• Gary Rollo says lean, agile small companies are the engine room of the nation’s innovation here's why.

More choice and lower prices? Fat chance.

logo

More choice and lower prices? Fat chance.

Rising costs, lower productivity and a strong Australian dollar will inevitably be blamed for the collapse of another food manufacturer in Australia this week.

Gourmet Group, the company that owns the iconic Rosella Brand of tomato sauce has been placed in receivership with reports it owes as much as $50 million.

But this additional nail in the coffin of our collapsing food manufacturing industry is exactly what the government wants, it may also be what the ACCC wants and it is what Australian consumers want. And if they all complain that they don’t want it, it’s what they’re going to get.

Quite simply Australians cannot have rising salaries, and landlords and investors cannot enjoy rising rents, while at the same time continuing to demand lower prices.

The government has conditioned Australians to demand lower prices and in return the government’s trade policies in almost every industry – from car manufacturing, to food manufacturing to the competitive landscape of the airline industry – is attuned to ensuring lower prices for consumers.

Indeed the very next page, to the article in today’s Financial Review piece announcing Rosella’s collapse, is an article about the ACCC and the very good work they are doing bringing companies to account for their misdemeanours. But in reference to the Qantas/Emirates tie up the chairman was quoted as saying “We are concerned that a reduction in competition will result in customers paying more”.

Paying more? That’s bad. Permanently rising unemployment as baby boomers retire will require cheaper prices please. So lets deliver that. That will get us all re-elected.

Walk down the isle of any supermarket and witness the “consumer benefit” of our current policy settings. Fewer brands than ever before, little or no innovation and why? Because Coles and Woolies have been allowed to engage in legislated expansion and growth to such a point that there are simply no alternatives. Bring in home brands and generics and put them at eye level and the best real estate on the shelves at vastly discounted prices and suddenly there’s no Rosella on the shelf anymore. Less choice.
You want lower prices? You’ve got them. But not for long.

Just wait. It only requires patience on your part and it won’t take much longer. Get rid of the choice of brands (they’re all going broke anyway trying to jump through every hoop the supermarkets insist is required to deliver cheaper prices) and once those alternative brands are gone, you just watch those home brand prices start to creep up. That homebrand block of butter that today is $1 cheaper than Western Star? It will go right up to the Western Star price, once Western Star is gone.

Woolies and Coles will moan on about how the raw materials are going up or that they are the largest employers in the country and their staff are demanding higher salaries and they will justify raising the prices of the generic items. Less Choice and higher prices. As my kids would say, AWESOME!!!

“Down, Down, Prices are Down” is a relative slogan not an absolute one. And what can the ACCC do about that?– zip.

So come on Australia, lets cheer the collapse of Rosella and any other brand that tries to offer real choice and compete with the big boys. Their collapse ensures cheaper prices…for just a little longer.

Alternatively we all wake up from our stupor and insist some brain power and spine is injected into that vein we call Canberra.

INVEST WITH MONTGOMERY

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


9 Comments

  1. “Alternatively we all wake up from our stupor and insist some brain power and spine is injected into that vein we call Canberra.”

    no chance of this

    what we need is free market not crony capitalism.

    when you see kids selling soda on the street and not being asked for license than we can see light

  2. Very thoughtful article,Roger.
    I hope you and Dick Smith form a political party before Australia is sold down the river by our present bunch of incompetents.
    You will certainly get my vote.

  3. Scott Williamd
    :

    Coles and Woolies do not care for the Australian Industry because they are filling the ranks of their buying teams with staff from overseas. The buyers are not local and have no regard apart from pushing down the profitability of every supplier. If you happen to see the UK Grocery trade magazine you will find full page ads from Coles and Woolies advertising to relocated interested staff.

    What is wrong with the personnel available in Australia? It is that those hired from the UK to run Coles want to instil their tough buying culture?

    Why do we have an English celebrity on the Coles advert who hardly anyone in Australia even knows? Perhaps the Marketing Director does not realise their new celebrity is not well known here?

    Look closely at the proliferation of English brands you now see on the shelf and you will find that Coles is the importer and distributor, the products will not be unique, just the equivalent of a local brand that is exclusive to that retailer in this market.

    Try to sell back into the UK market and you will be met with complaints of ‘food miles’

    As Roger said the problem in the culture we have developed here. The federal government are idealist and theorists with no business experience on the ground. Free Trade Agreements are good in theory however the practical reality if one way trade coming into Australia as the bigger stronger economy always wins in ‘free trade’ Have a look at the figure in trade with the USA since we signed up for ‘free trade’ with them…

  4. The same happened in the late 1980’s through the 1990’s with fresh produce. Woolies used fruit and veg as a non profitable line to get customers in the shops..This was the time they really captured market share of customers from coles .
    They put many small green grocers out of business also during this time, so reducing competition.
    In the last 10 years, the markup or G.P on fruit and vegs is huge, you could say they are gouging the consumer. Non profitable to very profitable..
    They now get a big percentage direct from the growers and insist that the growers interest are always met. Strangely they base the price they return to the growers on the market price. If you have 70% of the demand (coles and woolies) bypassing the market, you have lower prices, so the growers that think they are getting looked after are actually receiving less than if they marketed their fruit through the central markets, basic supply and demand. Again helping their bottom line.
    One thing you can be certain of, ” lower prices, and staying down” slogan, will soon need to changed.

  5. This is exactly what Coles and Woolies did in the fuel industry, forced the small independents out with their cross subsidized discounts. Everyone loved the discounts, but now with less competition consumers are now paying price. Some people may even believe they are still saving money!

  6. Roger
    You are right but (with regard to your last sentence) in the words of an eminent Australian “You’re dreaming.

  7. Very spot on post Roger.

    It brings me back to some comments i heard about the $1 a litre milk being sold by coles and woolies that was causing dairy farmers big problems. For all the outrage, people still went in and picked up their $1 per litre milk which helped me come up with my theory that “it’s what we want that matters, not what we need” when it comes to investing. Your post is another example of this.

    Sure we like Tomato Sauce, sure some companies have a good brand in tomato sauce, but do we care about the brand of tomato sauce enough that we are willing to pay more than we need to? This i think is true regardless of the economic climate but obviously the worse the economic sentiment the bigger this effect will be.

    Walking through Woolworths or Coles is a great way to spot businesses with huge competitive advantages. How? Well take a look at the confectionary aisle and tell me where the generic home brands are. There aren’t any and that is because even though we don’t need to eat chocolate (and parents would tell their kids they shouldn’t), we desire our favourite brand so much that we would not think about trying to save money on it.

    An example, Woolies has no home brand chocolate in the confectionary aisle to compete with Mars, Kit Kats, Cadbury etc, but it does have home brand cooking chocolate blocks. Why? As we really don’t care what brand of chocolate we put into a saucepen and melt as some type of recipe.

    The lower the amount of home brands in an aisle, the more that segment has some type of brand equity and competitive advantage.

    And you are exactly right Roger, why do i think this phenomenon exists?

    It is because as consumers it is how we behave, we want it to exist like this. We will happily pay what ever the asking price for what we want and desire but the boring items that we need, well we only want them because we need them so we want to limit the amount of money we need to spend so we can buy that extra packet of Tim Tams or Pringles.

    It is a big problem, one that i don’t think is easily fixed as consumers do expect low prices. Why else are Coles and Woolies fighting eachother with boxing gloves and giant down point fingers (although it is more diagonal). Kmart and Big W have the same thing happening and every Bunnings ad will end with Lowest prices guaranteed.

    Until the consumers change their behaviour then this will only get worse and you are right, we will end up paying more as competition will decrease. We will have no-one to really blam but ourselves.

    From an investing point of view though, it helped me realise, if you are going to buy a consumer good manufacturer, be really careful about the segment they are in. Chocolates, Soft Drinks, Potato Chips all seem quite good options, but sauces, cooking material such as flour, salt etc and many others are not so good places to be.

  8. Compounding the cheap price mentality I believe is the ‘supersize ‘ portion at a lower price mentality. Why by smaller at higher quality when you can have bigger for less.

    Is it our ‘junk food give it to me now because I dont want to wait’ attitude coming back to bite us? Time will tell I guess.

Post your comments