The Competition Commission (CC) has offered a glimmer of hope to the growing industry, stating that growers have been missing out on their fair share of profit, whilst retailers benefit from higher margins.
The CC stopped short of confirming that “demand withholding” or other profit-gaining tactics are taking place within the UK supply chain. But in a paper that forms part of the ongoing inquiry into the UK grocery sector, it identified various factors that influence the economic viability of primary producers, including the bargaining (or buying) power of grocery retailers.
Grant Thornton, business and financial advisor to the food industry, held nothing back when publishing its food supply chain survey in response to the CC’s findings.
The survey, which was sent out to senior directors of 50 UK food suppliers to supermarkets on August 12, found that 83 per cent of UK food suppliers expect to see more companies within their sector become insolvent during 2007, with more than 50 per cent laying the blame on supermarkets - pointing to price pressure, excessive power, de-listing and the refusal to re-negotiate price.
The results suggest that price reductions across the industry are causing a chain reaction. The survey revealed that over the past three years, almost 80 per cent of suppliers have been subjected to supermarket pressure to drop their prices. On average, suppliers’ products are now being sold eight per cent more cheaply than they were three years ago.
Duncan Swift, head of Grant Thornton’s food agribusiness recovery group, said: “Supermarkets undoubtedly drive a hard bargain on price and, in most cases, behave as any reputable business should. However, our research, and direct experience of the market, shows that unreasonable practices do occur and that such instances are not uncommon.”
The CC’s working paper on primary production and the grocery supply chain highlighted the fact that there has been a consolidation in the grocery retailing sector, both in terms of acquisitions by large multiple retailers and a decline in the number of small retailers. This in turn has been matched by consolidation amongst larger intermediaries, and may have contributed to the decline in numbers of primary producers.
It looked at the relationship between multiple retailers, ‘intermediary’ businesses - wholesalers, packers, processors and suppliers - and primary producers in agriculture, and concluded: “[Primary] producers have been taking a decreasing share of the retail price of apples, pears and strawberries (the three main types of UK-produced fruit) during the last 10 years, mainly due to retail price increases against relatively stable farmgate prices at that time.”
The paper also suggested that supermarkets’ increased buying power “could” lead to primary producers investing less into their businesses and therefore result in a low rate of innovation and product quality; ultimately affecting the consumer.
But supplier evidence is still short on the ground, said Swift. “We remain convinced that rather than looking at current suppliers, the inquiry should look at those that have been delisted over the last three years or have gone out of business, and ascertain whether supermarket pressure proved a factor in their demise.
“Failure to act will result in more failures within the sector and an impoverishment of the choice the market offers,” he added.
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