Growers fear that proposed £1 billion savings set out in Morrisons’ restructure and cost cutting plan could threaten the viability of many in the supply chain.
One source close to the retailer said Morrisons is not likely to reduce gross margins because the City requires it to achieve results, which means the supply chain will have to find more savings.
“In business, price pressure drives innovation, which to some extent is a good thing,” he said. “But the fresh produce industry has been driven to the edge of oblivion for years, and many businesses are teetering on the edge. Many companies have had to consolidate or have just gone bust. It’s not as if there is heaps of fat in the fresh produce industry.”
He added that people are apprehensive that if Morrisons go to war on price it will affect suppliers of all retailers, as where one goes others follow.
Speaking after Morrisons’ posted a loss of £176 million last week, chief executive Dalton Philips said: “We are significantly reducing our cost base and will invest £1bn into our proposition over the next three years, to improve our value even further and to defend and strengthen our competitive position.”
Another industry source said: “It worries me a bit when you hear certain retailers are going to make reductions, if it means they are going to reduce their margins that’s one thing, if it means they are going to target suppliers that’s a bit of a problem.”
FPJ can reveal that Morrisons has already dramatically slashed the prices of several fresh produce items. Asda is usually the cheapest across the basket, but this week Morrisons was cheapest or joint-cheapest on nine out of 10 lines, according to figures from ProduceView.
When asked by FPJ, Morrisons did not deny that savings may come out of the supply chain. A spokesperson said: “It’s too early to speculate how, or if at all, any commercial relationship in any area of our business might be affected.”
One grower noted that if retailers want to reduce prices and put downward pressure on the supply chain producers may switch crops. “Veg growers have other alternatives such as cereals or food for fuel,” he said. “There isn’t enough money in the pot to take money from growers. Why do we need to take less money when we can just do something else?”
Retail analyst and blogger Steve Dresser outlined other areas Morrisons may make savings, including a reduction in promotions and a wider roll-out of its IT upgrade.
“I think there will be a margin hit, there has to be given that the view is margins are too high,” he said. “There is little point maintaining a 5.2 per cent [operating] margin if sales are falling and this will be invested in price. This has already been seen on fresh produce with a number of price cuts and a tagline of ‘not offers, these are our new everyday prices’.”
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