If something’s on special or prominently displayed at your local supermarket, chances are the supplier paid for the privilege. Where does that leave small, local businesses trying to get their products on the shelves? Liv Sisson investigates.

The entry aisles of my local supermarket always seem to be lined with the same products on special: Doritos, Weet-Bix, Shapes, condensed milk, chickpeas, Pringles. These items have been positioned purposefully to grab the shopper’s attention, but what’s not as obvious is that suppliers have to pay supermarkets to put their items on special and promote them as such.

A curious shopper’s deep dive into the world of supermarket promotion indicates it’s a big business of its own. A big business that may offer you a cheap snack but often small New Zealand suppliers a raw deal, according to those who spoke to The Spinoff.

When an item goes on special, the price drops. So who eats that cost? One small New Zealand supplier, who sells their shelf-stable product directly to supermarkets and spoke anonymously to The Spinoff, puts it plainly: “Long story short, I take a hit to put my item on special. I get less per unit, but my overhead to get the product to the shelf didn’t change, and the supermarket retains the same percentage margin on my product.”

This local supplier, and several others interviewed anonymously for this story, has found the financials of running specials simply don’t work for them. And neither do the opportunities supermarkets offer for advertisement. The same supplier says, “What shocks me the most are all the things supermarkets want suppliers to pay for. Space in their advertising material. Better product positioning like the ‘wing shelf’ at the end of an aisle. And knowing what I know about how much profit we make – just a few dollars per product – if we have to buy space for a promotion, we take a big hit. And we’re competing against Coca-Cola, Fonterra, huge multinationals for those spots.”

Getting stocked by a supermarket, one supplier mentions, is difficult, expensive and time-consuming. And a bit of a false peak. Actually getting cut-through, making sales and selling enough units to remain on-shelf is the next challenge. This is where in-store and online advertising comes in.

Before diving into the detail of how advertising works at New Zealand’s two major supermarket groups, it’s important to note the two have different operating models and ways of doing business.

Woolworths New Zealand owns and operates 185 Countdowns (all of which, the company announced yesterday, will be rebranded to Woolworths in the coming months). Foodstuffs, on the other hand, runs a co-opted franchise model. “Foodstuffs North Island and Foodstuffs South Island are two separate co-operatives who share some brands, including Pak’nSave, New World and Four Square,” is how Foodstuffs spokesperson Emma Wooster explains it.

Each store, she notes, is owned by an individual franchisee. Head office decides on the core range of products to be stocked in each store nationwide but outside of this, individual store owners can buy from local suppliers at their discretion.

“Many successful Kiwi brands started out by talking to the owner of their local store,” says Wooster. That owner might “give the products a go” on their shelves and if those products sell, the next step is becoming “regionally or nationally ranged through the central buying teams at each co-op, and sometimes beyond on the international stage”.

When small New Zealand suppliers do get stocked or “ranged” at Foodstuffs, they “have the additional option to promote their products in the store and online”, says Wooster. “These options include investing in their product being on special, on on the in-store screens, or on posters to highlight their product. They can also invest in a more prominent display in a different location in the store.”

While you may not stop to think about it as a shopper, suppliers “investing”, ie paying Foodstuffs to promote their product in store, is standard practice in the supermarket sector here and abroad. Those Whittaker’s bars didn’t just get placed on the end of the aisle all by themselves and in the confectionery section by accident, for example. 

So how do suppliers go about securing these promotions and placements? They need to go through a retail media buying brand. 

A retail media buying brand is essentially an in-house advertising agency that sells ad space, both in-store and online, which can be purchased by suppliers. Woolworths’ retail media buying brand is Cartology. Foodstuffs’ is Precision Media. 

On being asked how it’s decided which products will appear in marketing material, a Woolworths New Zealand spokesperson responds, “We’re focused on what is the most meaningful for customers.”

A look through Cartology’s Countdown media kit, however, reveals just how monetised the physical space of each Countdown store is. Almost any surface can be bought. The stickers on the fridges. The floor decals. The sticky-outy aisle “fins”. The in-store radio. The little banners stuck on the checkout. The screens you see when you walk in. All of these are paid advertising spots. 

The online realm is similar. The “Did you forget this item?” pop-up. The “You might like…” suggestions. The recipes. All are paid advertisements. Social media is much the same.

So how does Countdown focus on featuring products that are the “most meaningful for customers” when all the opportunities to feature seem to be paid for by suppliers? The Woolworths New Zealand spokesperson gave a few examples of “organic” advertising spots, so to speak. Bus shelters. Mailers about seasonal veg. Christmas displays.

When asked how suppliers are chosen for a Christmas display, for example, the spokesperson indicated it would be a data-driven decision or suppliers buying branded displays via Cartology. So… a paid placement.

On the whole, the products that go on special at our supermarkets and get promoted to us seem to be driven solely by which suppliers are willing and able to pay. So how much do these advertisements actually cost them?

Woolworths and Foodstuffs declined to comment on the cost to advertise in their stores or online channels, citing commercial sensitivity.

But a supplier speaking anonymously to The Spinoff gave an example. “You can run promotions with Foodstuffs through head office to implement in every single store but you pay a co-op fee that goes directly to Foodstuffs’ head office. It’s a fixed fee, regardless of how big the supplier is or how much you sell each week. The cheapest promotion is $1,900. You go on ‘Saver’ for a month and you’re still expected to provide the stores the exact same margin you provide them on standard pricing.”

To be included as a “Club Deal” meanwhile, requires a $3,900 flat fee to Foodstuffs, this supplier noted. Whether you’re Coca-Cola, Fonterra, or a local, small-scale supplier, the fee is the same.  

As that same supplier mentioned, “It’s so important to be on special. Even though discounts on products in store are getting shallower and shallower, being able to set up an effective promotion is key. New Zealand is a promo-driven society.”

So while supermarket promotions are technically optional add-ons, the sentiment from suppliers seems to be that these optional add-ons are more like necessities. Necessities they have to drop their prices for and pay for. And compete with multinational brands for.

“I don’t know a single local food producer,” one supplier noted, “who is making a comfortable profit in supermarkets. Some might be making a small one on paper. But you compare that to the excess profits supermarkets are making, over a million dollars a day, and… it breaks your heart. It’s so frustrating. I am seeing more small NZ suppliers go out of business than enter.”

Businesses going under, prices going up. This is not an unfamiliar narrative right now. Deals, specials, promotions are extra important in this cost of living crisis. However, supermarket pricing and promotions have been under intense scrutiny. In some cases, the deals aren’t even deals. 

Consumer NZ has received 600 complaints about misleading supermarket specials. Countdown’s recent price freeze has seen some items frozen at a higher price. New data from MenuAid shows grocery prices vary widely across Aotearoa. Residents of the regions and Christchurch are paying up to 25% more. The data also showed prices were sometimes changing multiple times per day, making grocery shopping feel like a game of luck. 

On the pricing front, Foodstuffs spokesperson Emma Wooster says, “As the retailer of the products, we’re ultimately responsible for determining the pricing in our stores, with suppliers providing input into the recommended retail price. The cost of goods from suppliers is the largest cost for our business, on average making up 68 cents of every retail dollar spent by a customer.  GST makes up 13 cents, and we’re responsible for 19 cents. This covers our costs, like wages, transport, fuel, electricity, store costs and running our distribution centres. Around four cents is our profit after tax, much of which is reinvested into the co-operatives to build new stores and infrastructure like distribution centres.”

What the above graphic, provided to The Spinoff for this story and which also features on the Foodstuffs website, doesn’t show, however, is all the things suppliers pay the company for, like promotions. Where are the $1,900 Saver fees, and $3,900 Club Deal fees, for example, accounted for? Some of the yellow, the 68c that goes from shoppers to Foodstuffs to suppliers, actually comes back the other way from suppliers to Foodstuffs to pay for things like promotions.

It’s this missing piece that so often gets left out of the conversation on supermarket pricing and profits. Foodstuffs, for example, commissions Infometrics to produce a monthly report called the Grocery Supplier Cost Index, which shows the cost Foodstuffs pays to suppliers for groceries.

The index and commentary released with it consistently indicate that the cost Foodstuffs pays to suppliers for groceries is going up. Supermarkets, it suggests, are taking the hit at the checkout. Supermarkets are really hanging their hat on this index. It’s regularly being quoted and used to drive a story – “supplier cost still driving supermarket prices” as one headline put it.

But supermarkets don’t just pay suppliers, suppliers pay supermarkets, too. For many things. Like promotions. And those exchanges aren’t included in the index or this graphic provided by Foodstuffs. Neither seem to be an accurate reflection of how much money is actually flowing between these two parties. 

When asked how their supermarket journey has been overall, one supplier says, “On the whole it’s been a difficult experience. We’re pulling back from supermarkets. We are looking at export. It’s more profitable.”

Foodstuffs is taking measures to support smaller suppliers. They’ve introduced a Foodstuffs emerging supplier competition, which is an opportunity for grocery entrepreneurs to get fast-tracked into New World. Foodstuffs North Island has also recently created a new role to specifically support emerging suppliers, as well as a downloadable “small supplier guide”.

But with the terms of promotions as a litmus, it does seem that the supermarket channel is not one that’s working well for local suppliers. Which is an issue, because Woolworths and Foodstuff control 80% of our domestic grocery market. 

The current model “creates a pipeline for huge multinationals straight to our tables”, one supplier says. “At Foodstuffs, for example, they have their core suppliers that must be stocked in every store. That’s your Coke and Sanitarium products, for example. Beyond that it’s up to each store owner to take on more suppliers. Even if they do, the terms just don’t encourage growth or innovation. And those bigger brands are not always healthy when compared to locally made Kiwi products. If smaller, local suppliers can’t maintain a foothold in supermarkets, options are reduced and customers are taken further down the funnel of cheap, unhealthy, mass-produced food.”

At the very least, it sure changes the way you think about that entry aisle full of Pringles and Doritos.

Clarification: An earlier version of this piece said the Grocery Supplier Cost Index showed what shoppers pay to supermarkets for groceries as well as what supermarkets pay to suppliers. In fact, the index shows only the first metric and the piece has been amended as such.