* Australian country of origin labelling rules started this month
* Decision removes a competitor to Coles' own honey product
By Byron Kaye and Lidia Kelly
SYDNEY/MELBOURNE, July 6 (Reuters) - Australian supermarket chain Coles will stop selling a brand of honey that is partly sourced from China and Argentina, as it looks to support its "Australia first" policy while also cutting competition for its cheaper company-owned brand.
The decision highlights the pressure on the owner of Coles, Wesfarmers Ltd, to show it can keep growing profits at the supermarket through a period of shelf price deflation as it prepares to spin off the business as a separate listing.
The move is also part of a battle for market share, faced by Coles and its larger rival Woolworths Group Ltd, amid tough competition from discounters like Germany's ALDI Inc.
ALDI has smashed the century-old Australian duopoly in just a decade and a half, helped by its cheaper in-house brands - a move Coles and Woolworths have been copying to attract buyers.
Coles will stop selling the low-end Allowrie brand of Capilano Honey Ltd, a blend of Chinese and Argentinian honey with Australian honey, as part of a recent range review, it said in a statement, without giving a further reason.
The statement added that Coles-brand honey was "100 percent Australian" and "we are proud to support Australian producers and the work of Australian beekeepers".
Seeking to allay any concerns arising from Coles' decision, Capilano's managing director, Ben McKee, said Allowrie products had not been involved in any quality complaints or recalls.
Capilano had "worked closely with Coles throughout the decision-making process to ensure the best outcome for Australian consumer", McKee added in a statement.
Capilano shares fell 1.8 percent in a broader market that was up 0.8 percent, while Wesfarmers shares rose 1.1 percent after the news on Friday.
"Woolworths and Coles have been doing this for the last few years, trying this as a way of boosting sales of cheaper products which they can source themselves," said Nathan Cloutman, an IBISWorld analyst.
Coles' move coincides with the start of rules which require Australian retailers to disclose from this month where food has been grown, made or processed. Of the three biggest supermarket operators, Coles sources the most products locally at 41 percent, according to consumer advocate CHOICE.
Woolworths said it would keep stocking Allowrie, calling it a "good quality product, offering an affordable price point for customers on a budget".
About three quarters of Woolworths honey products are 100 percent Australian, the company added in an email.
New South Wales Apiarists' Association president Neil Bingley said de-stocking Allowrie honey had no immediate benefit to local beekeepers who were already struggling to meet supermarket demands due to drought.
"It would be preferable to have all Australian product, but in the real world that's not going to happen."
Rosalie Archibald, a fourth-generation honey producer from Melbourne City whose product is stocked by Woolworths, welcomed the change. "It's about time this product gets off the shelves."
"It's more and more difficult for Australian producers to compete with products which are often of worse standards." (Reporting by Byron Kaye in SYDNEY and Lidia Kelly in MELBOURNE; Editing by Himani Sarkar)