Supermarket

The best thing to have in business, South Island hotels entrepreneur Earl Hagaman once mused, is a monopoly. At the time he was intent on buying the Christchurch Casino because of its protected monopoly status. Compared with owning and running hotels in a highly competitive market, owning a monopoly like the casino was a business dream, Mr Hagaman reasoned.

By that logic, the next best thing must be a duopoly, where two big players have the market sewn up. This is the case in the New Zealand grocery market, where home-grown co-operative Foodstuffs and Australian-owned Progressive Enterprises dominate. Figures from the Organisation for Economic Co-operation and Development (OECD) show the giants are enjoying a very happy duopoly.

According to the OECD, grocery prices have risen 42 per cent in New Zealand in the past decade, while those in Australia, which also has a market dominated by two players, have risen 41 per cent. By comparison countries with more competition – Britain and the United States – have experienced more moderate rates of grocery price rises.

On the face of it there appears to be no shortage of competition between our big two. Both advertise extensively, constantly refreshing their offerings and rethinking their approach. The owner of Timaru's New World, under the Foodstuffs banner, has spent a small fortune redeveloping the Highfield supermarket and its mall and is taking on another 75 staff. You don't do that if you're not sitting pretty in a comfortable duopoly.

Likewise Progressive is spending up large to rebrand its Woolworths stores and its Church Street supermarket has just had a makeover.

While the big two argue their competition is cut-throat the suspicion is that it's become more of a handbags-at-dawn affair than a pitched battle. Critics believe they are going through the routine while protecting established positions which see the consumer lose out.

That is what the Australian Government believes and there has been a lot of jumping up and down about the OECD figures, and talk of bringing the "blowtorch" of competition to the incumbents.

In New Zealand The Warehouse had a crack at the duopoly and failed miserably. Supermarkets do have competition in the form of alternative meat and fruit and vegetable outlets, but there is precious little competition in terms of groceries.

In Timaru consumers have the option of a farmers' market. If the success of the first one, last weekend, is anything to go by, the supermarkets' traditional market is being nibbled around the edges. But until The Warehouse gets its act together, or someone else arrives, there seems precious little consumers or the Government can do.

The wallet has been a bit lighter over the past 10 years if new figures are anything to go by with food prices both in New Zealand and Australia rocketing up more than 40%.

And experts say it's because New Zealand has only got two major supermarket chains, with a stranglehold on prices.

Statistics prove the cost of food in New Zealand has increased more than almost anywhere else in the 30 countries that make up the developed world.

The OECD figures show Korea had the biggest grocery price hikes over the past decade, 48%. In New Zealand, they went up 42% and Australia was close behind on 41%, all significantly higher than the OECD average of 33%.

A competition expert at the University of New South Wales, Frank Zumbo, says it's not fair on consumers on both sides of the Tasman. "We're paying more than competitor countries and the reality is consumers are being ripped off," he says.

He says consumers are being ripped off because both in New Zealand and Australia two supermarket heavyweights have a stranglehold on shoppers' wallets. Zumbo says Coles and Woolworths control 80% of the Australian grocery market.

In New Zealand, Foodstuffs owns Pak 'n' Save and New World, and Progressive Enterprises runs Foodtown, Countdown and Woolworths.

Hamish Wilson of Consumer New Zealand says this does lead to a lack of competition. "There've been some attempts by people like The Warehouse to try and break into it but it's pretty difficult," he says.

And it seems the increases are not going all the way down the food chain. Ken Robertson of Horticulture New Zealand says vegetable and fruit growers probably have not seen any real price increases in the past 10 years.

ONE News approached both chains. Progressive would not appear on camera but says consumers are getting a fair deal. Foodstuffs agrees. "It is an intensely competitive industry. We certainly don't meet with Progressive and agree price increases or nothing like that," says Tony Carter of Foodstuffs.

In Australia, the government says it's going to take its "competition blowtorch" to the industry. Until that happens in New Zealand, the advice to consumers is to shop around.

Consumer Affairs Minister Heather Roy says the Australians have their blowtorch and National and the Act Party have their regulations bonfire. She says she wants more competition and they are working on taking out some of the red tape and compliance costs to encourage more competition for New Zealanders' dollars.

Zumbo is advocating a marketplace similar to Britain's where four or five big players share about 60% of the market. He says letting rivals such as Aldi have a greater market share is the only way consumers will get a fair go.

THE decision by the retail giant Woolworths to accelerate spending on store upgrades, new stores and systems for its ailing New Zealand supermarkets and Dick Smith businesses has ignited concerns about the size of the outlay in this economic climate.

The Merrill Lynch retail analyst David Errington said yesterday that while he was pleased with the company's progress, the aggressive push to expand its New Zealand stores and Dick Smith by increasing investment was a worry. It appears that Woolworths is in a hurry … and we are concerned that being in such a hurry could cause the company some short-term turbulence. We have concerns with throwing a lot of money into NZ and [Dick Smith electronics] … particularly in current economic conditions and [given that Woolworths is not the leader in those market segments]."

Woolworths should not increase its spending so quickly but improve its businesses more incrementally, he said. Pumping more money into its two weakest divisions could be "throwing good money after bad",

Woolworths had $930 million in capital expenditure in the first half across all its businesses, compared with less than $300 million by Coles.

Spending by Woolworths was 45 per cent up on the $639 million it spent in the same period last year. Over the full financial year total capex is expected to be almost $2 billion, compared with $1.1 billion a year for Coles Group businesses, which are owned by Wesfarmers.

On Friday the chief financial officer, Tom Pockett, implied that capital expenditure would also exceed $2 billion next financial year. The Woolworths decision to increase its capex comes as its British peer, Tesco, cut its allocation by about 11 per cent to less than £4 billion ($9 billion) this year, and Wal-Mart in the US said it would spend about 13 per cent, or about $US13 billion ($20.5 billion), less this year.

In its first-half result announced on Friday Woolworths said earnings in its New Zealand supermarkets fell 8 per cent and at its Australia-New Zealand Dick Smith business 27 per cent.

Woolworths supermarkets in New Zealand slashed grocery prices to win market share from the market leader, Foodstuffs, triggering lower earnings.

Costs also rose due to compulsory increases in the minimum wage for its youngest staff, and the introduction of a superannuation scheme.

Mr Errington criticised the Woolworths decision to buy the New Zealand business for $2.5 billion. "Woolworths bought a distressed, run-down asset a number of years ago, and the business is not improving." The first-half earnings of $NZ92 million ($71.5 million) did not support the $NZ2.8 billion of funds invested and was an unacceptable result, he said.

The Foodtown and Woolworths supermarket brands may vanish from New Zealand under a cost saving strategy by Progressive Enterprises.

Supermarket retailer Progressive Enterprises is on the verge of collapsing its three supermarket brands into one chain - the Countdown brand, reports The Independent business newspaper, citing research from Australia.

The move would see the end of the Foodtown and Woolworths brands in New Zealand, leaving just Countdown to be rolled out in a revamped store concept to compete against rival Foodstuffs' Pak'n Save, New World and Four Square chains. The concept, called 2010c, is also being rolled out in Australia by parent Woolworths.

The Independent cites documents from Macquarie Research Equities which say Progressive "appears poised to collapse its tri-banded retail offer into just one brand after just two store trials of the Australian 2010c format''.

Progressive announced this week it will spend $200 million refurbishing and upgrading back-office systems in existing stores and building three to five new supermarkets each year, but it made no mention of store branding. The company has already spent $320 million in New Zealand on refurbishment since Woolworths bought the business three years ago. It has also rebranded two prominent Auckland Foodtown stores in a new Countdown format.

Woolworths (Progressive's Australian parent company) released second-quarter sales results last week revealing poor New Zealand performance, fuelling speculation it needs to do something to turn the business around.

New Zealand sales in the second quarter were expected to increase by 6 percent compared to the same period last year but they lifted only 3.9 percent to A$1.1 billion ($1.27 billion).

Adding fuel to speculation about a collapse of the brands is Progressive's managing director Peter Smith's response to the Macquarie report this week, said The Independent. Smith didn't deny the report, saying only there was no news to announce.

Statements by Woolworths' chief executive Michael Luscombe have also been interpreted as indicating a brand change. He was asked by Credit Suisse analyst Grant Saligari during a webcast where Progressive was in repositioning the New Zealand supermarkets business. "We've got no doubt that the new store format is the way to go,'' said Luscombe.

"The two stores that we put on the ground as our tests have been performing very well. They were existing stores that were big stores with big numbers and they've been doing very, very strong double-digit growth since that opening. "So we've got the right format, we just need to now get the critical mass of them out there.''

Rival Foodstuffs boss Tony Carter said he had heard the rumours about Progressive restructuring its branding but declined to comment further.

Woolworths paid $2.5 billion in 2005 for Progressive and signalled it would turn around the business within three years by using the Australian model of bulk buying on both sides of the Tasman, centralising distribution systems, lowering margins for suppliers while increasing its own margins, and introducing its own brands with the result of lowering prices for customers. But the plan met with a backlash from suppliers and Progressive's workers, and more customers have moved over to Pak'n Save.

Progressive's profit growth has slumped to under 4 percent in the last two quarters at a time when total grocery and supermarket sales have increased by more than 5 percent in the period, according to the Department of Statistics. Progressive owns 148 Countdown, Foodtown and Woolworths supermarkets. Woolworths will post its half-year results on February 27.

Supermarket chain Progressive Enterprises is planning to spend up to $200 million on new supermarkets and refurbishing existing stores during the next five years.

Owned by Australian-based Woolworths Ltd, the company today said it had spent $320m on a large programme of work during the past three years, since Woolworths bought Progressive in late 2005. That work included installing new ordering, merchandising, point of sale and back office systems, as well as store refurbishments and buying land and buildings for new supermarkets.

Progressive employs more than 19,000 staff nationwide and owns 148 Countdown, Foodtown and Woolworths supermarkets.

Spending of $150m to $200m would fund the development of three to five new supermarkets each year for the next five years, and refurbishment of 18 to 20 stores every year for the next three to five years.

Progressive said it also intended to integrate back office support services including accounting and information technology to Woolworths' shared services platform, establish new functions in-house which were previously outsourced at high cost, and invest in improved supply chain systems.

Progressive managing director Peter Smith said the company expected to increase its total staff numbers in 2009. Each new store would add at least 120 new jobs once opened, he said.

While about 100 support positions could be affected by proposed changes, the company was working on alternative career and job opportunities within Progressive and the greater Woolworths Ltd group.

For the third year in a row, retailing performance is likely to be low on the list of concerns among shareholders attending the annual meeting of The Warehouse in Auckland tomorrow.

The questions are likely to be the same as they were in late 2006. Is the company going to be taken over and when?

Stephen Tindall, who controls around 52 percent of The Warehouse, still holds the key to the future of the company he founded. As he is just a non-executive director of the company these days, it is unlikely he will be scheduled to speak to Friday's meeting. But it is probable that shareholders will put the pressure on (as they did last year and the year before) for him to get to his feet and say a few words. It's likely, however, that once again shareholders will get little meat on the carcass. Tindall will most probably reiterate that he will aim to do the best by the company and the shareholders.

Behind the scenes there will have unquestionably have been very recent further, separate, negotiations between Tindall and the supermarket giants Woolworths and Foodstuffs over a possible takeover. Both of the supermarket giants were blocked from making bids when the Commerce Commission successfully appealed against a High Court ruling that such bids could be made.

However, on October 9 The Warehouse blew that out of the water by deciding to stop the move it had made into supermarket retailing with its Warehouse Extra concept. While analysts have speculated that one or both of the supermarket companies will reapply for Commerce Commission approval, they are wrong. Neither party will, because neither party now believes it needs to.

The commission's argument had been that independent Extra could lead to increased competition in the supermarket sector. But Extra is now being wound down and the hurdle is gone. The Warehouse is well under way with plans for the three Extra stores to be converted simply into normal Red Shed general merchandising stores. The company has put the exit and restructuring costs at $10m to $12m before tax but says the move will lead to annualised pre-tax improvements in operating earnings of about $9m. With Extra out of the way both Woolworths and Foodstuffs are keen to strike a deal with Tindall. But price is the big snag.

Before the commission blocked any takeover Woolworths had indicated it was prepared to offer $7.15 a share for The Warehouse. The Australian company paid $6.50 a share for its 10 percent stake, compared with Foodstuff's entry price for its 10 percent holding of about $5 a share.

Doubtless both supermarket companies will now be arguing conditions have changed enormously since 2006 and therefore any acquisition of The Warehouse should be at a much lower price level. The Warehouse stock has been hovering under $4 recently.

From Tindall's perspective, however, there is little reason to rush. He does not have to sell and he will hold out for what he sees as the right price, still likely to be about $8. It appears unlikely any deal will be reached before Christmas and, indeed, Tindall will probably want to see how The Warehouse handles its most crucial trading period in what are truly awful times for retailers.

Shareholders are likely to get a brief update at the annual meeting on latest trading. However, this will probably not add much to the $322.4m first-quarter sales figures presented to the market on November 7.

Both on an overall and same-store basis, the figures were down 1.6 percent on the same time a year ago. Other major retailers such as Briscoe Group and Hallenstein Glasson have actually reported much bigger drops than this recently - Briscoe down 8 percent and Hallenstein Glasson nearly 7 percent lower. As a store that grew up in relatively tough times in the 1980s and 1990s, The Warehouse would rate its chances of holding, and perhaps even increasing, its market share during the downturn.

Relatively robust Christmas trading figures would provide Tindall further ammunition with which to drive up any takeover bids. The likelihood remains that a deal will be done, possibly more toward the middle of next year.

Woolworths and Foodstuffs would still be able to raise the cash despite the credit crunch. Woolworths may ultimately be the more desperate to bolster its position in New Zealand since anecdotally it is still losing supermarket share to Foodstuffs.

In 2006 pretty much all the shareholders present at The Warehouse's annual meeting believed that it would be the last one. Three meetings on nobody will want to be so bold as to definitely say this will be the last time - but it really might be.

In the ongoing battle for supermarket supremacy there's a lot at stake. Last year New Zealanders spent more than $12 billion at supermarkets with the vast majority of that passing through the tills of the two majors Foodstuffs and Progressive Enterprises.

In both ownership model and approach the two rivals are radically different. Foodstuffs which owns the Pak 'n Save and New World brands is actually a collection of three regional co-operatives controlled by local owner-operators.

By contrast, Progressive Enterprises which runs the Woolworths, Countdown and Foodtown supermarkets is a far more centralised operation owned by listed Aussie retailing giant Woolworths.

The competition between the two has been likened to trench warfare a long grinding battle with progress measured in hard fought increments of a percentage or two of market share. When Woolworths bought Progressive in 2005 it was thought its massive buying power and experience from the Australian market would pose a major threat to Foodstuffs.

But, so far at least, the three co-ops have proved remarkably resilient.

Market-share comparisons between the two chains are complicated by the fact that while the publicly listed Woolworths publishes detailed numbers, the three Foodstuffs co-operatives do not.

Foodstuffs chief executive Tony Carter claims New World and Pak 'n Save had 58.4 percent of total supermarket sales in the year to February, up from around 58.27 percent the year before and around 55 percent when Woolworths bought Progressive in late 2005.

But Progressive chief executive Peter Smith begs to differ. He concedes that Progressive had a small market share loss but says this is largely due to it closing some stores and that the company's market share numbers have been pretty flat over the last two years. "We're sitting on a bit over 43 percent and it's been like that for quite some time," he says.

Most analysts seem to be of the view that Progressive has lost market share over the past three years. Sydney-based JP Morgan analyst Shaun Cousins recently told The Australian newspaper that Progressive had slipped from 45 percent to 43 percent market share.

Tim Morris, of specialist retail research company Coriolis, has compared Progressive's published sales figures with total supermarket sales data from Statistics NZ between 2003 and 2008. While Progressive's sales have grown by 23 percent over the period, the supermarket sector as a whole including independents as well as Foodstuffs grew by 37 percent.

"Foodstuffs has been growing significantly faster than Progressive," Morris says.

He has done work for both companies and describes himself as neutral. "They (Woolworths) talked some good talk when they came in and bought the business. But they've yet to deliver on the market share gains."

There are also significant geographical market share differences. Foodstuffs is particularly strong in Wellington and the lower North Island where Carter claims it has around 70 percent of the market and weakest in Auckland and the upper North Island where he says it has around 52 percent of the market.

"We are weakest in metropolitan Auckland and stronger in the regions. I suspect it's because the focus from our competitor (Progressive) has tended to be on where they live and where they know."

Carter reckons Foodstuffs' decentralised business model, with owner-operators making their own buying decisions, is a big advantage. "We give a lot of discretion to enable guys to tailor their range to the needs of their catchment."

The autonomy and enthusiasm individual store owners have for their staff and customers also make a difference, Carter says.

He also thinks Woolworths' buying power advantage has been over-emphasised. "Half of what we sell is fresh produce and there is no scale advantage in fresh produce. Of the balance, around half is supplied by New Zealand-only suppliers and the other half by multinationals. So they've really only got a perceived buying power advantage on perhaps a quarter of purchases."

In Woolworths' recent result for its New Zealand operations it achieved an earnings before interest and tax (ebit) to sales ratio of 4.19 percent down slightly on the 4.23 percent the year before and well below the 5.52 percent in the Australian supermarkets. "Ebit to sales basically measures how much profit we make from every dollar," Smith says.

The reason for the gap between New Zealand and Australia is because New Zealand has a lot of older stores, a lot of smaller stores and a lot of stores in need of refurbishment, he says. "We've got a lot of old stores that have just had an emphasis on basic groceries but not much else. We're turning that round."

New ordering, merchandising, point of sale and back office systems will be going live by the end of next month, Smith says.

"There isn't anything that's standing still in our business right now. We've had a project going on since we moved here and it's basically re-engineering the business. (Woolworth CEO) Michael Luscombe described it as New Zealand currently having open-heart surgery while it's still walking around. That's effectively what we are doing right now."

Smith promises big investment over the next five years with around 18 to 20 store refurbishments a year.

He points to the Countdown supermarket in the Auckland suburb of Greenlane, recently converted from a Foodtown, as an example of where Progressive is heading.

Painted bright green on the outside with Countdown emblazoned in red lettering, the store has a prominent fruit and vegetable section, stocks a small range of general merchandise such as vacuum cleaners and electronic equipment and features a walk-in beer chiller.

"It's a new generation Countdown you'll see a lot more of those," Smith says. "There were probably some similarities between Countdown and Pak 'n Save in the past but there aren't any now."

But it's the big box Pak 'n Save concept, with its wide aisles and product stacked almost to the ceiling, which has been the main ingredient driving Foodstuffs' growth, Morris says.

"There's a big saving in the Pak 'n Save model. "They do huge turnover per store."

Pak 'n Save has consistently come out as cheapest in Consumer Magazine's regular supermarket price surveys.

But things may be starting to change if Consumer's latest survey is anything to go by. It found that while a basket of 40 basic grocery items was still cheaper at Pak 'n Save in Christchurch and Wellington, it was less than $1 less expensive than Countdown. And in Auckland, Woolworths, Foodtown and Countdown were all cheaper than Pak 'n Save.

Woolworths certainly promised cheaper prices for New Zealand consumers when it first entered the market and drove a hard bargain demanding better terms from suppliers.

But according to one supermarket industry insider, after being beaten up by Woolworths and having to drop their prices by around 10 percent, most suppliers offered the same deals to Foodstuffs and then after the dust had settled quietly raised their prices again.

"It was a hard negotiation for some people when Woolworths came in," says Lindsay Davidson, commercial director of the Food and Grocery Council which represents suppliers. "Most suppliers I'm aware of had a subsequent trading terms discussion with Foodstuffs after Woolworths came in. In a broad sense it's business as usual now."

He's unsure whether there's any lingering ill-feeling towards Woolworths from suppliers. "We do an annual review of supplier preferences and it's all over the map. It varies year on year and category by category."

Smith is adamant that the arrival of Woolworths has led to lower prices. "The market today is a hell of a lot more competitive than when we arrived," he says. But Carter disputes this. "The relative competitiveness of their brands against ours has not improved."

Progressive has come together through various mergers and acquisitions over the past two decades and it along with some of its predecessor companies has had a number of owners, including Hong Kong's Dairy Farm Group and Australia's Coles Myer and Foodland Associates.

Because having the best sites is crucial in the supermarket game, this legacy of changing ownership has had a big impact on the situation today, Morris says. "Most people go to the closest supermarket or the one on their way home from work.

"Foodstuffs has been investing in property for 20 or 30 years. But Progressive in its previous incarnations sold off their property and didn't invest in the future. When Woolworths bought the business there wasn't a portfolio of future sites waiting to be developed. Supermarket retailing is like trench warfare. You've got to just keep throwing waves of troops into the trenches."

He accepts it's taken Woolworths almost three years to sort things because the Progressive systems were bad. "The jury is out to date. Certainly their (Woolworths) track record in Australia suggests you wouldn't count them out."

New Zealand businesses often have a tough time competing against larger Australian rivals.

Our corporate history is littered with failed New Zealand attempts to break into the Australian market, while large Australian companies have done well here, often buying and running dominant companies in New Zealand and increasing their profits.

The Warehouse, Telecom and Air New Zealand are the most recent examples of our corporate failures across the Tasman. Only Michael Hill comes to mind as a success.

Australian-owned media companies Fairfax (the owner of Stuff, TradeMe and the former INL chain of newspapers), APN (New Zealand Herald) and the banks (ASB, ANZ, BNZ, Westpac and National) have all done extraordinarily well since buying into New Zealand, particularly over the last five years as they profited from dominant positions in a relatively fast-growing economy.

So most assumed that when Woolworths bought the Progressive supermarket operation in 2005 it would monster the apparently outdated cooperative structure of New Zealand’s Foodstuffs operation.

There was plenty of swagger in Woolworths’ early approach in New Zealand. It flexed its muscles as a massive purchaser to drive down prices and margins for suppliers in new “Trans-Tasman” bulk purchasing arrangements. This made a lot of local suppliers very grumpy and lost it an enormous amount of goodwill with the supplier community. New Zealand is still a small place and many have not forgotten these tough negotiating tactics.

Then in August and September of 2006 Woolworths locked out workers at its Palmerston North distribution centre for almost a month to show them who was boss after they went on strike for fairer and higher pay. After a couple of weeks, gaps began to appear on shelves. Customers joined the queue of grumpy parties, alongside workers and suppliers. Eventually Woolworths settled, but the damage to its reputation was significant with customers used to well-stocked shelves.

This early robust approach may well have worked in Australia, but it just got a lot of people’s backs up here. There is definitely a difference in business cultures between New Zealand and Australia. New Zealand managers tend to be more consensual and less confrontational than those in Australia. They don’t like criticising rivals and tend to be much more careful before deciding to “burn” a supplier or rival or union.

Australian business leaders tend to be more brash, more willing to criticise rivals and debate issues publicly. Their approach is much more about a good stoush and a beer afterwards. Here we’re a little more reticent. There’s something about our national character which is more conservative and unwilling to confront rivals. We try to avoid open confrontation if we can. That means we can sometimes get monstered in negotiations.

This, of course, is a crass generalisation, but many New Zealanders would recognise it. I worked in Australia as a business journalist for five years and found it a much easier place to report business issues because leaders there are more direct and uncompromising, although ultimately had a more outward-looking and more optimistic view of the future. I admire it, but I know it’s different.

Toll Holdings is still patting itself on the back for the amazingly high price it managed to extract from a vote-hungry Labour-led government after years of arm twisting. People I talk to in Australia still can’t believe our government rolled over for this price. They just chuckle and count the money.

So the failure of Woolworths to win the battle with Foodstuffs is unusual. We like to beat the Australians in any battle and this win is particularly sweet.

Woolworths expected to “turn around” the business it bought for NZ$2.5 billion within three years by bringing in the Woolworths Australia model of using massive purchasing power and highly centralised distribution systems to pass on lower costs to customers while increasing margins.

Yet the three years is nearly up and the business, which includes the Foodtown, Countdown and Woolworths chains, is seeing its sales growth and profit margins dropping.

Figures from JP Morgan analyst Shaun Cousins show that Woolworths’ market share has dropped to 43% from 45% in New Zealand, while Foodstuffs’ share has risen to 57% in the last couple of years.

Woolworths’ results for the financial year released on Tuesday lay bare the scale of the failure in New Zealand.

Woolworths’ profit margin (earnings before interest and tax to sales) in New Zealand actually fell 4 basis points to 4.19% and its overall profit growth was up only 6.4%. This compared with 18.8% profit growth and a 5.52% profit margin in the Australian supermarkets.

So Woolworths is a full 133 basis points less profitable in New Zealand than in Australia. That may not sound a lot but for a tight-margin, high-volume business like groceries this is a big deal. Comparable sales growth (after taking into account the different number of weeks in the financial years) fell to 3.5% in the fourth quarter of the 2008 financial year from 9.9% in the first quarter.

This is shockingly weak when overall supermarket and grocery sales reported by Statistics New Zealand rose 5.3% in the June quarter from the same quarter a year ago. Woolworths itself said food price inflation ran at 4.6% for the year so a 3.5% rise actually implies a fall in volumes.

Foodstuffs, which owns the Pak’nSave, New World and Four Square chains, is winning the battle.

So what went wrong for Woolworths and right for Foodstuffs?

Woolworths’ robust approach to heavying suppliers and workers was not popular, but the problems run deeper. Woolworths believed it could make significant gains by imposing a centralised distribution system on Progressive and introduced big “Homebrand” ranges that are made under contract for Woolworths. It is also rolling out its own Select, Naytura, Organics and Freefrom brands for various specialist foods.

This sounds like a good idea, but other suppliers get nervous when the supermarket chain starts stocking and promoting its own brands in precious shelf space at the expense of real brands. Suppliers also seem to prefer Foodstuffs’ decentralised approach in New Zealand where the supermarket is itself the warehouse (stack ‘em high and sell ‘em cheap).

It’s easier to take the supplies direct from the factory to the supermarket than to some intermediate depot. Suppliers also like dealing direct with supermarket managers rather than with warehouse managers. It means they’re one step closer to the customer.

The latest clash between New Zealand suppliers and Woolworths was revealed last month by The Independent. Woolworths wanted to penalise suppliers who were selling goods on discount through Foodstuffs at the same time as through Woolworths. It’s no surprise suppliers don’t love Woolworths.

There’s also something more fundamental going on. Foodstuffs is essentially a collection of owner-operated supermarkets who share purchasing and marketing costs, but are often fiercely independent and “local” in their approach.

That means the individual supermarket owners are intensely motivated to run good supermarkets because they keep the profits and tend to guess right what the population around their supermarkets wants to buy.

The corporatised Woolworths model has lots of employees but not many owners.

The final (and probably key) factor is Foodstuffs’ dominance in the discount grocery area. Pak’nSave has become The Warehouse and TradeMe of the grocery world all wrapped into one. It is cheap and cheerful with great ranges.

That’s what New Zealanders want right now. We are feeling the pain from higher food and fuel prices and want to find a bargain whenever we can. Pak’n'Save is simply bigger and better at it than Woolworth’s Countdown brand, as can be seen in this report from The Press.

Woolworths is trying to turn this around by converting some of its Foodtown stores to Countdown stores (Greenlane in Auckland is one that comes to mind) and rejigging its ranges to take them down market.

I think of my own family’s buying habits in recent months. We have a great collection of Pak’nSaves around us in Auckland and quite a few Foodtowns. When we need something unusual such as gluten- and dairy-free stuff we go to Foodtown, but it’s less often than it used to be. The strike/lockout in 2006 and the shortages it caused were the trigger point for us to start looking elsewhere. A visit to a supermarket is useless if you can’t get everything in one visit.

We’re now doing our big shops now at Pak’n'Save. We reckon we can save up to $100 a week.

Kiwis love a bargain and right now we seem to love the Kiwi grocery chain a bit more than the Aussie one.

Grocery giant Foodstuffs' presence in liquor retailing could get a shot in the arm as it looks to swallow Liquorland.

The co-op, which controls around 56 per cent of the grocery retailing sector, is understood to be one of several parties interested in purchasing the 72 stores of DB Breweries' franchise retail chain. Besides supermarket wine and beer retailing, Foodstuffs also operates the large format liquor store Duffy & Finn's, and the smaller format Henry's.

Success in the Liquorland bid could add fuel to the already intense rivalry with Woolworths.

The Australian-owned supermarket firm is still pursuing Liquor Licensing Authority approval for store-within-store models selling spirits as well as beer and wine - despite being denied a bid to set up in a Christchurch Countdown in what was regarded as a test-case decision.

And success for Foodstuffs could spell trouble for independently owned stores, which cannot compete with the supermarkets' buying power. Large liquor chains have a slight edge in market share, controlling around 53 per cent, to the independents' 47 per cent.

Foodstuffs was not commenting on speculation of the bid, as was DB, citing confidentiality agreements. A DB spokeswoman said the company decided to review the option of selling the Liquorland franchise after several unsolicited expressions of interest. "We're not committed to a sale - we're investigating the possibility. "We just received a bit of interest and like any business, we evaluate opportunities as they arise. "Liquorland is a successful asset for DB Breweries, so while we are looking at the option to sell, we will only consider this if a suitable buyer is identified."

Cranleigh Merchant Bankers was appointed last month to evaluate bids and manage the sale process. Evaluation of a possible sale will take place over the next few months. The spokeswoman said any sale would ensure the future interests of franchisees and staff, and the continuation of the franchise as a whole. A sale would also need to ensure that DB retained "an excellent relationship" with the franchise, retaining placements for DB products within Liquorland outlets, the spokeswoman said.

Questionable supermarket policy needs investigation: Greens

Allegations that supermarket giant Progressive Enterprises is applying pressure to its suppliers adds further impetus to the Green Party's call for a Commerce Commission inquiry into industry practices, and a code of conduct for supermarkets, Safe Food Spokesperson Sue Kedgley says.

According to a news report, grocery suppliers will be penalised for having their products promoted in rival supermarkets at or around the same time as Progressive's own advertised promotions. If this occurs, suppliers would be charged for the differential on the price offered in the opposition supermarket.

"These are precisely the kind of tactics that penalise small independent growers and suppliers who are already struggling in a highly competitive environment," Ms Kedgley says. "Progressive allegedly wants details of suppliers' supermarket specials with trade competitors - in advance - and will not accept promotions for inclusion in its mailers where there is a clash with a competitor's promotion arranged by the supplier," Ms Kedgley says.

Ms Kedgley says she is alarmed at reports that, while suppliers are furious about these practices, they fear if they don't play ball, their products would be left off supermarket shelves.

"Why should a farmer who grows and supplies broccoli to Progressive and the local New World be punished by a retrospective cut on their payment from Progressive because New World decides to have a special on broccoli in the same week?

"Most farmers and manufacturers have nowhere else to sell their produce than the two supermarket chains that control 96 percent of New Zealand's grocery market. An investigation would clarify whether there is any truth to the allegations that Progressive may be misusing its position to force small farmers and business people to take cuts in their margins.

"It would also determine whether this practice breaches the restrictive trade practices under the Commerce Act.

"New Zealanders spent $16 billion in supermarkets last year. They are a huge business, and it is essential that there are clear rules governing the trade, which prevent unfair trading practices occurring in the sector. That's why we need a Commerce Commission Inquiry into the sector and a code of conduct for supermarkets, such as exists in the United Kingdom," Ms Kedgley says