Hello Reader,

Cinnamon used to get you killed.

Well, that might be a stretch. But sourcing it was tough. Cinnamon came primarily from Sri Lanka, and it was a big deal in the west. Over time it got used for everything from flavouring wine, mummifying pharaohs, making sauce, and burning at funeral pyres. It was a key product traded down the Silk Road (which was used for more than just silk, and also wasn’t a road since much of it came by sea)

nd it was expensive. Pliny the Elder puts 327g of it at 50 months of labour. My conversion rate between NZD and Ancient Rome is a little rusty, but seems like it’s in the order of $636/g. Now, Mrs Rogers will give you 30g for the princely sum of $2 at PNS NI stores. $66/kg, or 6.6c/g - 10,000x cheaper than Ancient Rome.
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But is it cheap enough?

I can grab 1kg of Cinnamon in NZ for $20. That’s the retail price, so there’s clearly good margin in that. From what I can tell, FOB prices for cinnamon in India are somewhere around $4NZD. There will be some costs for import into NZ - generally spices will be heat treated or irradiated. Shipping will add a few cents/kg. Then there’s the packaging, and getting it to store - which likely costs the same again as the actual cinnamon inside the box.

So for a $2 box of cinnamon on shelf in store, someone is clearly making a huge amount of margin. And we all know this, because asian grocers are significantly cheaper than Woolworths and Foodstuffs. Most spice boxes in NZ supermarkets could be twice the size and half the price. If the retailer wanted to, they could either find a brand to bring in a range at this price, or they could bring this out as a private label line.

So why don’t they?

In a retailer, these sorts of decisions are made by category management. The goal of category management is to maximise the return on space in a specific section of the store which serves specific customer needs. Category management makes sure that the products that are stocked keeps consumers shopping from the category, minimises duplication (if consumers are equally happy with 2 products that do the same job, it’s better to delete 1 of them), and often makes sure that there’s a sensible value ladder in the category to help consumers trade up.

Ideally, numbers should be going up and to the right. So category managers will be stoked when spice blend brands like Mingle Seasonings or Pepper & Me do a tonne of work on marketing to get people spending more in the category on higher value products.

Retailers like Woolworths will track what % of total sales a specific category is, and will have a pretty good idea of what % of total sales that category is in Foodstuffs. They’ll keep an eye on this over time, and so they’ll have a pretty good idea of when they’re losing share of that category to alternate retailers like Asian grocery.

But as long as that’s not happening, they’re not going to want to reduce what consumers spend in the category.

Which is exactly what bringing in a lower price spice offer would do. Bigger boxes at a lower price will hit you twice. Consumers will shop the category less often (which means you risk losing the next purchase since it’s less habitual), and you’ll have less actual spend in the category.

And because Foodstuffs and Woolworths are so aware of how each other play, as soon as one of them did it the other would launch a similar value offer. So congratulations: you’ve just gutted sales out of the category so your numbers now look worse, your higher price suppliers are pissed off at you because you’ve tanked their sales, and you’ve maintained the same market share you always had. The only people who win here are the consumers.

Now in fairness, I’m not sure who captures the value in the way things are at the moment, so I’m not even implying that the retailer is making excess margin in the category. Foodstuffs North Island appears to have scaled back their ranging on the Pams spices in favour of Mrs Rogers, so Mrs Rogers are clearly delivering some great value to Foodies there. Suppliers fund the fancy pull out drawers, and the small boxes will be a curse to replenish, so a good supplier who keeps shelves full (job number one for category management is: out of stocks cost you money + share + are totally avoidable) is super worthwhile to the retailer.

But the incentives clearly don’t align to deliver unreasonably good value to the consumer here.

And this is what everyone is missing about the prospect of a 3rd grocery player. With 3 players, they need to be differentiated in a different way to 2 players. 2 players are only stealing market share from each other, and they can’t afford to lose customers to each other so they end up mirroring each other’s pricing, offers, and product mix. With 3 players, that becomes impossible. Over time, the chains start looking different from each other. A chain could choose to differentiate on wild value, and all of a sudden having a few categories like spices that are wildly cheaper than other stores makes sense. If you’re trying to actually attract customers, gutting value out of a category isn’t a big deal: margin is only theoretical until people actually spend money. Then the other two players get to decide whether they want to compete head to head, or to maintain the margin they have in their categories. And the likelihood is, they make different choices.

Hundreds of choices like this would fundamentally reshape the prices we pay for groceries and the options we have. And I’m here for it. Let’s make food weird again.

What I’m watching

I’ve been listening to the audio book of Anthony Bourdain’s Kitchen Confidential and I’m blown away at how he tells stories: he had this incredible blend of competent insider, literary texture, and an eye for what non-insiders will find interesting. So last night I started watching some of his shows, and I love it - started with his old stuff I think these episodes will be my watching for a whil

What I’m reading

I’ve started the Watties book ​

I’ve also been skimming through the 89 page Sense Partners report prepared for MBIE about breaking up supermarket chains. From what I can tell, the reason they’ve recommended breaking up Foodies rather than Woolworths (or both) is that Foodstuffs supply chain is way more efficient, and so breaking up Woolworths wouldn’t put enough competitive pressure on foodstuffs - whereas breaking up Foodstuffs would put pricing pressure on Woolworths anyway, so they are disciplined either way. Probably the best example of a backhanded compliment I’ve seen in a while.

That’s all from me this week - I’m sure it’ll be a busy week of discussion about the industry in the week ahead, can’t wait!

Reuben