THE battle for market share between Woolworths, Coles and Aldi has come at a cost to Australia's second-largest baker, George Weston Foods, which said packaged bread prices are unsustainable, setting the scene for price rises.
George Weston Foods chief executive Andrew Reeves said about $100 million in value has been stripped from the $2 billion bread market since Coles and Woolworths cut the price of housebrand bread late last year, forcing Weston and rival Goodman Fielder to reduce the price of leading brands such as Abbott's Village, Tip Top, Helgas and Wonder White.
"I don't believe the current level of pricing is sustainable for the health of the category," Mr Reeves said after the company reported a weaker first-half result.
"There's been on average a 10 per cent reduction in the price of bread, which is very significant; interestingly, we are not selling any extra loaves.
"We have seen more than $100 million of category value disappear and it's certainly had a detrimental effect on our bread business profitability in that time. We are selling the same product for less price and that flows right through the P&L (profit and loss statement). That's something we'll address in the months ahead," he said, without giving details.
Mr Reeves' comments echo those in February of Goodman Fielder's former chief executive, Chris Delaney, who blamed a 54pc slump in baking profits on aggressive discounting in supermarkets.
They raise questions about the price and promotion strategies of Woolworths and Coles amid signs that a long-running marketing war in the $88 billion grocery market could escalate into a fully fledged price war as Woolworths invests more than $500 million into grocery prices to reinvigorate weak grocery sales growth and regain market share lost to Coles and Aldi.
Woolworths, which favours a high-low pricing strategy, has relaunched its Cheap Cheap grocery price promotion and is offering 50 per cent discounts on leading grocery brands and trimming prices on less popular products, which crept up last year.
Coles has been moving towards an everyday low-prices strategy and has been reducing shelf prices on a wide range of branded and private-label products while maintaining the frequency and depth of products on promotion.
Industry sources said 60 to 70pc of packaged bread was bought on promotion and consumers often delayed purchases to take advantage of 50-per-cent-off discounts and two-for-one offers.
This volatility has prompted both George Weston and Goodman Fielder to move to an everyday low-prices strategy – Westons in Coles and Goodman Fielder in both Coles and Woolworths – but the pressure on margins and lack of volume growth begs the question of whether the strategy is right for bread.
At Coles, prices of Weston's Abbotts Village and Tip Top brands were cut by as much as 34pc two months ago (to $3.40 and $3.00) and Goodman Fielder's Wonder White was reduced by 21 per cent to $3.30. At Woolworths, the price of Helgas was reduced to $3.50 and Wonder White to $3.30.
The shelf price of Abbotts Village bread is now $5.39 and Tip Top $3.98 at Woolworths, with generous discounts for loyalty-card holders. Woolworths regularly slashes the price of both brands by as much as 50pc on promotion.
Mr Reeves said George Weston had funded most of the everyday low-prices strategy price cut at Coles but had seen no increase in volumes or sales.
"In a category like bread where demand is very stable and inelastic intuitively EDLP would make some sense – with consistent pricing there's consistent supply chain management, more bread is available and there's less wastage," he said.
"But the facts are so far in Coles the bread category has actually gone backwards through this period of EDLP – volumes and revenues have both gone backwards," he said. The EDLP model in bread may work but it doesn't seem to be doing the job at the moment."
Coles managing director John Durkan, speaking after the launch of a $50 million fund for small food and grocery suppliers on Thursday, said the strategy was working well.
"Bakery is one of the most staple products and for our customers. (EDLP) is working really well. Our bakery business is in good shape," he said.
"It's good for our consumers they get trusted pricing every single day, they know that price is not going to change," he said. "Getting trusted pricing does not happen overnight – it takes years of investment."
George Weston is hoping for a stronger winter half, when it usually benefits from sales of higher-margin products such as crumpets, raisin bread and muffins.
"I'm confident that we will improve our position in the second half," Mr Reeves said.