The competition watchdog will investigate allegations major fresh food suppliers planned to withhold supply to German retailer Kaufland in fear of reprisal from Coles and Woolworths.

Suppliers have alleged a formal or informal agreement between leading fresh food companies, including fruit and vegetable suppliers, to withhold supply from Kaufland was one of the factors contributing to its shock decision on Wednesday to withdraw from Australia before opening its first store.

“It’s Masters all over again,” said one supplier, referring to the decision of major hardware brands to not supply Woolworths’ failed home improvement chain for fear of being kicked out of market leader Bunnings.

“They declared their allegiance to the existing customer base,” he said.

“Kaufland realised it was a game they couldn’t win in the short term – they would have looked at ten years of losses.”

Australian Competition and Consumer Commission chairman Rod Sims vowed to investigate the allegations and called on people with knowledge of the situation to come forward.

“We’ll definitely have a look at this,” Mr Sims told The Australian Financial Review.

“Agreements between competitors not to supply certainly raises cartel concerns and the law is pretty clear on this,” he said. “Even if it’s less than [cartel behaviour] you can also deal with it now under concerted practices.”

“We would be extremely keen to talk to anybody who has any information about this, we have very sophisticated processes for protecting the identity of anyone who does come forward,” he said.

Winners and losers

Coles, Metcash and Woolworths will be the biggest winners from Kaufland’s unexpected exit from Australia, while shoppers are set to lose out as food and grocery prices rise.

Analysts said Coles and Metcash had the most to lose from Kaufland’s entry into the $110 billion food and grocery market and had the most to gain from the German discounter’s abrupt decision to pull the plug before opening the first of 30-odd stores.

Woolworths was likely to be least affected by Kaufland’s entry given its leading market share but stood to gain from its exit because food prices were likely to continue to rise after returning to growth last year, analysts said.

Rising food prices enable retailers to recoup costs and are conducive to like-for-like sales growth and margin growth.

“Kaufland’s exit is a significant positive for the industry as barriers to entry [have] increased, and food inflation is more likely to persist,” said JP Morgan analyst Shaun Cousins.

“The …. reason dry grocery inflation has ended is that Woolworths allowed it to occur, we suspect, largely to offset its rising labour cost pressures,” Mr Cousins said.

Higher food prices

“The entry of Kaufland could have seen a return to dry grocery deflation … this is no longer the case and hence an impediment to dry grocery deflation ending has been removed.”

Citigroup analyst Bryan Raymond said Kaufland’s decision to exit Australia was likely to contribute to higher food price inflation.

“Kaufland’s entry was expected to disrupt what is currently a very rational grocery industry over the past 12 months,” said Mr Raymond. “We now see no near term impediment to the constructive pricing environment remaining in place.”

Kaufland’s exit reduced the risk to long-term profit margins, said Mr Raymond, and also made it less likely that Kaufland’s sister chain Lidl, which is similar to Aldi, would come to Australia.

Woolworths shares hit an all-time high of $41.58 on Thursday before closing down 0.9 per cent at $40.94, taking gains this week to almost 5 per cent, Metcash shares were flat at $2.65, while Coles shares slipped 1.9 per cent after gaining 3 per cent on Wednesday.

Kaufland, which is owned by the world’s fourth-largest retailer, Schwarz Group, said it would withdraw from Australia to concentrate on its core markets in Europe.

The announcement came only a week after Kaufland’s Australian directors signed off on another $100 million capital injection from its German parent, taking paid up capital to $523 million.

Kaufland staff notified

Kaufland Australia’s German-born managing director, Julia Kern, was informed of the decision in Germany on the weekend and delivered the bad news to staff after flying back to Australia on Tuesday night.

“She insisted on telling staff face to face, they had to hear it from her,” a spokesman said.

Most Kaufland staff have been told they will have jobs until the end of March, but the retailer will retain a core team to help sell assets, which include at least 10 free-hold store sites, exit leases on another dozen stores and terminate contracts with builders and suppliers.

A Kaufland spokesman dismissed suggestions the decision to withdraw was prompted by weak retail spending, pointing out that the food and grocery market remained robust.

“The retail woes are a furphy,” the spokesman said. “The company line is to focus on the European operations.”

Analysts questioned whether the retailer, which sells general merchandise as well as food and groceries, had second thoughts about its long-term prospects in Australia, which has one of the most concentrated retail markets in the world.

“The gap in the market that Kaufland would be filling was never obvious … hypermarkets had not proved successful in Australia … so the offer would need to win customers over yet the need for such a format, especially given the challenges facing discount department stores, was not obvious,” said Mr Cousins.

Lawyers said Kaufland faced the threat of legal action from suppliers, contractors, employees and landlords left in the lurch by its abrupt change in tack. One retailer said several senior staff had resigned in recent weeks to join Kaufland and were still on gardening leave when the announcement was made.

“Kaufland mentioned an ‘orderly withdrawal’ which would seem to constitute an acknowledgment of outstanding commitments that [it] may have to deal with,” said David Krolikowski, who leads KHQ’s commercial property and development team.

“Suppliers, builders and other consultants who had hitched their wagons to the Kaufland train may be feeling a little bitter,” he said.

Australian operation losses

Mr Krolikowski said he had no inside knowledge on why Kaufland pulled the plug after breaking ground on its first distribution centre only six months ago and securing sites and planning approvals for at least 20 stores.

Although Kaufland had secured a variety of development locations, finding appropriate sites had been a challenge, he said, due to highly restrictive planning laws.

“Kaufland’s timing was also slightly off,” he said. “Had it been ready to take advantage of the failure of the Masters experiment (before the best sites were gobbled up by other, savvy investors and developers such as the recently IPO-ed, Home Consortium), perhaps the story would have been different.”

“The Australian market may seem ripe for a new competitor … but setting up in a foreign country requires significant capital input, and extreme intestinal fortitude when the losses keep rolling in,” he said.

Kaufland’s Australian operations lost $25.8 million in the 12 months ending February last year, according to ASIC accounts, taking accumulated losses to $30.6 million.

“In some circumstances, particularly if the trajectory is slower than estimated, it might seem better to cut and run. In some ways, Kaufland can be congratulated for not falling foul of the sunk cost fallacy,” he said.

This article was originally published by the Australian Financial Review (AFR). Read the original here.

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