prices, spending on its main factory in Melbourne and fierce competition have been compounded by restrained retail spending.
While demand for commodities fueled Australian economic growth of 2.3 percent in 2011, faster than the U.S. and Europe, households have cut back on spending and boosted savings rates to levels last seen in 1987.
A measure of Australian consumer confidence yesterday recorded its seventh decline in nine months.
The Australian dollar has been the best-performing major currency against the greenback over the past 18 months, driving down the cost of imported goods and adding to pressure on local producers.
Woolworths, the country’s largest retailer, this month reported that net income fell for the first time since at least 2000, as its market-share battle with second-ranked Coles (CGJ) pushed its grocery selling prices down 3.7 percent.
An index of local food prices fell 1.5 percent in the December quarter compared with the September period, its biggest drop since 2007. Such deflation is a major risk for retailers, whose costs typically rise in line with inflation even when their revenues do not.
“The supermarkets cannot afford to have any dead wood,” Mark Epper, lead Australian partner for food and beverages at KPMG, said by phone from Sydney. “The retailers only want stuff on their shelves which is moving, so you have to be the number one or two brand in your category.”
Woolworths’ shares have risen 1.7 percent this year while Wesfarmers’ have fallen 2.2 percent. That compares with a 5.5 percent gain in the benchmark S&P/ASX 200 index. The MSCI World Food and Staples Retailing Index has advanced 1.2 percent in the same period.
Australian supermarkets are bringing brands in-house in an attempt to defend their profit margins because products exclusive to their own shelves can’t be undercut by rivals.
Private labels have been less prominent in Australian stores than in Europe and Canada, Ben Gilbert, a Sydney-based analyst at UBS AG, wrote in a November report. In 2009, private labels made up 15 percent of sales in Australian stores, compared to almost 20 percent in Canada and more than 35 percent in Germany and the U.K., Gilbert wrote.
That is changing.
Grant O’Brien, chief executive officer at Sydney-based Woolworths, has promised to double private label sales, having added 600 lines last year alone. Coles also plans to widen its private-label range, which currently accounts for about a fifth of its product lines.
That threatens shelf space for independent producers, who struggle to match private-label prices because of their higher marketing costs.
The country’s Senate held a nine-month inquiry last year into the impact on the dairy industry of a push by the two chains to reduce milk prices to A$1 a liter in a battle for market share. It concluded that the private-label market needs “to be monitored for any signs of anti-competitive conduct.”
Goodman Fielder Ltd. (GFF), Australia’s largest baker, last month cited “severe retail price competition” for a 77 percent drop in first-half profit as Coles and Woolworths compete to sell A$1 loaves of bread.
Mighty Soft, Helga
Goodman Fielder’s Mighty Soft and Helga brands have lost shelf space at the chains and while the Sydney-based baker is trying to compensate with contracts for private-label brands, those sales are less profitable.
“We’re producing more private-label bread, but less proprietary bread,” Ian Greenshields, a Sydney-based spokesman, said by telephone. Goodman Fielder shares fell about 80 percent from a July 2007 peak before Singapore-based food processor Wilmar International Ltd. (WIL) revealed on Feb. 28 it had bought a stake.
International companies are feeling the impact, with Pittsburgh-based Heinz posting a “double-digit” decline in Australian sales in the three months to October, Chief Executive Officer William Johnson said in a Nov. 18 earnings call, after its Greenseas tinned tuna was removed from Coles’ shelves. Australia has almost become “fairly immaterial to us going forward, because it has taken such a hit,” he said.
Heinz has shut down a tomato processing plant, cut capacity at two other factories and brought in new management in an attempt to shake up the under-performing division.
Lion, a brewer and milk processor owned by Tokyo-based Kirin, said Feb. 10 that aggressive discounting in the Australian dairy industry was largely responsible for a A$1.2 billion writedown in its full-year results.
Campbell’s Arnott’s unit, whose Tim Tam biscuits are so celebrated in Australia that they were an official gift to President Barack Obama during his visit to the country last year, saw sales drop in the two successive quarters to Jan. 29.
The dominance of Coles and Woolworths has grown, with their share of the market rising to 78 percent in 2009 from 58 percent 14 years earlier. That may attract the attention of the competition regulator, according to David Cooke, an analyst at Nomura Holdings Inc.
The Australian Food and Grocery Council’s Carnell wants a limit of about 30 percent on the space retail chains dedicated to own-brand products, and the Australian Competition and Consumer Commission has promised to focus on any abuse.
“Our priority in 2012 will be to determine whether or not there are breaches” in the way supermarkets deal with their suppliers, ACCC Chairman Rod Sims said last month.
For Unibic’s former owners, Michael and Paul Quinn, any support from the regulator will come too late, as the company’s emergence from bankruptcy on March 13 cut their stake to 20 percent from 100 percent.
That process will help clear its A$30 million debt load and preserve all 170 jobs at its Melbourne factory, said Michael Smith, an external spokesman for accountants Lawler Draper Dillon at Inside Public Relations.
Matt Forster, who will be managing director of the new company to be called Modern Baking Co., said he is grateful for the “patience and support” of Coles and Woolworths.
“The marketplace has a job to do,” he said by phone from Melbourne.
Anzac cookies are named after the Australia and New Zealand Army Corps, a World War I military division that fought at the battle of Gallipoli. The first recipes for the biscuits began appearing in cookbooks in the war’s aftermath, Helen Leach, a professor of anthropology at the University of Otago in Dunedin, New Zealand, said by phone.
While the cookies are still occasionally included in military ration packs, they are not generally sold outside Australia and New Zealand. Anyone wanting to use the name commercially in Australia must get permission from the Department of Veterans’ Affairs under a 1921 law. About 60 permits have been granted since they were first issued in 1994, Felicity McDonald, a spokeswoman for the department, said by e- mail.
Even the use of the American English term “cookie” is frowned upon because of its “non-Australian overtones,” according to the department’s website.
Unibic donates 4 percent of its revenue to the Returned and Services League, Australia’s largest veterans’ organization, and carries the RSL’s coat of arms and a map of the Gallipoli battleground on its packaging.
Making sure supermarket shelves are well stocked is the priority for Unibic’s new owners, since about a fifth of the cookie’s sales come in the month leading up to the April 25 national Anzac Day public holiday, Forster said.
“It’s an iconic product,” he said. “It has great heritage.”
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