Food firms could pay for supermarket price wars
“It is too early to speculate how, or if at all, any commercial relationship in any area of our business might be affected”, a Morrisons spokesman told FoodManufacture.co.uk.
The retailer also said its integrated supply chain would give it some flexibility to deliver value to customers, while retaining meaningful shareholder returns.
But, predicted Julian Wild, partner and head of the food team at Rollits solicitors, food manufacturers would feel the sting of retailer cost-cutting in the event of a price war. “Unless retailers are ready to chop their margins, then there was only one place money was going to come from and that’s the food manufacturers,” he said.
The sting of cost-cutting
Investec analyst Nicola Mallard said retailers could go down their list of suppliers, starting with their weakest and ending with their strongest, to see what price cuts they could negotiate.
“Generally, companies with high market shares in categories with little excess capacity will have stronger brand positions. Greencore, which holds 70% market share of private label sauces, would be in a stronger position,” said Mallard.
“In the past, Premier Foods might have been vulnerable, as its high leverage meant it could not afford to lose contracts. However, its balance sheet is now on stronger footings and its portfolio does contain some category leading brands,” she said.
There was only a limited amount food manufacturers could do to sustain their own margins if retailers demanded lower-priced products, Wild said. It was likely manufacturers would first look at commodity prices and the cost of labour, but “fundamentally, food manufacturers can only reduce their cost-base so far and on occasions when commodity prices allow for it”.
‘Price war’
Darren Shirley, analyst at Shore Capital, said talk of a price war was still all speculation at the moment. “However, if retailers did engage in a price war [as a result of Morrisons’ plans], then costs will be passed along the supply chain to food manufacturers. But, we’re not suggesting retailers have already started to ask for cuts,” he said.
Morrisons announced it would cut food prices after posting losses of £176M last week, leaving food manufacturers concerned the other big three – Tesco, Asda and Sainsbury – would enter into a price war and slash margins to attract customers with discounted food.
Further evidence of the pressure affecting the big four supermarkets came yesterday (March 18), with the news that Sainsbury’s total sales for the fourth quarter, ending March 15 2014, were 1.5% down, with like-for-like sales down 3.8%. The result ended the retailer's nine-year run of like-for-like sales growth.
What the supermarkets said:
- Tesco would not comment on a potential price war or what it would mean for its suppliers. A spokeswoman pointed to the company’s recently published strategic plans, which were outlined at an Investor Event on February 25. Within the plans, Tesco said delivering the “most compelling offers” across its multiple retail channels were a key focus for the business.
- Sainsbury would not comment on the impact of a price war on food manufacturers, but added its Brand Match meant customers would not pay more for branded products in its stores than they would in Asda, Tesco and Morrisons. A spokesman said: “Our Brand Match plays a part in ensuring we give customers a great deal and is straightforward and easy-to-understand. Our market share is the highest for a decade, with our own brand range growing at over twice the rate of branded food and the growth of online and convenience giving our customers more choice.”
