The battle for shelf space: Lewis Road Creamery vs. Fonterra

One of my favourite discussion points in the pricing strategy topic of ECON100 has little to do with pricing at all. It is actually about making the business environment difficult for your competitors, by competing with yourself. The principle is actually very simple. If you produce a wide variety of similar substitute products and stock them on supermarket shelves, then there is less space left available for competing products (meaning those made by your competitors). By competing with yourself, you actually ensure that it is more difficult for any other firm to do so, in spite of giving the consumer the impression that there is a lot of competing brands. If you doubt this happens, I suggest going to the laundry powder aisle of the supermarket, and comparing the backs of the boxes there. I can almost guarantee that most of the apparent variety of brands will actually only be produced by two (or maybe three) suppliers.

Which brings me to the current bust-up between Lewis Road Creamery and Fonterra, first reported by Liam Damm in the New Zealand Herald on 12 December (see also here and here, where the latest news is that LRC will commence legal action against Fonterra, but presumably that has more to do with packaging and less to do with shelf space). The first of those articles has the detail:

Lewis Road Creamery founder Peter Cullinane is accusing Fonterra of negotiating a "greedy" deal with supermarkets which would limit the ability of smaller dairy brands to get space in the chiller.

In an open letter to Fonterra chief executive Theo Spierings, Cullinane questions whether Fonterra is playing fair.

He said he understood that "Fonterra is looking to use its market power to introduce an exclusionary deal with supermarkets in the North Island that would all but remove non-Fonterra brands".

The deal would give Fonterra's white milk brands 95 per cent of the chiller space, he says.

This is something we should not be surprised about at all, knowing that reducing the shelf space for competing products is a viable strategy. The supermarkets gave the following responses:

Yesterday a representative for the Countdown supermarket chain said it was not involved in any deal with Fonterra.

"Countdown does not have any deal with Fonterra of this nature, and would not enter into any agreement like this," said Countdown general manager merchandise, Chris Fisher. "We treat all of our suppliers fairly and shelf space is determined based on the merit and popularity of each product," Fisher said.

A spokesperson for Foodstuffs North Island said the company had "an agreement in place with Fonterra, as we do with other suppliers including Lewis Road Creamery, to supply a range of dairy products, the terms of our supplier agreements are confidential".

I'd be more surprised if the supermarkets weren't negotiating deals with suppliers where a single supplier provides multiple competing products, especially if they involve side-payments from the suppliers. The fewer suppliers the supermarket chains have to deal with, the simpler (and therefore less costly) their logistics will be. Everybody wins. Well, everybody but the consumer who wants fair competition that leads to a variety of products and low prices.

Ultimately though, there may be a question for the Commerce Commission as to whether these agreements over-step the mark in terms of reducing competition. It will be interesting to see how this story progresses in the new year.