Cost of price wars?

The current supermarket price war spells good news for hard-pressed consumers in the short term, but is it sustainable and will the long-term consequences for Irish suppliers and producers prove detrimental?

For:

THE exceptional reduction this week in the price of vegetables and fruit, notably from Aldi and Lidl, as it was they who threw down the gauntlet that others have taken up, has given rise to some of the most diverse reactions since Ireland abolished the Groceries Order some seven years ago.

It had been claimed that the order did little else but keep prices artificially high — by banning retailers from selling goods below cost price.

This was why, on Mar 20, 2006, the abolition was heralded by a leading broadsheet as a breath of life for competition in Ireland and the point from which consumers could “look forward to savings of around €100 a month”.

The Consumers’ Association of Ireland (CAI) was not so enamoured with the abolition and, unsurprisingly, neither were Food & Drink Industry Ireland (FDII) or the Irish Farmers Association (IFA) — albeit for very different reasons.

Then, as now, Christmas time was a notable event in the retailing calendar. But there were problems.

We were at the height of a boom; shopping in New York was a feature of ‘normality’ and the growth in online shopping was taking hold of consumers’ attention. However, it was the persistent price comparisons between North and South in terms of groceries, alcohol and clothing that determined how footfall was down and the drop in sales was taking a nasty toll on profit margins.

However, not a lot happened and we, especially, could not find that much-heralded €100 a month of savings. Why not? Well, predominantly because it did not affect the major grocery outlets no matter which side of the border consumers spent their money — they had tills on both and with high profit margins built in, regardless of jurisdiction. We even had dual price display until the embarrassment finally took effect.

It was not until just after that, when we entered recession, that all bets were off. A new approach emerged with pre-Christmas sales, discounting, 3-for-2 offers and every imaginable connotation possible to bind the consumer to home and with little attention to those nasty price comparisons. Impressively, it was at this time too that the culture of ethical economics entered our consumer world and we were encouraged to be patriotic purchasers.

I say, impressively, because, despite the fact that we had been supporting Irish producers for most of our lives, we were made to feel guilty for not buying more — and from the longer established and ‘Irish’ retailers.

So here we are today in a, yet again, much changed consumer environment. As consumers we care about the food we buy. We require to be informed about its origin, its ingredients, its calorie count, sugar and fat content and its life span. We split our shopping to buy what we can best afford within significantly reduced family incomes and budgets. We appreciate the value of good food and know the price of it. However, what we still do not know are the various elements that go to making up the price of a product — any product — and, notably, what margin of profit that price is demanding.

Many have tried to drill down on these but the warnings of commercial sensitivity have made such efforts futile. In Jan 2013 the UK established a Grocery Sector Adjudicator. This was welcomed at the time by the FDII as essential “to protect suppliers and food companies”. They, the IFA and others require a similar statutory code of conduct to be put in place in Ireland supported by an independent ombudsman to investigate what are referred to as ‘retailer abuses’.

The current price war on fruit and vegetable prices, they would argue, would fall under that category, as would those of similar below-cost sales of alcohol and many, many food products over recent months.

There is a valid case to be made that producers, who have long prepared and toiled to grow vegetables to enable them make a living are, if they are not suppliers to these supermarkets, in danger of financial ruin. This, very well would, in my mind, indicate a retailing system that is potentially eliminating competition in the market place and therefore in need of independent oversight.

There is an alternative here however. That this is notably specific to this time and presents a definitive example of a strategy to create footfall by creating the illusion of a highly competitive retailing environment. The prices of the vegetables may be down for this week but it is limited and it will end — swiftly. Consumers can sleep soundly in their beds and dream of affordable sugarplums and chestnuts without concern that they are unpatriotic in their availing themselves of a real honest-to-God bargain.

Why? Because this is probably the first example since 2006 of what the removal of the ban on below-cost selling could do for their basic household budget and, regardless of that, they will have made their contribution to the profit margins of these organisations in their purchases of anything else in the place.

Dermott Jewell is policy and council adviser with the Consumers’ Association of Ireland.

Against

THE latest tactics by the retail multiples in a frantic rush to get market share in the run-up to Christmas is a cynical exercise that makes a mockery of the hard work of all food producers.

It simply is not sustainable to sell vegetables and potatoes, or any other food, for a fraction of what it costs to produce. It has to stop.

Everyone is entitled to a living, and anyone who applauds the current behaviour of the retail bosses cares little for fair play or the viability of jobs, small farms, and associated businesses.

It’s a simple fact that the retailer bosses, in giving away vegetables and potatoes, shift their margins to other products to protect their profits.

The responsibility for retail regulation lies with the Enterprise Minister Richard Bruton, whose failure on this issue has left farmers very frustrated. Time and again, they have been promised that proper regulation would be introduced. Yet for the third year in a row, they have seen no action from Bruton.

The build-up to Christmas is a very important time for growers. We know consumers are willing to pay a realistic price for Irish produce. Yet we have a price war between the retailers which is denigrating the value and the work of a sector of Irish farming that is already under pressure due to rising costs and downward pressure on prices.

Retailers are showing no regard for the work and investment growers have made to deliver the highest quality fresh produce to their shelves.

As farmers face into a new year, they are also concerned about the price/cost squeeze. Input costs are 35% above their 2005 levels, which is in marked contrast to the general level of inflation which is 12%. The significant rises in feed, fertiliser and fuel have not been reflected in the price passed back to producers.

Across all commodities, the power of the multiples continues to put downward pressure on the price paid to producers, yet their margins are maintained. The Government commitment to a code of practice to regulate retailers is long overdue, and must be progressed by the Cabinet as a priority.

Retailers have used their power over producers and suppliers to devise and implement a number of methods whereby they reduce producer margins, although not directly, by reducing the returns to their suppliers. Some examples of this are:

Producers have been compelled to pay ‘hello money’ to get their product on the shelf or to contribute to the opening of a new outlet;

Retailers can demand ‘pay to play’ money from suppliers in order to have their products re-listed on shelves, or to keep them there;

Producers and suppliers dealing directly with retailers in the fresh produce sector can be subject to costs imposed by the retailer at will, including packaging and transport carrying costs (eg, crate rental), which are compulsorily provided by the retailer;

Retailers have used their buying power to impose long-term agreements (LTAs), which provide for the payment by suppliers of substantial off-invoice rebates at the end of a trading period;

Processors and suppliers are compelled to carry the cost of product-discounting campaigns by retailers, rapidly leading in turn to downward pressure on producer prices;

Extensive advertising, in-store promotion and the allocation of prominent shelf space to own-brands have significantly increased market control by retailers in particular segments. Retailers’ own brands have damaged greatly private brands built up over many years of substantial investment by farmers.

What farm families want is the cost of production and a margin to make a living. They are proud to provide consumers with food produced in an environmentally sustainable way, to the highest quality, safety and animal welfare standards, and with the best traceability in the world. But they have to make a living.

The issue of retail regulation is getting serious attention at EU Commission level and the UK government has moved ahead with its own code. Crucially, it has appointed an ombudsman with real powers to investigate and impose significant fines.

The Government here must rebalance power between producers, suppliers and retailers. Producers have to get a fair share of the retail price if they are to survive. We need a statutory code of conduct for the retail sector and an independent ombudsman to investigate retailers’ abuses. And we need fair competition law.

Enterprise Minister Richard Bruton has had enough time to introduce legislation that will have a meaningful impact on the food supply chain by keeping the power of the multiples in check. This Government made great play on this issue before taking office. Farmers will not tolerate any more delays.

John Bryan is the outgoing president of the Irish Farmers’ Association


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