A Review To Critically Examine The Procurement Methods Used By Coles And Woolworths To Secure Supplies And The Impact It Has On Their Suppliers

Executive Summary
This report reviews and critically examines the procurement methods used byColes and Woolworths to secure supplies and the impact it has on their suppliers.
Both Woolworths and Coles are in aggressive competition against each other to gain market share and increase their profit margins. In their drive to maintain this growth and reduce pricing for the consumers they are both leaning heavily on their suppliers to drop their prices.
Coles and Woolworths command 80% of the Australian market share.Due to the dominance, this gives Coles and Woolworthsthe bargaining power and control over their suppliers. Both have been accused of using heavy-handed tactics and anti-competitive practices and are under enquiry by the Australian Competition and Consumer Commission (ACCC).
This report concludes that should this procurement practice be allowed to continue, it will have negative consequences for competition in the long term, which will inevitably have an undesirable impact on the consumers as well because pricing will increase.
Effective measures and regulatory legislation is required to prevent unfair commercial practices and to promote fair-trading amongst the retailers and suppliers.

Problem Definition
This report will review and critically examine the procurement methods that supermarkets use to secure supplies and the impact it has on their suppliers. This report will focus on Woolworths and Coles as the two supermarket giants in the Australian retail industry.
Background
According to Fernandes (2014),the supermarket sector is highly concentrated with two chains dominating the market, Woolworths and Coles. They compete aggressively, using value-driven strategies to win customers hearts and dollars. Coles launched its Status Quo-inspired campaign, Down Down, forcing Woolworths to respond with Everyday Low Prices.
The competition has had a severe impact on Coles and Woolworth's relationship with their suppliers.
Woolworths
Woolworths Limited, Australia's biggest retailer, operates supermarkets, petrol stations, hotels, liquor stores, consumer electronics, hardware and general merchandising stores across Australia and New Zealand. Woolworths Limited is considered one of the largest private sector employers in Australia.(NTT Data, 2013).
Some known facts about Woolworths:
' 3490 suppliers work large and small work with Woolworths.
' Fresh food people: - 111,304 employees in Woolworth's supermarkets and supports functions across Australia.
' 96% of their fresh fruit and vegetables are grown and farmed in Australia
' 100% of their fresh meat is sourced from Australian producers
Coles
(WesFarmers-our business-Coles)The Coles division was formed in November 2007 as a result of the acquisition of the Coles Group by Wesfarmers. Coles is a leading food, liquor and convenience retailer, with a presence in every Australian state and territory. The business operates more than 2,200 retail outlets across Coles and BiLo supermarkets, First Choice Liquor, Liquorland, Vintage Cellars and Coles Express. The Coles division is an integral part of the Australian retail sector.
Some known facts about Coles:
' 100% Australian owned
' More than 99,000 team members
' Approximately19 million transactions a week
' 100% ownership of Australia's largest loyalty program FlyBuys

As depicted in Figure 1, Coles, Woolworths form a duopoly of Australian supermarkets, together accounting for almost 80% of the Australian market(Mules, 2011).

Procurement Methods
What isprocurement?
According to WiseGeek (2014), 'Procurement process is the term used by businesses to describe the buying process, and can refer to the purchase of supplies or services'.
Types of Procurements
There are two types of procurements, direct (raw material and production goods) or indirect (maintenance, repair and operating supplies). Depending on the consumption needs the retail industry uses one or both of these methods to procure goods.
Procurement methods
Procurement methods are many, and they go by different names depending on the procurement category. Most, with few exceptions, generally fall into the following types:
' Open Tendering,
' Restricted Tendering,
' Request for Proposals,
' Two-stage Tendering,
' Request for Quotations, and
' Single-source Procurement.

Both Woolworths and Coles are in aggressive competition against each other to gain market share and increase their profit margins. In their drive to maintain this growth and reduce pricing for the consumers they are both leaning heavily on their suppliers to drop their prices.

Issues with Procurement
Due to the dominance both Coles and Woolworths have on the Australian retail market, this gives them bargaining power and control over their suppliers.
Reference WIKISuppliers have accused Coles and Woolworths of using heavy-handed tactics and anti-competitive practices. However, an investigation in 2004 by the Australian Competition and Consumer Commission did not result in any action being brought against Coles and Woolworths. A 2012 investigation where suppliers were offered anonymity is believed to have uncovered unethical practices. In 2013, the Australian Competition and Consumer Commission (ACCC)began investigating both Coles and Woolworths over accusations that they used improper market practices to force down prices from their suppliers.
Due to the fear of retribution, only 50 suppliers have anonymously lodged complaints so far.
Some of the allegations against the two supermarketgiants,which the ACCC chairman is investigating include:
' Persistent demands for additional payments from suppliers, above and beyond that negotiated
' Suppliers were being bullied into reducing their prices
' Coles and Woolworths are locking suppliers in long-term contracts
' The imposition of penalties that did not form part of any negotiated terms of trade;
' Threats to remove products from shelves or otherwise disadvantage suppliers if claims for extra payments or penalties are not paid;
' Notproviding sufficient notice to pull out of contracts
' Leaving suppliers to bear the cost of unsold products.
' Failure to pay prices agreed with suppliers;
' Discrimination in favor of home brand products.

Case Studies
As a result of ongoing issues, some large suppliers have pulled out of their contracts and/or formed new contracts, as they were highly unsatisfied with the level of treatment received from Coles and Woolworths.

The following case studies provide a high level overview of the damage Coles and Woolworths procurement method has caused between them and some of their suppliers.
Dairy Co-Operative
Coles flared a controversy when they slashed the price of their home-brand milks, placing further price pressure on branded suppliers.
Coles signed a controversial ten-year agreement in early April 2013 with the Murray Goulburn dairy co-operative, whereby farmers will supply 200 million litres of milk annually for the supermarket chain's private label milk brands in return for premium prices. The co-operative announced that it would invest AU$120 million to construct two new dairy processing plants in New South Wales and Victoria to fulfill the deal. Coles seeks to receive a 10 per cent discount on the cost associated with its former milk supplier Lion.
Heinz case:
Heinz bosses blamed supermarket duopoly for erosion of its profit margins. Being a global food manufacturerHeinz has slammed the market power of Coles and Woolworths for fostering an ''inhospitable environment'' in Australia for suppliers.
According toGreenblat, chairmanBill Johnson claimed, ''There is no doubt that in terms of retail environment, the Australian market is the worst market, and ultimately the people that will pay the price over there are the consumers because products will ultimately be devalued to address the price points that customers are asking us to address'.
Fosters
When Coles and Woolworths began a price war on beer in March 2011, Fosters immediately took action to halt their beer deliveries to these supermarkets. Fosters, being a large multinational company, was able to exert its market power as a supplier, but many smaller suppliers are not in a position to take such action. Fosters were concerned selling their beer at below cost would impact their brand and hurt independent liquor outlets.
Regulatory Solutions
Under the voluntary code of conduct, Coles and Woolworths have undertaken not to change the terms of supply contracts retrospectively, charge suppliers for goods broken and stolen at stores or seek payments from suppliers to secure better shelf positioning.
AUSTRALIA'S biggest supermarkets have agreed to a code of conduct governing how they deal with suppliers, providing a potential solution to long-running tension between food and grocery producers and retail giants.

Conclusion
Should this procurement practice be allowed to continue, it will have negative consequences for competition in the long term, which will inevitably have an undesirable impact on the consumers as well because pricing will increase.
Due to the unfair procurement methodsbetween the supermarket giants and their suppliers, many suppliers are pulling out of their contracts. This may lead to further issues in the supermarket industry because if no Australian suppliers are willing to do business with Coles and Woolworths. They will have no choice but to go to international suppliers, which will impact price increases for the consumer.
Effective measures and regulatory legislation is required to prevent unfair commercial practices and to promote fair-trading amongst the retailers and suppliers.

Source: ChinaStones - http://china-stones.info/free-essays/business/review-critically-examine-procurement-methods.php



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