Is this the end of the grocers’ race to the bottom?

posted by Steph Green
25 September 2019

In July Tesco raised the price of over 1,000 products on its shelves by an average of 11%.

Their reasons included meeting profit targets for shareholders, and rising wholesale prices in categories such as meat and dairy. There’s no doubt these are among the many pressures felt by margin constrained grocers.

However, is this largest single set of price increases made by a supermarket for decades a sign of something else? The beginning of bigger changes to come across the entire market which could impact the foundations of purchasing relationships between grocers and their supply chains.

Grocers, including Tesco, have been price discounting for years, taking a hit on their category margins in service of footfall-driving promotions. Messages of “Every Day Low Prices” and “Every Little Helps” have become the mottos of the sector. It’s not difficult to see why. Between 2012 and 2018, all the major players lost market share to ankle biting discounters such as Aldi and Lidl.

There’s no doubting that this pressure from discounters has led Tesco and others to play the price dropping game themselves – but they have been playing on the court of better equipped opponents.

But add to this; the more recent threats of Brexit (note Lidl Ireland preparing British suppliers for higher costs following the UK’s departure); the Bank of England’s new cautious growth projections; and labour cost increases. Maybe grocers have realised that they can no longer afford to run their categories at a loss.

There are many visible casualties of the fact UK retail is struggling. Almost 2500 stores, banks and other businesses disappeared from Britain’s high streets in 2018, 40% more than the previous year.

Grocery retailers must protect themselves from the same fate by preparing themselves for a future of profitable growth through these price increases. And, if Tesco has made the move, it’s only a matter of time before others follow.

Tough conversations have always been a necessary part the complex negotiations between grocers and their suppliers, the basis for agreeing deals and prices acceptable to both parties.

However, if upstream price rises are to become the norm, the nature of those conversations is likely to change.

Ultimately, driving suppliers into the ground to shave off bigger margins will force closures, such as Kerry Foods’ factory in Staffordshire last month which resulted in the loss of 900 jobs.

A continued focus on squeezing cost prices in spite of price increases will lead to further instability in supply, through additional closures for manufacturers, or the shifting of production abroad.

From a grocer’s procurement perspective, the focus needs to shift towards long term sustainable partnerships with suppliers in order to keep the market buoyant.

Additionally, both parties need to work closer on driving supply chain efficiencies or adding joint value rather than focusing solely on cost.

UK grocers need a reliable local supply chain and, as responsible retailers, must ensure they are collectively able to operate profitably.

And for suppliers, now is the time to use this shift in behaviour from Tesco to reflect on the balance of power between themselves and the retailer, then rethink their negotiation behaviours, particularly around cost price increases.

However this will need to involve robust plans, clearly demonstrating how at least part of that additional revenue will be used to drive further category growth.

The UK grocery industry simply cannot survive unless retailers and suppliers are both making money. They need to invest together in order to drive sustainable growth for the future.

☛ Steph Green is associate at Total Negotiation

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