Supply deals the way to go, says Coles

JULY 04, 2014
THE AUSTRALIAN
NEWLY elevated Coles managing director John Durkan is seeking more long-term supply deals with food manufacturers after signing a 10-year contract with Murray Goulburn that is expected to see $1 per litre milk remain a fixture in Australian supermarkets.
Speaking at the opening of dairy co-operative Murray Goulburn’s $80 million milk processing plant at Laverton in Melbourne’s western suburbs, Mr Durkan said the deal not only cut costs for Coles and therefore for customers, but provided the certainty suppliers needed to invest for growth.
“We want to start entering into more long-term agreements with farmers in general … five to 10-year contracts are the way to go for Coles, and we want to support the farming community with these sorts of contracts,” Mr Durkan said.
The Murray Goulburn plant was built to supply Coles with 1.3 million litres of Coles-brand milk per week to supermarkets in Victoria, ensuring it can continue to sell milk at $1 per litre — a price that led to an outcry from dairy farmers when first introduced in 2011.
Speaking at the launch, Tony Abbott came to the defence of Coles, which is facing Federal Court action over allegations it bullied suppliers into paying rebates.
“Coles cops a bit of flack because it’s our biggest retailer and Coles and Woolies between them have a very dominant position in Australian retailing, but it was a great credit to Coles that they were prepared to offer Murray Goulburn a 10-year contract, because that’s what Murray Goulburn needed to invest $160m in this plant and in a comparable plant in Sydney to service that contract,” the Prime Minister said.
On just his third day since taking the reins as managing director from predecessor Ian McLeod, Mr Durkan said he believed Coles had a strong defence in the Federal Court case, which has been brought by the Australian Competition & Consumer Commission.
“There’s more to this case than would meet the eye from the pleadings from the ACCC — we feel we’ve done the right thing for suppliers over the past five years,” he said.
“We’re very positive about our case, and we’re going to put our right foot forward in talking about the $1 billion we’ve invested in our supply chain and the benefits that has brought to suppliers.”
The ACCC has alleged that in 2011 Coles threatened smaller suppliers with sanctions including having their products dropped altogether unless they paid Coles a rebate equivalent to 1 per cent of the value of their orders.
In a defence lodged with the court, Coles has said the rebates were sought in return for giving suppliers access to its new computerised ordering system which provided substantial forecasting information, and for Coles ordering in “economic quantities” that cost less per unit for suppliers to deliver.
“It was a voluntary scheme, and if suppliers didn’t want to sign up, we still traded with them,” Mr Durkan said of the case, which names him as having overall ­responsibility for the scheme in his former role of merchandise ­director.
He also denied claims from the Master Grocers Association that Coles was buying up sites and opening stores in areas that did not have sufficient demand to support a supermarket, just to take market share away from the independent competitors the MGA represents.
“We only open stores in areas that will support a profitable supermarket … in the past five years we’ve closed as many stores as we’ve opened, because we’ve been closing unprofitable stores,” he said.
“There’s no fixed time for a store to be profitable … but it’s relatively quick and we’re very cognisant of not opening too much space because we need to make the right shareholder returns, we won’t just open space for the sake of it.”