The big retailers are squeezing margins – and nobody but themselves benefit
In times of recession, consumers often resort to a mild form of economic nationalism. They buy Irish to support jobs here. Savvy consumers know that keeping people in employment will help economic recovery. Our large grocery retailers have been quick to drape the Irish flag over themselves in an effort to cash in on this laudable consumer trend. And it’s working.
An examination of CSO data on retail pricing and the consumer price index shows that supermarket retailers have at least maintained, if not increased, their margins though the recession. Every other retail sector focused on selling products to Irish people has seen their margins shredded.
The only sector where consumers are buying more with increasing revenue is in large supermarkets. And sales values are up by more than volumes (ie supermarkets are charging more for their products across their entire range). This remarkable performance reflects the ability to loss-lead.
They have done this in two ways. First, it’s a reality of the grocery sector that large retailers have huge power over suppliers to demand “support”. They simply take margin from their suppliers.
Second, they have hidden higher prices and higher margins by loss-leading on particular items to attract consumers into stores. They then recoup margin through the higher prices of other products in the trolley. Supermarket buying is uniquely a “multibuy” phenomenon with up to 150 items in a trolley so price-sensitive items are discounted and margin recovered on the remainder.
The figures from the consumer price index are even more revealing of the tendency of supermarkets to maximise margin rather than minimise consumer price when deregulated. In 2005/06 the Competition Authority and large supermarkets successfully had the Groceries Order abolished.Their argument was that they would deliver lower prices for relevant products if they had wholesale freedom to set their prices.
Figures from the CSO show this simply has not happened. The figures to end 2011 show the price of products outside the Grocery Order has fallen by 8.5 per cent from December 2006 to December 2011. However, the price of deregulated category of products had increased by 2.4 per cent from December 2006 by end 2011. This means an almost 11 per cent higher rate of prices in the category of food products that supermarkets said would be cheaper if the order was abolished.
Furthermore, supermarkets have imported more food from the UK since 2006. These imports were at lower costs due to a favourable sterling/ euro exchange rate. In effect, they were charging Irish consumers even more.
The UK competition commission has commented “supermarkets have used buying power to transfer excessive risk to their suppliers and de-risk their own businesses”. This was also the conclusion of the EU high-level group on food when it looked at the European dairy industry in 2009. Everyone from farmer to processor had a recession except the retailer.
And as yet, the Irish Government is not willing to address this situation. Dominant supermarket buying power affects the agri-food sector profoundly, putting one job in seven at risk.
By using fresh products as “loss-leaders”, dominant supermarkets are eroding producer and processor incomes and thereby undermining the sustainability of the supply sector. This has led to the exit from manufacturing of both multinational and indigenous companies.
Having to meet the demands of retailers reduces available money to invest in innovation. It’s a brutal reality that food companies wanting to introduce a new product must pay retailers to have the new product listed. They must pay in advance for any loss to the retailer on the product being replaced. Most outrageously, they must agree to provide the retailer with an own-brand version of the new product at half the selling price.
Jobs in the Irish economy in the food supply sector are being destroyed not in the name of lower prices but ultimately to preserve retail margin!
