Britain's food supply chains face grim times over price wars

Missing a favourite food item from one's usual UK supermarket is now more likely than ever to leave shoppers victims of an even harsher squeeze on food suppliers brought on by the intensifying price war between the food discounters and the four dominant supermarket chains. Losing market share to discount arrivistes like Aldi and Lidl, Tesco, with around 28% of the UK food market, are fighting back by squeezing suppliers not only on prices but also by numerous charges, including even for barcode changes and prominent display of products, along with the odious favourite of deliberate late payments that could easily bankrupt small supplier companies. Reportedly, there are almost 60 ways that supermarkets extract money from suppliers.

It has been a bullying practice long exercised by the big retailers and is symptomatic of a laissez-faire attitude of the Competition and Marketing Authority which took over responsibility from the Monopolies and Mergers Commission. In the past, any merger that would have meant control of 25% or more of the market would trigger a referral to competition authorities, yet Tesco currently has around 28% of the UK market, admittedly acquired through organic growth rather than by takeovers, but it nevertheless shows the unhealthy status quo where just four market leaders, Tesco, Asda, Sainsbury and Morrison control 76% of the British market. Such dominant control by a few retailers is also typical in mainland Europe.

For far too long the big four have exercised unhealthy control over Britain's food basket, leading to lack of competition and what at times must have seemed like a cosy cartel where price differences for identical products were derisory and special offers limited to only a handful of products for a very short period. Treating their customers as though they were addle-headed, supermarkets would uniformly push through steep price rises by significantly cutting the product weight but still maintaining the previous prices and the packaging size so as to disguise any real price rises.

In the past, the big four have sometimes acted in the shoppers' interests by resisting suppliers' price increases, ostensibly caused by commodity price rises, a practice that might have encouraged suppliers to introduce efficiencies. But it is clear that only if larger suppliers routinely stand against retailer demands for price cuts and charges will they succeed (albeit at the expense of smaller suppliers too weak to stand up for themselves) but at a risk of losing business through product delisting. Premier Foods reportedly lost £10 million in three months when Tesco delisted its Hovis, Mr Kipling and Oxo products three years ago. Tesco also, reported the Sunday Times, suspended 75 Princes' products, including baked beans and Cross & Blackwell soups. In denying their customers their favourite foods Tesco is insouciantly breaking the first law of marketing -- give the consumers what the consumers wants and not what Tesco thinks is best for them.

This is where consumer power, helped by social networks, can change the unhealthy status quo between oppressed food suppliers and the big four retailers. When shoppers cannot find their favourite foods at their usual supermarket they should put them under notice that they risk irretrievably losing their business to competitors. Better still, if they have not already done so, they should switch to the discounters like Aldi and Lidl who have no pressing interest in squeezing their suppliers and where prices are permanently lower than the big four by around 30%. This is important in one other sense. The big four will fight back and the only way to do so in a shopping environment that has seen a paradigm shift where price is king is by sharp, prolonged price cuts. That could hurt the discounters but they have one impressive weapon in their armoury that their rivals lack -- a smart logistics/business model. This model took Jack Cohen's (Tesco's founder) slogan of 'Pile them high and sell them cheap' one step further -- and sell them fast. The discounters' no frills shop displays and small car parks not only mean lower start up costs but crucially their limited 1,600 or so SKUs (stock keeping units) compared with the big four's 40,000 SKUs, are concentrated heavily on fast movers whereas much of the big four's stocks are slow movers, and money tied up in stock puts money to sleep, to the extent it could dwarf all other warehouse costs combined. It is a model that the big four may have to emulate to survive in reasonable shape and already there are signs of such a move. Sainsbury, for example, are joining forces with the Danish discounter, Netto, the first of the Continental discounters to set up in Britain some 20 or so years ago. Others are looking to cut back on their big store developments and concentrate instead on much smaller convenience stores.

The old Chinese curse of "May you live through interesting times" is about to fall on Britain's food retailing, but the risk is collateral damage to food supply chains, where pressures may lead to worse scandals over false food labelling, less consumer choice, and even human trafficking, oppression and slavery in the supply chains.
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