What the Australian supermarket takeover means

Wesfarmers has made a takeover bid for the Coles Group, which includes Australia’s second most successful supermarket chain, after Woolworths. This week the National Association of Retail Grocers in Australia, which represents independent grocery groups such as IGA and Foodworks, released a report showing Coles and Woolworths controlled 79% of the market. By comparison, it found that Britain's top two supermarkets, Sainsbury's and Tesco's, had 48% of the market, and in the U.S., Wal-Mart and Kroger have 20%. NARGA chairman John Cummings told The Age that greater supermarket concentration in Australia will mean higher prices for consumers and lower quantities of local produce.

"We're constantly, as independent business people, getting told by growers, by meat processors, by farmers, by small manufacturers, that they have been screwed to the nth degree [by the major supermarkets] and they can't go any further," he said.

Wesfarmers is a nearly 100-year-old company whose sentimentally pastoral name reflects its origins as provider of services and merchandise to rural Australians. Today, it’s a conglomerate with coal mining and liquefied petroleum gas businesses, insurance services (it’s one of the largest rural insurers), and home-improvement retail stores, and it also supplies chemicals and fertilizers to the mining, industrial, and agricultural industries. The merger would allow Wesfarmers to "expand housebrand products, extend global sourcing and benefit from colocation and store refurbishments,” Citigroup retail analyst Craig Woolford told the Herald Sun in Melbourne. Wesfarmers has tried to assure Coles' shareholders that it will redesign Coles' down-at-heel and dowdy supermarkets and improve the way they’re managed to “drive a customer proposition around value and convenience.”

Value, however, means shareholder value by way of a solid and rising price for the company’s stock, and to achieve this Wesfarmers will likely look to further cut the prices of their already tightly squeezed and increasingly environmentally challenged suppliers. In the bottom line of a financial report, if the supply-chain economics of locally produced produce is unfavorable, if floods in Gippsland drown carrots that were being grown for the shelves of Coles and Woolworths and they have to be ploughed into the ground, what happens next? If alternative sources of Australian carrots are too expensive to deliver the point-of-sale price projected for consumers, to earn the desired profit for shareholders, then will the supermarkets bypass Australian growers entirely and fly carrots in from somewhere else in the world? When Richard Cornish recently wrote a story for The Age in Melbourne about trying to consume only food produced within a 100-mile radius of the city, at Coles he found fruit grown in Victoria but also internationally grown produce. "Stacked on a shelf nearby, however, are bundles of out-of-season asparagus," he wrote. "There's no indication of their country of origin on the shelf or on the front of the label, and it's quite difficult to bend the thick plastic label back to reveal it was grown in Thailand. It is obvious from the silhouette of a 747 on the sticker that the baby corn has been flown in, but the country of origin, again Thailand, is obscured on a bend in the packaging."

In Australia, small farmers compete for space on the supermarket shelves with massive horticultural projects created by agribusiness corporations that are geared up to provide cost benefits to the supermarket chains. In January of last year Matt O’Sullivan wrote in the Sydney Morning Herald about how Coles and Woolworths are changing the face of food production in Australia. Corporations once avoided investing in horticulture, Mike Keogh head of the the independent policy think-tank the Australian Farm Institute told the Herald, but now “they’re seeking greater exposure to the sector because it tends to run counter to broader economic cycles.” The Victorian Costa Group has trademarked the name Blush for variety of vine-ripened truss tomatoes that are reminisicent of what we think of as real tomatoes: juicy, red, firm but yielding. The company has the largest and most sophisticated greenhouse in the country, 5 hectares under one roof, and estimates that it handles over a billion dollars' worth of tomatoes every year. Timbercorp, another agribusiness company, is diversifying from producing lumber to offer investments in the production of olives, almonds, avocados, wine grapes, tomatoes, tropical fruit and citrus. “The agribusiness sector is now recognised as a legitimate asset class, providing substantial taxation deductions,” Timbercorp explains in a press release. “There are a wide variety of investment products that cater for the diversified range of investment requirements by discerning investors. From early cash-flow income styled projects to longer-term wealth-creation products, most investment needs can be met.”

The options for small farmers? Move into organic production, still considered a niche market here, or to grow produce that isn't suited to large-scale industrial production according to Mike Keogh.

The Sydney Morning Herald described Wesfarmers CEO Richard Goyder as the son of a sheep and cattle farmer, and wrote of him aligning the humble single store beginning of Coles and the quaint rural origins of Wesfarmers as a farmers cooperative, both almost a century ago. But the Wesfarmers CEO and Coles Chairman Rick Allert talked over the deal at the five-star Park Hyatt in Sydney, with magnificent views of the Opera House, where standard rooms are $A600 a night, and the hotel’s restaurants serve a seasonal menu of “award-winning Australian cuisine.” On the menu at the Park Hyatt in Sydney is seafood from Petuna Ocean Trout in Tasmania, a company chronicled by Justin North in Becasse: Inspirations and Flavours. Cervena Venison from New Zealand, from animals raised in free-range conditions that are free from antibiotics and growth hormones. (An 8 rib rack weighing about 2.8lbs can be ordered and shipped from Amazon.com for $US48 plus shipping.) Luxury Japanese-style Wagyu beef. And Jannei goats curd made painstakingly in small quantities, with milk from a herd of a 100 goats on a 14-hectare farm near Lithgow in New South Wales.

The stories in the business sections of Australian newspapers chronicling the meetings and dealmaking that led to the Wesfarmers-Coles agreement make clear  that those who are dealing with food as an abstract financial entity graze from a different food chain than the people who are dependent on affordable, fresh food being available in supermarkets. The caterers who provide meals for the corporate boardrooms, the restaurants in the five-star hotels where the bankers, lawyers, advisers and executives stay, and the high-priced restaurants they frequent are able to purchase their produce from artisan farmers and luxury food purveyors. The price of such produce reflects what it really costs to produce, and these growers don't need to compromise the sustainable, even biodynamic or organic principles they follow to sell high-volume produce to supermarket chains.

Today, in an interview in The Australian, Wesfarmers CEO Richard Goyder said he never wanted to follow his father into farming. "I thought there were too many elements outside your control that could have an impact on you," he said. 

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