Progressive Enterprises

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.

Waikato supermarket owners are "blown away" by figures showing a 42.5 per cent rise in food prices since 2000.

The news has prompted Labour consumer spokeswoman Carol Beaumont to call for the Government to encourage more competition in the supermarket sector.

New Zealand grocery prices have risen 42.5 per cent between 2000 and 2009, followed by Australia which pays 41.3 per cent more, Britain's prices rose 32.9 per cent and America's were up 28.4 per cent, according to a study out yesterday.

Pak `n Save Mill St owner Glenn Miller said he was trying to obtain a grocery bill from nine years ago as he and his staff doubted the cost of many grocery items had risen to that extent.

He said a can of spaghetti cost 90c in 2000 and now customers would pay $1.09 for the same can. "At Pak n Save the margin we enjoy is lower than many other countries in the world and we think we are still very competitive given manufacturing cost and we try and keep our overheads down," said Mr Miller, who believes Pak `n Save is extremely competitive.

Vege King owner Swaran Singh said prices at his Fairfield fruit and vegetable shop would have risen by up to 10 per cent at the most. In some cases prices had not changed. He said the price tag on asparagus had stayed at $3.99 since 2000.

Progressive Enterprises, which owns Countdown, Woolworths and Foodtown, blamed international events such as drought as the main drivers of food inflation. Progressive spokesman Bill Moore said the group was consistently striving to offer the best prices and its profitability had remained at between 3 and 4 per cent since Australian-owned Woolworths Limited purchased Progressive four years ago. The group said there was plenty of competition between supermarkets, delis, butchers, green grocers and bakeries.

But Ms Beaumont has questioned why New Zealand is not following the example of Australia's Competition Minister, Craig Emerson, whose government was taking "hard measures" and lowering the barriers to other retailers competing with Coles and Woolworths on that side of the Tasman.

She was critical of Consumer Affairs Minister Heather Roy's suggestion that New Zealanders "shop around" to combat some of the fastest-rising food prices in the developed world, saying it had attracted widespread criticism. It was "poor advice" to families struggling with soaring food bills, Ms Beaumont said.

Public comments on news websites and on talkback radio produced a stream of consumers critical of grocery pricing, with many calling for overseas chains such as Aldi and Costco to compete against New Zealand's Foodstuffs (which owns Pak `n Save and New World) and Progressive Enterprises.

Hamish Wilson, of Consumer New Zealand, said there had been some attempts by other companies, such as The Warehouse, to break into the supermarket sector "but it's pretty difficult". The controversy arose in the wake of the Australian study which says the price of food in New Zealand has risen faster than in any other OECD country other than Korea.

- With NZPA

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.

SOME shoppers are suspicious of a planned five-cent tax on plastic shopping bags by the Foodstuffs chain, concerned that it will serve only to boost profits.

Foodstuffs, which uses about 250 million plastic bags a year, said yesterday that, for environmental reasons, it would charge 5c for every bag sold at its New World and Four Square supermarkets from August 3.

The levy would raise $12.5m a year, if the 5c tax did not reduce the amount of bags used.

Shoppers clutching plastics bags outside Chaffers New World in Wellington had a mixed reaction to the charge yesterday.

Andre van den Assum and Annabel Gardner both said the 5c charge was acceptable, as long as it did not simply boost supermarket coffers.

"If it goes to a charity or an environmental project, that's okay," Mr van den Assum said.

Jason Strawbridge said the bag tax would probably reduce plastic bag use. "But they are just trying to make more money, really."

Foodstuffs managing director Tony Carter said profits would be used to pay for an environmental initiative that has yet to be announced. "Clearly any benefits we get as an organisation we'll pass on to consumers in other ways." A Foodstuffs spokeswoman said "a significant proportion" of funds raised by the levy would go toward environmental projects, the details of which were still being worked out.

Some shoppers welcomed the bag tax. Laura Gilkison, 15, said she would accept a levy of up to 20c. "I'm all for the environment."

Emily Hughes, 16, has just moved from Ontario, Canada, where there is also a levy on plastic bags. "Pretty much no-one uses them now."

Progressive Enterprises supermarket chain said it had no immediate plans to follow its competitor's move. Company spokesman Bill Moore said it was looking at options.

Mr Carter estimated 600 million plastic bags were used by New Zealand supermarkets annually. He would not say how much Foodstuffs paid for its bags, but it was less than 5c each.

Speech by NDU Retail Secretary Maxine Gay to the Council of Trade Unions' 'Unions and Productivity' conference, 18 March 2009

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.

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."