Price war fallout to worsen as retailers produce their own goods

By Niamh Michail contact

- Last updated on GMT

Price war fallout to worsen as retailers produce their own goods
Manufacturers are already on the brink but they now face a "nightmare scenario" as more retailers begin producing their own goods, says a market report - so what can industry do to survive?

The number of UK food and drink manufacturers under 'significant financial distress' was up 54% in the second quarter of 2015 as smaller suppliers bore the brunt of supermarkets' aggressive pricing strategies, according to a report​ by Begbies Traynor.

And author of the report, Julie Palmer, warned that this bleak picture could transform into a “nightmare scenario​” as more and more retailers began bypassing suppliers altogether and manufacturing their own goods.

In the UK, British supermarket Morrison’s has already vertically integrated part of its supply chain, producing private label goods in its own factories, while French supermarket giant LeClerc owns its own fishing fleet.

“This is going to cause further problems for existing suppliers many of whom will go out of business without the volume the supermarket contract gives them,"​ said Palmer.

“[It] will enable the supermarkets to position their own manufactured goods both at the premium end and the budget end of the market and be able to react better to changing consumer demands.”

It’s a market economy: Survive, thrive or go bust

But is this competition simply a feature of market economies that manufacturers need to deal with - or are measures in place to protect suppliers?

Palmer's report welcomed the Grocery Code Adjudicator (GCA)’s newly appointed power to fine retailers for breached contract terms such as late payments, but said its powers did not go far enough to protect suppliers.

A GCA spokesperson told FoodNavigator that it did not monitor pricing strategies – and said it was not aware of any authority in a market economy that did.

Meanwhile Steve Barnes, director of economics & commercial services at Britain’s industry trade group, the Food and Drink Federation (FDF), said the competitive edge ensured the food industry’s success.

“The British food manufacturing industry thrives on competition. It would not be as successful as it is - employing 400,000 people with a gross value added (GVA) of over £21bn - were it not for its vigorously competitive nature.

“Therefore, new entrants would no doubt help raise the bar even further ultimately benefiting British shoppers who already are beneficiaries of the safest and highest quality food and drink in the world.”

The survivors would be manufacturers who provided retailers with a solution – the right product that met shoppers’ needs – according to IRI's European marketing director Anne Le Franc, who said that said this was already happening elsewhere in Europe.

“French shoppers are buying more premium products. In 2014, many retailers expanded their assortment of small brands – the ones that are innovating. At the same time, the number of private label products on the shelves only increased by 0.6%, in particular due to the development of themed private labels.”

But Palmer painted a bleaker picture, saying that suppliers may have a dwindling number of options left: “All suppliers can do is survive and become one of a smaller number of suppliers or develop niche products that the consumer wants and will pay a premium price for.”

Fair trade goods – from Europe

However, is it even possible for manufacturers of everyday basic goods –  such as bread – to create niche, innovative solutions at a premium price?

Beyond the onus on manufacturers to innovate and stand out, Palmer said that consumers should be made aware of their purchasing power.

“We need to promote much greater awareness of the effects on suppliers from current practices generally,” ​she said, pointing to Oxfam Germany’s efforts in this direction.

Sebastian Meyer from Oxfam Germany said that while the main focus of its campaigns was ensuring that suppliers in developing countries got a fair price for their products, it had developed strategic alliances with domestic farmers and their organisations in the past.

“Just to give you one example: during the latest milk price crisis in 2009/2010, we have been working together and supporting the German Federation of Dairy Farmers (BDM) and the European Milk Board,” ​he said.

“We think that the crucial actors to address are the big supermarket chains. Therefore, Oxfam demands for a legal framework that obligates them to fair trading practices and fair working and environmental standards.”

A Mintel survey involving 1500 British respondents found that one in three (32%) consumers believed food products from British farmers and producers should be allowed to carry the Fairtrade Mark.

Related topics: Business, Prepared foods, Food prices

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