Price wars between the major multiples are causing bigger problems for food and drink suppliers than anything they have experienced for many years, as the big four supermarkets battle it out with each other.
For years, Food Manufacture’s annual ‘state-of-the-industry’ survey has reported on excessive pressure from the top retailers. We have had examples of them suddenly changing the rules of the game: issuing demands on their suppliers to cut costs; calling for money up front to be listed; or penalising them for dubious contractual failings and for consumer complaints. But this year, the level of complaints has soared.
Not only did 61% of the 522 respondents to our survey report that supermarket price wars were preventing them from passing on cost increases to their customers, but there were numerous complaints about underhand practices by big retailers.
“Poor retailer performance will only result in one thing – reduced margin for manufacturers,” said by one respondent was typical.
Downward price pressure (Return to top)
“There is downward price pressure due to multiple retailer competition,” said another respondent. “Although competition is good, lower prices lead to cost cutting and corner cutting, which will inevitably lead to the next food scandal or crisis.”
Given that 64% believed the food industry had learned lessons from last year’s horsemeat scandal, it is worrying that some believed pricing pressure could lead to it happening again. “Retailer price wars are causing ever increasing margin pressure on manufacturers,” said a manager at a convenience foods firm. “This is exactly the type of situation which could cause another ‘horsegate’, which would be disastrous for the industry.”
Overall, 84% reported that pricing pressure from retailers was threatening the quality of own-label products through excessive ‘value engineering’ basically, forcing them to cut costs through the use of cheaper ingredients. While this was very similar to the 83% who reported the same last year, it was the volume of accompanying complaints about supermarket misbehaviour and bullying that really stood out.
“Supermarket pressure is causing a reduction in quality in order to achieve a price point. Some competitors are being forced to sell at a loss to keep volume,” said a respondent. “One of the major issues we face is that retailers are looking to hold or increase their margins while squeezing producers on price,” said a manager in the bakery sector. “In the end the only thing producers can do is to engineer products to fit that price which, in turn, could mean the consumers are not seeing the best of your products.”
And another biscuit company manager said: “Price wars among the retailers are having a major impact on business development. Also, trade investment seems too high with 60–70% of products always on promotion.”
Just 21% of respondents thought the Groceries Code Adjudicator Christine Tacon was being effective in preventing big supermarkets from abusing their power over suppliers. That compares with 55% who last year expressed hope that she would stop them from doing so.
“Most retailers are still approaching any negotiations in a ‘price down for quality up and don't care if you go out of business’ manner,” remarked one respondent. “The corrupt practices hidden under the carpet in the UK retail market beggar belief – give us a whistle-blower protection scheme and there’ll be a herd of witnesses available!” Clearly, Tacon has more to do to convince suppliers – particularly small companies – that she is being effective.
Positives (Return to top)
On a more positive note, however, the number complaining that their customers were taking longer to pay bills fell slightly to 44% this year, compared with 46% last year. And while raw materials prices are still a problem (83%), the figure is down slightly on last year (88%). Also, despite the cost pressures from retail customers, 66% (62%) planned to invest more in new product development (NPD) this year.
The focus on healthy reformulation remains. Last year 58% claimed that reducing fat, salt and sugar was a key part of their companies’ NPD strategy. However, with all the adverse press coverage about sugar in food and drink over the past six months, it was interesting to note that 47% reported that the debate over fat, salt and sugar content was hampering their NPD.
Despite everything, optimism in the sector remains high, with 78% more positive about the future of their companies than a year ago (73%) and 88% positive about the long-term prospects of the sector as a whole. Expectations about improving profit margins are also on the rise 72% (66%), although lack of access to finance remains a problem for around one-third 36% (33%).
The overall feeling of optimism is further demonstrated by a significant increase in the number of respondents expecting their companies to carry out more capital investment this year – 61% compared with 51% last year – and those planning to take on more staff at 49% (45%) because of vacancies in key roles (48% cf 45%). On the down side, problems in recruiting people with the requisite skills remain, at 63% (60%).
Also, pressure on profit margins was likely to inhibit manufacturers’ ability to invest. As one own-label ready meal manufacturing manager succinctly put it: “Retailer price strategy is having a massively negative impact on future plans.”
Energy efficiency (Return to top)
The environmental ambitions of companies highlighted by the survey remain similar to last year. The most notable difference, however, relates to plans by 71% (66%) to improve energy efficiency of their operations, which is probably related to new rules under the Energy Savings Opportunity Scheme (ESOS).
However, as one respondent noted: “Utilities and raw material increases too are a major concern; it is all very well saying invest in energy efficient equipment, etc, but you have to generate the income to do so.”
The ESOS comes into effect next year as part of the EU’s Energy Efficiency Directive and will make it mandatory for all large energy users to carry out energy audits every four years. The Food Manufacture group is organising a free webinar on ESOS on September 18. For more details and to book, click here.
Viewing the results of the survey overall, it would be fair to conclude that despite much adversity, those in the sector are clearly more ‘cup half full’ than ‘half empty’ people.
Responding to a new question this year on expectations about consumer spending over the coming year, 75% said they expected it to rise. And yet this isn’t supported by recent economic indicators, which point to consumer wariness about any economic recovery.
But, no doubt, retailers as well as manufacturers will also be hoping that consumer spending does pick up over the coming year.
Read more about Tacon's record in combatting alleged abuses of supermarket power here.