Supermarket price war turns smaller food suppliers into ‘cannon fodder’

Sarah Butler
24 November 2014
The Guardian
Insolvencies rising among wholesale bakeries, pasta makers, fish processors and ready meal manufacturers amid industry-wide squeeze on profit margins
More and more food producers are facing bankruptcy, with margins further squeezed by the supermarket price war.
Food producers have become cannon fodder in the bitter supermarket price war, according to accountancy firm Moore Stephens, which found 28% more specialist manufacturers have gone into insolvency this year than last.
In the year to September, 146 food producers went into insolvency, including wholesale bakeries, pasta makers, fish processors and ready meal manufacturers.
In one of the larger cases, 170 jobs were lost when Sussex-based fresh pasta maker Pasta Reale went into administration in August after it lost three major supermarket contracts in a year.
Duncan Swift, head of the food advisory group at Moore Stephens, said: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder. UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains.
“To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing.”
The rise in insolvencies among food suppliers is in stark contrast to the 8% fall in liquidations in the economy as a whole over the same period.
Swift said that because supermarket buyers’ bonuses were based on securing cash contributions from suppliers, they were being hit with “spurious deductions”, cancellations at short notice and threats to take them off the supplier list.
Highlighting contracts where suppliers contribute to supermarkets’ costs, he said: “Supplier contributions cause major cashflow problems for food producers and can tip them into insolvency. It’s a raw deal for food producers, who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them.”
The extent of these contributions has come into the spotlight this year after Tesco admitted it had found a £263m black hole in its accounts relating to the way it booked payments from suppliers.
Moore Stephens estimates that suppliers’ payments for promotions, marketing or product placement are worth several billion pounds a year to the top 10 supermarkets.
In a bid to protect suppliers from bullying by supermarkets, the government last year appointed a grocery code adjudicator, Christine Tacon, with the power to fine the UK’s biggest retailers millions of pounds if they are found to have abused their power. But the adjudicator’s remit is limited to examining whether retailers have broken the terms of contracts. She cannot interfere in the original price negotiation that forms the basis of a contract and that leaves suppliers vulnerable.
The pressure on suppliers comes as UK grocery sales have gone into decline for the first time in 20 years. Lower food commodity and fuel costs have combined with the rising popularity of discounters such as Aldi and Lidl to force the major grocers to cut the price of goods on their shelves. Aside from the grocery discounters, shopping habits learned during the recession are seeing chains such as Poundland and B&M continue to steal sales from Britain’s mainstream supermarkets.
Meanwhile, structural changes in the market, including the growth of online and high-street convenience stores, are adding to the big supermarkets’ pain.
Last week, Asda reported its biggest underlying sales decline in eight years with like-for-like sales down 1.6% in the three months to 30 September. Chief executive Andy Clarke blamed the intensifying price war and a blizzard of discount vouchers for the deterioration.
A year into a plan to spend £1bn on price cuts, Asda admitted that it has already invested more than planned and it is likely to increase its budget by as much as £500m. Sainsbury’s recently pledged to cut prices by £150m in the next 12 months, while earlier this year Morrisons said it would spend £1bn on lowering prices and improving the quality of its food over the following three years.
All of these price cut campaigns involve improving the cost of goods via greater efficiencies and that can mean relying on fewer larger suppliers, pushing smaller players out of business.