Over the past six months, on almost a weekly basis, the Journal has featured a news story regarding the UK supermarkets’ pricing decisions in an attempt to gain market share.
The Journal has also conducted several polls throughout the past 12 months asking our readers about their thoughts on supermarket price wars in the fresh produce sector.
One reader’s response to the question “Who will benefit from the onset of the supermarket price war?” was: “It’s wrong to call this a supermarket price war when in reality all the supermarkets will do is bash their suppliers over the head to reduce prices and retain their margin - they won’t lose, it will be the supplier who loses, as it usually is.”
It is no surprise that the sector was reluctant to comment on the current pricing strategies adopted, especially with the media spotlight on it following last week’s release of the Office of Fair Trading’s findings from its sector audit.
The OFT says it is aware of the wide concerns about the growth of supermarkets and the effects of below-cost selling and price flexing.OFT chairman, John Vickers says in relation to the audit: “There is extensive complaint about supermarket dealings with suppliers and some evidence of past Code of Conduct breaches. This code can only work if evidence comes forward.”
According to IGD research on pricing and profitability in the UK food industry, price was a key factor in 2004 for retailers in their bids to win shoppers - the strategy adopted by the supermarkets was to not increase prices. However the importance of price to UK shoppers appears to be in decline, and they now want to be confident that low prices and value are available every time they shop.
The retail grocery market is highly competitive, says Duncan Swift, head of food and agribusiness recovery group at Grant Thornton. “Although these supermarket practices have been happening over the last decade, the situation has worsened in the last two years, with supermarkets operating differently from their public stance,” he says.
During Sainsbury’s third quarter performance results presentation, chief executive Justin King highlighted the fact that “the market was very competitive in the third quarter and early indications are that the fourth quarter will be challenging with renewed pricing activity. We are continuing to invest in the customer offer, providing great quality products at fair prices and have improved our competitive pricing position. Since this time last year, we have lowered the prices of 6,000 products and our overriding objective is to deliver a competitive offer for our customers”.
The Lehman Brothers UK Retail Price Survey, conducted in November 2004, states that despite Sainsbury’s lowering its prices by five per cent in the three-month period to November, its prices were nine per cent higher than of Tesco and 10 per cent more expensive than Asda prices.
The survey sample included 100 products in superstores and 30 key products from convenience stores. It was found that Morrisons was disproportionately more expensive than its peers during this time, with a six per cent price difference to Asda, a far wider gap than the generally accepted one-two per cent for the sector. The report’s author asked: “Is Morrison taking the foot off the pedal on pricing to take margin in compensation for a struggling Safeway portfolio?”
In contrast Lehman Brothers forecast Tesco, with its large buying economies of scale advantage, will quickly narrow the price gap with Asda on a like-for-like basis, and become the cheapest supermarket.
Tesco has overtaken Asda as the cheapest UK supermarket, according to The Grocer 100. Since July 2004, Tesco has been closing the gap on Asda, cutting its prices by an average of 2.7 per cent. An Asda spokesman’s response to The Grocer survey was: “Unlike some of our competitors, we don’t do short term promotional price drops. Instead we simply guarantee to our customers that our prices will always be low, every day of the year.”
Although Sainsbury’s bill for the same basket of goods (products ranged from branded products through to fresh fruit and vegetables) came to £175.30, the retailer’s prices have also been falling since January.
Since joining the Wal-Mart family in 1999, Asda has cut its prices by around £0.5 billion in total and every day low pricing (EDLP) has been gathering momentum as a concept ever since. Swift says there is an overwhelming trend on how to define and apply EDLP. He says: “Supermarkets have embraced this concept as the main test for buyers to play off the main suppliers in each category. The consequences of this strategy are that the interface between suppliers and retailers is only transactional driven, which has become the number one focus.
“This makes dealing with retailers difficult for the supply chain, as the focus is not only on label price promotions, publicity payments and rebates - retailers focus on the transaction contribution but suppliers are driven by the unit price,” he says.
Swift adds only where a product has a premium price and a dominant category brand can suppliers resist the predatory pricing of supermarkets.
A recent example in the fresh produce sector involved Pink Lady apples. The branded apple has suffered because of the Asda EDLP policy, when the retailer downgraded the apple to a gap-filler in late 2004. Instead it was replaced with the generic Cripps Pink variety. At that time Asda fruit buyer Lee Harper said he would continue working with the Pink Lady Association, but would only use branded fruit to cover gaps in availability: “We make a 30p a case saving which is passed onto our customers and with Pink Lady we’re only paying for a name. As an EDLP retailer I will not accept that.”
The response from chairman of the International Pink Lady Association, Peter Dall was one of disappointment with the decision, but he was adamant that any branded fruit sold to Asda would retain its premium price. “We’re happy with the loyalty we’ve received from the other supermarkets, but there’s always the worry they might follow Asda,” he says.
In February 2005, Tesco slashed prices on a number of produce items and added more than 20 new lines to its Value range, including items like apples and tomatoes to more exotics, such as mangoes and kiwifruit. Tim Lee, produce manager, says: “While the price of most food continues to go up, we are committed to bringing down prices and making items, that some people would consider fancy, affordable for all.” The retailer now has almost 60 Value lines on fresh produce, ranging from potatoes to bagged lettuce.
With regard to the fresh produce sector, the Lehman Brothers survey found that over the three months to November 2004, the fresh produce category experienced a negative price trend relative to Tesco; Sainsbury’s dropped prices by eight per cent, Asda by 10 per cent and Morrisons by five per cent.
However that month, both Tesco and Sainsbury’s pushed through substantial price increases in the category of about 13 per cent. The main price moves were experienced in tropical and exotic fruits - red grapes rose by 36 per cent in a month at Tesco, Conference pears by 29 per cent and nectarines by 51 per cent.
The reports states: “Sainsbury’s and Tesco’s produce categories appear to be a mirror image with both supermarkets tracking each other’s pricing. Asda and Morrisons have been largely non reactive - Asda’s red grape price did not change from £2.67 per pack since August 2004. In that period, Tesco and Sainsbury’s have both moved from £2.67, down to £2.18 as an offer and then back up to £2.98 in November.”
Goldman Sachs (GS) Retail Pricing Study published in February 2005, states that Tesco’s aggressive price cuts are further evidence of a pick-up in price aggression in the sector. The authors write: “The price cuts add credibility to management’s claim that it has invested £80 million in price since the beginning of 2005.”
This idea is supported by TNS data that highlights market share gains for Tesco in January 2005. The GS price study raises the point that competitive pricing activity is increasing: “We continue to believe the pricing environment remains challenging in the post-Safeway era. Out of 152 products, 24 product prices were slashed, increasing its price gap on Sainsbury’s from 5.1 per cent to 5.9 per cent. This follows the aggressive Morrisons’ marked price cuts at Safeway last December and further highlights the increasing competitive pricing environment in the UK food retail sector.”
In the vegetable category five items were compared across the four retailers in the GS study; Tesco remained ahead in terms of price competitiveness followed closely by Asda. However Sainsbury’s prices were 16.4 per cent above Tesco’s but Morrisons had slashed Safeway prices by 16.9 per cent (see figure 1).
The Tesco price cuts followed Asda’s launch of its Smartprice brand into the produce sector, which brought banana prices to a record low for pre-packed bananas at 65p a kilo. Tesco followed suit dropping prices on its Value offer to 59p a kilo in February, the lowest figure to hit the market for several years, equating to a 45 per cent price deflation in the last two years.
One industry insider speculated that the motive behind the Tesco move was a desire to strengthen its position against Morrisons, which stood to lose more by matching the Tesco price, since the majority of its banana offer directly competes with Tesco’s Value range. However for Tesco, its Value banana offer represents a small proportion of its total banana sales.
Swift says the problems with EDLP, as a concept is that it is very confrontational and research suggests that a collaborative approach in the sector will have the best effect and benefit all parties involved. He says: “EDLP is detrimental as each transaction is confrontational, especially with the retailers’ readiness to substitute produce if the price is not right. There is a need to increase the amount of positive dialogue between retailers and suppliers.”
He adds that focus should also be placed on the relationship cost, rather than the ease with which supermarkets rapidly delist suppliers. “This is especially prevalent in fresh produce,” he says, “given the threat of lower priced imports.
“The fresh produce sector faces strong import competition. Two solutions are needed to address the abuses of power, which are frequent although not widespread in the UK - fair trade terms need to be introduced and there is a need to redress the balance of power in the sector to ensure fair pricing.”
This is not true for all supermarkets says Swift, citing Waitrose as a good example where a retailer collaborates with its supplier base. However others who are purely transaction driven need to introduce transparency in their trading terms so suppliers fully understand the total transaction.
He says: “Transparent contracts with clear and fair terms will ensure all parties know the terms of transaction, stopping abuses that are all too often occurring. But the sector needs to collaborate to try and redress the balance of power. At the moment there are six main retailers versus almost 2,000 fresh produce suppliers - for each supermarket tender there may be 15 applications. Marketing companies such as BerryWorld and Worldwide Fruit are good examples of how suppliers can work together under one common practice - this way produce is better marketed to the supermarkets to get the best price for all.”
He further explains that, on the Continent, the sector dynamics are different. “Suppliers work as co-ops and have done so for many years. The Dutch have been working this way since the 17th century, so we are playing catch-up.”
Last week’s OFT findings were of no surprise whatsoever given the way the code was drafted back in March 2002, says Swift. “Instead of setting out how business should be conducted between supermarkets and suppliers, the code is designed to protect supermarkets from criticisms and to brick-wall them from claims of abusive trade practices towards their suppliers,” he says.
“The reality in the market is one where UK food suppliers to UK supermarkets are increasingly finding themselves under major financial distress, caused by the market power wielded by the major multiples.
“These are demanding ever-cheaper products with longer payment periods and other supplier contributions as part of the unwritten agreements they readily pull out of when it suits them,” he says.
Swift argues that urgent action is needed through radical reform of the ineffective code. “Only this way will we be able to ensure the long-term future of the UK’s food industry.”
WHAT OUR READERS THINK
The Journal has conducted several polls throughout the year touching on price wars. Here are some comments from our readers.
• “The multiples employ people who’s sole aim in life is to squeeze as much (money) margin out of consumers and suppliers as they can. They no longer have any notion of fresh produce and the fresh produce market. The category managers now only employ people whose sole aim in life is to keep the multiples happy, they have little more knowledge of the produce business.”
• “The real question is will the multiples and category managers one day wake up to the fact that they can’t keep driving down prices for higher and higher quality and still have growers to supply them?”
• “The consumer gets great value for money as the retailers fight it out. So whose margin is being hit? A three per cent net margin for the suppliers is now regarded as very good, and many suppliers underperform this. Just look at any company report to see. Consolidation of the supply base will delay this decline, but is only a temporary solution. Look what the price war did for banana consumption; absolutely nothing! Who really gains from selling pineapples as a loss leader?”
• “Currently the consumer seems to get a good deal, but the supermarkets need to survive, i.e. the cost of price wars are being passed on. The suppliers get squeezed; they in turn squeeze the producers who in the end will have to produce more for less. This works completely against fair trade that guarantees good worker conditions in production.”
• “With the global market today, we expect to see mangoes, kiwis and other exotic fruits, year round. This expectation also drops the price (since they are no longer exotic) and again the producer gets squeezed the most. It’s time that we put exotic back in produce and set the price accordingly.”
• “Any price war inevitably hurts the growers, and damaging their profitability will ultimately damage any industry they are involved in.”
• “The initial losers are the independent fruit and veg outlets whose advertising dollar is best not wasted when supermarkets fight for market percentage. When shove has pushed, the growers lose because of diminished bargaining power and fewer options to sell their produce.”
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