Heinz's chief executive, William Johnson, has been vocal about its difficulties, describing Australia as the worst market of the 200-odd countries and territories in which the 142-year-old ketchup maker operates.

A price war by Australia's two supermarket heavyweights is forcing international food giants such as H.J. Heinz Co and Unilever Plc/NV to adapt fast or lose sales as competition heats up in the nation's $109 billion (70.4 billion pound) food industry.

Multi-nationals down under are being squeezed as tougher tactics by Australia's supermarket near-duopoly, Woolworths and Coles, relegates suppliers to the weak bargaining position of price takers, wielding very little influence during negotiations to set commercial terms.

Heinz sales fell 13 percent in the second quarter in Australia, the world's second-most concentrated retail market after neighbouring New Zealand.

Woolworths and Coles, owned by Wesfarmers , command almost 80 percent of sales in the country of nearly 23 million. Metcash and Germany's Aldi are the third and fourth players.

Coles and Woolworths, as the market leaders, have significant influence when dealing with suppliers and in controlling access to the consumer, said a report by manufacturing industry group the Australian Food and Grocery Council and consultant A.T. Kearney Australia.

The industry is expected to be significantly less competitive in 2020 than it is today, said the report, entitled 2020: Industry at a crossroads and written after interviews with 30 manufacturers.

Consumers and politicians aren't happy about the lack of competition.

It's about supermarket profits. It's about...pushing costs and risks on to manufacturers, said Australian Sen. Kim Carr. We've got to make sure there are fair and ethical business practices undertaken in this country.


Foster's, which was just acquired by SABMiller , successfully withheld supply of some of its beer brands from the pair earlier this year when it felt price discounting had gone too far.

It was through a lens of: 'Are our brands suffering and being damaged by effectively using them to drive foot traffic and...sacrificing them to the benefit of those (supermarket) businesses?' So we had to take those actions, John Pollaers, who stepped down as chief executive at Foster's this month, told Reuters.

Many other manufacturers are scrambling to reinvent themselves, changing their products or packaging, as the powerful supermarket leaders increase their stranglehold, employing tougher negotiating tactics and creating and sell their own brands, known as private labels.

One dollar in every four, or a third of packaged grocery units sold in Australia, is now going to private label brands owned by retailers, research by Nielsen found. That is likely to rise 40 percent by 2015, almost catching up to Britain.

Private label will always increase further the intensity with which we compete, said Sebastian Lazell, chairman of Unilever Australasia, in an interview with Reuters on Wednesday.

You do, in the end, lose to private label if you don't bring differentiations, strength, novelty, quality and value to the table, he said.

Supermarket leader Woolworths has said it wants to double its offering in private label, which secures the retailer a higher profit margin than other brands.

Manufacturers such as Heinz need to focus on variety, nostalgia, better shelving positioning, innovations and unique ingredients to combat the switch to cheaper house brands, Nielsen found.

That is not easy when ingredient prices are rising and the supermarkets control the final point of sale.

In this environment, the challenge is to keep the innovation pace up. If we don't do it then yes, we run the risk of being clobbered, Unilever's Lazell said.


Heinz executives have described an inhospitable environment for suppliers in Australia after a drop in consumer confidence and spending triggered deep discounting and a scramble for market share among major retailers, in turn hitting manufacturers' margins and lowering sales.

Consumer sentiment dropped 8.3 percent in December, a survey released on Wednesday showed. [ID:nS9E7MN022]

Earlier this year, Australia's upper house Senate launched an inquiry in response to an outcry from politicians and dairy farmers after Coles cut in milk prices to A$1 a litre to lure shoppers, a move soon matched by Woolworths.

While the inquiry backed the supermarkets, National Foods, owned by Japan's Kirin <2502.T> says its Australian milk sales are running at a loss.

If what Coles and Woolies have done to the dairy industry isn't illegal, it should be, said Sen. Nick Xenophon.

Dairy farmers will end up becoming like medieval serfs dealing with a feudal landlord and that landlord will effectively be Coles or Woolworths, he said.

Sen. Carr says the industry watchdog is investigating claims supermarkets have ended contracts early, charged unfairly for warehousing, transportation and stock handling, and auctioned shelf space or used shelf space to get better contract terms.

What the supermarkets are now doing is trying to channel consumers into the purchase of home-brand products. They will then determine where those products comes from and the terms in which those are delivered, Carr said.

Suppliers are forced to divulge their product plans for the next 12 months to the major supermarkets and then they find that...copycat products arrive either at the time that their products arrive or shortly thereafter, he said.

Goodman Fielder , which makes private label goods on contract as well as its own brands, has described the worst trading in 40 years, but was coy when asked about any change in relationship with retailers.

It's not anything we would comment on publicly. The terms of those contracts are confidential. If supermarkets come to us and they want us to produce bigger volumes of private label then it would be subject to negotiation, a Goodman Fielder spokesman said.

While Unilever and Kirin say they are committed to Australia, the grocery council report said it was highly likely some large national and multi-national food and grocery manufacturers would decide that offshore locations were more attractive places to invest than Australia.

Heinz says it has shaken up its management, closed a production facility and downsized two others, and says it has tried hard to mend things with the two big retailers in Australia.

It will focus on infant products, an area resistant to private-label, according to Nielsen.

The key thing is the improved relationships with the retailers, Heinz's Johnson said.

(Editing by Lincoln Feast)