A bit of background info about the Tesco factor.
The story of Coles as a rundown chain that once lagged behind Woolworths is now part of the Wesfarmers narrative. But Durkan’s next words were more telling:
We also needed to get back to being customer facing; the company had drifted away from the core retailing principle of making sure the items customers wanted were there for them to buy, rather than just offering them what suppliers had available. In the first few weeks we held hundreds of meetings with suppliers to get feedback, and whilst they clearly wanted a resurgent, successful Coles, they had to also accept that they would have to supply what the customers wanted rather than what suited them to supply.
This was a turning point in Australian retail history. What is known as the “Tesco playbook” (it might as aptly be called the Asda playbook) had arrived. McLeod and his team had a genius for increasing sales and profitability at a time prices were falling – “Down, Down”. In 2011, they lowered prices by an average of 10%, and Coles’s sales took off.
If global food price deflation was good luck, the strategy was calculated, if not entirely new. Back in 1999, a House of Representatives inquiry into the retail trading sector, chaired by the Liberal MP Bruce Baird, described the market as “heavily concentrated and oligopolistic in nature” and expressed concern about predatory pricing and unconscionable market conduct. Of the 332 submissions to that inquiry, 285 were opposed to the increasing power of the two supermarkets. One area of creeping concern was supplier rebates, where the chains would charge their suppliers for shelf space and other advantages.
Rebates had been pioneered in the US, refined in the UK and imported into Australia. David Jones and Myer had been criticised for sending suppliers to the wall by ramping up rebates in the 1990s. Coles and Woolworths were to take the practice, as ever, to an industrial scale.
Consumer psychologists had found that most shoppers circled supermarkets, ducking into aisles while passing by. Therefore, the ends of aisles were a prized position. Likewise, shoppers had been found to spend more time looking at items on certain shelves. Retailers would then charge suppliers extra for these spaces, or make them bid against one another for shelf real estate; the loser was pushed out, or over the “cliff”, in a practice known as “cliffing”.
Suppliers were also asked to pay “voluntary” marketing kick-ins. If they did not comply, they were faced with periodic “range reviews” in which the retailers would establish if suppliers met “hurdle rates” of sales. If they didn’t, they were often displaced by the supermarkets’ private labels (also known as “home brands” or “own brands”), of which McLeod was a champion. In his time, private-label sales grew rapidly. Coles vertically integrated retail with production, and the packaging of private-label goods increasingly resembled that of independent brands.
Woolworths was on the same trail with its “Woolworths Select” brands. In 2011, its board appointed a new CEO, Grant O’Brien, with a specific brief to counter Coles’s revival. To carve out customer loyalty and defeat the “Colesworths” impression – a weakness of the copycat history was that 84% of customers weren’t exclusively loyal to either Coles or Woolies – O’Brien directed a strategy to mine customer data and strengthen a loyalty program with Qantas. It was touted as a rare breakaway from Coles, even if it too was following what Tesco had done in the UK.
