Is this the end of the road for IGA?

THE future of your local IGA has just got a lot more cloudy. The Government has signalled it will crack down on the struggling supermarket system even as it loses market share to Aldi, Coles and Woolworths.

Before we see why your IGA could be in strife, we need to look at how IGAs work.

You probably know the I in IGA stands for independent. What you might not know is that almost all IGAs depend on a big grocery wholesaler called Metcash. Metcash supplies them with the groceries they sell (except in Tasmania, it's different down there). But Metcash is now in the Government's sights, and that could squeeze the local IGA.

Metcash always seems to be a few years behind the big two supermarkets. You might remember a few years back Coles and Woolworths got in big trouble for the way they were treating their suppliers.

There was a ruckus and a Grocery Code of Conduct was set up to prevent it from happening again. The Grocery Code is a weird law - you have to agree to be part of it, but once you agree, it applies like any law. Aldi, Coles, Woolies all agreed to abide by the system and it has apparently made a positive difference. Their suppliers are happier now.

But Metcash opted out of the Grocery Code. And now the Government is after them. It commissioned a review on how the Grocery Code is working, and the draft report singles out Metcash for its behaviour towards the farmers and food manufacturers that fill IGA shelves.

"The review received complaints from suppliers concerning the conduct of Metcash, including issues relating to unilateral demands, forensic accounting practices to offsetting amounts owed without the supplier's consent, failure to comply with promotional terms, and requiring payments above reasonable costs to conduct study tours," the draft report says.

"The review identified ongoing issues between the wholesaler and its suppliers. Metcash should become a signatory to the Grocery Code."

The draft report could change, and even then the Government doesn't have to accept the recommendations. But it seems very likely Metcash will soon find itself with its back to the wall.

STRUGGLE TOWN

The narrow aisles of the IGA were once a big part of Australians' grocery shopping lives. But that has changed and IGA is slowly becoming a victim of our enthusiasm for Aldi. Metcash now has around 7 per cent market share and dropping.

 

Is this end for your local IGA?
Is this end for your local IGA?

The review outlines the problem - Metcash and IGA are behind the times.

"With increased price competition, independent retailers and Metcash have faced a steady decline in their turnover over the past five years. Questions have also been raised about whether its traditional wholesale model remains suitable for adapting to changes in consumer habits," the review says.

ADVANCE FAIRLY

Everyone would agree that Metcash should treat suppliers fairly. But IGAs already struggle to compete on price with the big chains. Forcing Metcash to sign up to the code might make its groceries even pricier, and accelerate the decline of the humble IGA.

So it would be no surprise if Metcash wants to avoid the code. I asked Metcash spokesman Steve Ashe whether Metcash would still be viable if it had to sign up to the code, and if IGAs would have to shut down. He didn't answer those questions directly, but he didn't exactly show enthusiasm for fully signing up to the code.

"Our model is based around partnering and working closely with our suppliers. We believe we already comply with the parts of the Code that relate to us, and would consider signing up to components of the code that do not, lead to an adverse impact on the competitiveness of our independent retailers," he said.

Metcash can try to duck and weave, but the review suggests the Government should just shirt-front them if they do.

 

"In the event Metcash continues to remain outside of the Grocery Code, the Review recommends that the Government introduce a separate mandatory code of conduct containing the same substantive terms as the current Code (together with any amendments adopted as a consequence of Government accepting recommendations in this Report) with targeted application to Metcash," the review says.

That struck me as a fairly harsh approach, and actually made me wonder how much influence Coles, Woolworths and Aldi might have had on this report. Nevertheless, it seems the Government will soon be on the warpath, and the threat of a mandatory code might be enough to force Metcash to sign up "voluntarily".

CAN'T WE ALL GET ALONG?

Treating your suppliers badly to get cheap prices is the easy way to get cheap prices, but not the only way. Aldi is renowned for having excellent supplier relationships and very low prices, and its market share rose from 7 per cent in 2014-15 to 9 per cent in 2017-18. It goes to show both sides can be happy if you're willing to do things differently.

The question is whether Metcash can do things differently, or if it is stuck in the mud. With Kaufland arriving soon and Costco expanding, competition in the Australian grocery sector is only getting more intense. For IGA to go on and thrive, Metcash and IGA need to shake things up, urgently.

Jason Murphy is an economist, and writes the blog Thomas the Think Engine.


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