Battle of the grocery giants

Internationally the standard ratio is one supermarket per 50,000 people. In New Zealand it's 1:10,000. Photo / Richard Robinson

The battle of the supermarkets has never been so cut-throat, with the major players constantly on the lookout for new ways to lure us inside. Alan Perrott finds global trends indicate worse is to come

Anyone know what the shelf life of one of those teeny, tiny milk bottles is then?

Don't even pretend you don't know what I'm talking about.

If you have small children you'll have been badgered to buy every accessory that went with the milk bottle and its 43 supermarket miniature stablemates - and if you don't, you were probably collared after leaving the checkout by parents hoping to nab your fake pineapple.

Clearly, New World struck gold in borrowing the mini collectables concept from Dutch supermarket chain Albert Heijn, which used them to promote their 125th birthday last year.

For starters, it probably didn't cost them a thing. No one is saying how much, but we can imagine what the various "invited" brands had to pay for inclusion while knowing exactly who will eventually cover the bill. Us.

All going well, the food chain's parent company, Foodstuffs, will even get to clip their ticket twice. To begin with, there's the upfront cash. By handing over one random miniature per $40 spent by parents eager to please their children, the whole enterprise encouraged larger trolley-loads and, given there were 44 collectibles - assuming you somehow managed to get to avoid any double-ups - it'd take a minimum spend of $1760 to collect the lot.

Then there was the chance to hook the next generation of shoppers. Sure, there's been a halfhearted attempt to talk of their educational value, but let's not kid ourselves, many thousands of New Zealand homes now have a New World-branded store propped up in a corner of the lounge and a little shopping basket laden with Tim-Tams, Marmite and Dove soap. Judging by the listings still infesting TradeMe, it also looks like the promotion will go on well after it's dead, regardless of New World's valiant attempt to limit this cash stream by hosting swap meets in its own stores.

While all this has been going on, New World's arch-rival, Countdown, has been trying to show us how to feed four for only $15.

While this pitch clearly lacks cute collectables, it is quietly clever in its own way. That we are eating out more all the time means just one thing to the mega-grocers: an increase in lost sales. So, how can they slow the tide? By showing us the joys of cooking a fancy meal you can show off to friends, for cheap. As a long-term gambit it may prove more effective than teaching kids brand recognition.

Either way, these campaigns illustrate how supermarkets try to influence our behaviour, a fundamental strategy in the ongoing price war between the two dominant players, known in the trade as Foodies and Progs (Countdown is part of Progressive Enterprises, which is in turn part of Australia's Woolworths).

Among themselves, New Zealand-owned Foodstuffs outlets call their Aussie counterparts "the dark side" and, in a recent interview with the Herald's business section, Countdown chief executive Dave Chambers could barely bring himself to call his competitors anything at all.

Pick any day of any week and about 60 per cent of the products in your local supermarket will be on special. They are the lures to get you into a store where they can then channel you to the far more profitable items in the specialty sections before tempting you with treats at the checkout. It's all about getting traffic volume, maximising the shelf space each shopper is exposed to and doing everything they can to encourage even one extra purchase - with wafer thin margins that extra purchase is where a supermarket's profit lies.

Pak'n Save are the masters. While they pointedly paint themselves as the budget choice, once you're through the turnstiles there is no way to avoid weaving through the produce and butchery areas where the ker-ching of each purchase is just that much louder.

Their strategy has turned us into cheapskates. We only buy specials, especially when it comes to cheap bananas (we buy more of them than any other product). So, the canniest shopper now fleeces a store of its cheapest wares then pops over to the competition to cherry-pick theirs. And why not? No supermarket has the lowest prices on everything and they're practically next door to each other these days.

Which brings us to ubiquity.

Supermarkets are everywhere, with more coming all the time. Ponsonby/Grey Lynn will soon have four, as well as one each of the specialty stores, Farro Fresh and Nosh, all within walking distance of each other. Even Blenheim has four, while Stratford and Whitianga - with 5300 and 4100 residents respectively - will soon have two each.

Internationally the standard ratio is one supermarket per 50,000 people. In New Zealand it's 1:10,000 which suggests monument building on a scale that'd make a pharaoh blush.

It also tells us something elementary about grocery retailing - for all the toys, glitz and cute stick figures, it's a macho industry run almost exclusively by men on distinctly tribal terms.

Turf is marked out by stores. For example, the rationale behind Whitianga's upcoming Countdown store is that the company had no presence between Waihi and Coromandel.

Who cares about demand when there's a flag in need of planting? And whenever a new one is announced on a rival's territory, the other immediately lodges planning complaints to if not stop it completely, at least to slow its arrival.

The most infamous saga was Progressive's string of appeals that meant Foodstuff's Wairau Park Pak'n Save was unable to open for more than two years after it had been built. Countdown's website still has a press release on the subject, which goes to considerable lengths to explain how the new store contravenes the district plan and the risks to local traffic flows and public transport patronage without once stating who it was they were complaining about.

It's in keeping with the nonsense that both sides declined to take part in this story when they heard it would involve their rival.

But if you think it's a bit silly here, just look at Australia. The main players over there are Woolworths and Coles. One of Woolworths' flagship Sydney stores is in Neutral Bay. Just imagine the conniptions when earlier this year they discovered that their arch-enemy had used a $10 Virgin Islands company to buy up their lease (at well above the market rate) and became their new landlord.

If a team of Coles honchos turned up demanding to inspect the site and check their sale records all they could do was offer them coffee while they were at it.

Utu seems to have involved, with the Sydney Morning Herald suggesting it was brought about after Woolworths bought the lease for one of Coles' Blue Mountains outlets and promptly evicted them.

So, how did things get to this point and, more importantly, where are they headed?

The whole concept goes back to the 1930s after American Michael Cullen failed to interest his boss in the notion of pooling their various outlets under one roof and slashing services so they could offer discount prices.

So he quit and created King Kullen, which was essentially a hole-in-the-wall operation run out of an empty garage space.

The idea finally reached us on June 18, 1958 when Ken Ah Chee and Norm Kent opened their first Foodtown supermarket in Otahuhu.

Grocery shopping has come a long way since The first Foodtown opened on Great South Rd at the southern end of Otahuhu in 1958.

A queue was in place before dawn and the New Zealand Herald reported the inevitable stampede: "Women shoppers trampled foodstuffs, broke shopfittings and jammed doorways ... they overwhelmed shop assistants in their determination to snap up bargains."

When two women had to be carried to the ambulance on hand for the occasion, the police shut the doors so staff could restock the shelves and clean up before readmitting people in relays. Outside was just as bad with the then massive 130-space carpark filled to overflowing and store workers being called on to help police with traffic control.

Heady times, but if the original store is long gone, the rundown building remains. By current standards it's beyond small. It's possible the whole thing could squeeze into the entrance area of Pak'n Save's enormous Lincoln Rd, Henderson store, from where it could watch the two instore screens showing Sky Sports and consider the signed All Black jerseys and Rolling Stones guitar hanging behind the checkouts.

Still, Ah Chee's experiment caused an explosion. Without trying to catch them all, and excluding superettes like IGA and Four Square, over the years we've had Woolworths, Super Value, Big Fresh, 3 Guys, Price Chopper, Self Help, Moore Wilsons, Fresh Choice, Foodtown and, of course, Countdown, New World and Pak'n Save.

Various players have been swallowed up with only the last three now remaining, and Progressive making the last big play by converting and upgrading all of its supermarkets to the Countdown brand between 2009 and 2011. It was costly, but the pay-off was the ability to advertise one set of specials in one brand, across 156 stores nationwide.

In contrast, Foodstuffs not only operates as North and South Island co-operatives, every Pak'n Save ad essentially cannibalises potential New World business.

So, effectively, we are now down to a duopoly. Even if the Progs and Foodies won't admit it.

Their industry might be divided - 55 per cent (Foodstuffs) to 45 per cent (Progressive) - but they see themselves as surrounded by an increasing number of competitors of all sizes.

"It's called channel blurring" says Coriolis analyst Tim Morris. "It's like, 'okay, what do we have? A box and a carpark. What else can we put in the box to fill the carpark?'"

As a result, supermarkets have cafes, Lotto outlets, pharmacies and petrol stations - that Lincoln Rd Pak'n Save even has a flower arranger - while elsewhere petrol stations sell coffee, music and groceries; music stores sell clothes, coffee and food; and dairies have money machines, Lotto tickets and, oh, coffee.

Then there is the rapid rise of Asian supermarkets - about 15 per cent of us now use them regularly - and like Cullen's King Kullen they usually start as low overhead, hole-in-the-wall operations, but the international trend is for them to catch up fast. One chain in Vancouver grew so large the city's dominant player was forced to buy them out.

But if this sounds like an age of opportunity, it isn't.

According to a Neilsen study of 2012 sales figures, growth here has been flat at best with a drop in the price of milk alone wiping out $25 million in retail sales. As a result, everyone has become risk-averse and instead of innovating supermarkets, they put all their resources into price promotions and marketing, including petrol discounts which were first offered by Countdown in 2006. The problem, says Neilsen, is when everyone does the same thing with similar vigour and no one goes anywhere.

It also means both sides take a forensic interest in each other's (increasingly comparative) promotions and will bring in the Commerce Commision at the slightest provocation. For his part, Chambers accuses "the yellow shed" of advertising food prices taken from one store as though they are all available nationally and then continuing to advertise them long after they've passed.

Foodstuffs made a similar complaint against a comparative ad featuring unspecified groceries obtained from rival stores. After careful consideration of both claims the Commerce Commision decided the ads might be misleading and left it at that.

If the futility of it all sounds familiar, Morris describes the situation as two World War I generals sitting behind massive trench systems and spending vast amounts of money and effort to retake tiny amounts of ground.

"But it's a global problem," says Morris, "growth is getting harder to find and no one has found an answer. All they're doing is trying to find new ways of doing the same old things, it's come here and get some slightly cheaper petrol or go there and get a tiny cardboard box that looks like biscuits. What'll happen when the wolves and bears arrive?"

And herein lies the industry's real fear.

Because bears and wolves are now loose in Australia. America's Costco and Aldi from Germany are huge corporations with the ability to ship in enormous amounts of cheap goods, and despite the fevered war that has been dominating retail over there both Costco and Aldi say it's the best market they have entered for immediate results.

As a result, pundits have been trying to predict when they'll arrive here. Neither company seems poised for a move but Morris scoffs at the idea that it won't happen: "Some people think they won't bother because we're too small, that's a fallacy. If they've gone into Ireland, Finland and Sweden why not here as well? And they're running out of new places to go and would you rather open in New Zealand or Myanmar? They're now in Perth, which has pretty much the same population as Auckland, and Auckland's closer to their head offices in Sydney. All they require is a relatively rich consumer, not the richest, or the biggest. If it happens and we finally get bears and wolves, then you're going see real change."

But supermarkets aren't the only ones with reason to worry, many producers will also be reaching for their beads.

Cheap prices don't come out of thin air, so the supplier has to cover the shortfall and, once they start struggling to stay afloat, they become vulnerable to a buy-out.

Companies such as Pukekohe's Budapest Pickles tried to upscale and compete with the big boys, only to be put out of business by a mountain of cheap Romanian produce. So, your local supermarket shelves may look crammed with all sorts of imported brands, but in reality the bulk come under a small number of huge corporate banners.

The kicker comes when already pressured brands are invited to provide even cheaper products for the supermarket's home brands. These anonymous boxes then get the best shelf spaces and specific television advertising which can't be a great feeling when you've sunk a lifetime into developing your business. But they can't say no because, as the only game in town, it's play to the supermarket's rules or don't play at all.

Even our national backbone is vulnerable. The Hawkes Bay farm of Federated Farmers president Bruce Wills used to be surrounded by other sheep and cattle operations. Now he's alone - everyone has given up on growing meat and taken to trees instead.

The main reason is British supermarkets, which have long been the biggest market for local meat farmers. With their stranglehold on the British market and with more than 20 meat export

companies here they simply ask everyone to state a price then take lowest: "So we fall over ourselves to be the cheapest and it becomes a race to the bottom," says Wills.

Without a powerful representative such as dairy's Fonterra, the situation has pushed more and more farmers to give up. Crop farmers have been caught up as well, with many Canterbury growers being forced over to dairy.

If his land was suitable, Wills says he'd follow suit.

It would be understandable if you're not that bothered by their woes, after all the end result is a lower food bill for everyone - some product lines have even seen deflation.

In a strange way, supermarket power also plays into the hands of retailing newcomers like Farro Fresh and Nosh.

There are small, artisan brands popping up all the time and these outlets are now ideal stepping stones into the big stores. In fact, Farro Fresh co-owner Janene Draper is seeing some producers who are having their second crack. Having done well enough with them to earn a go at the big time, they failed and are starting all over again.

The system is utterly indifferent to grinding someone's passion into dust just so long as we can get our cheap bananas. But the risk the supermarkets run is if they push prices so low those budding entrepreneurs stop trying.

"And that's a problem," says Morris, "because the core of their business is food and that's going nowhere no matter how cheap they make it.

"So, while they try to figure out how they can sell more wine, clothes, cheap no-name televisions and outdoor furniture, their hole is only getting deeper. The exciting, new stuff is happening away from the stores. Online [shopping], eating out and niche markets: that's where the growth is and that's where the next generation of bears and wolves will come from."