UK: Food wars - competition in the supermarket sector. (4 of 5)

UK: Food wars - competition in the supermarket sector. (4 of 5) - On top of all of this, a refocusing of the eye on price seems inescapable. The consumer, given more choice of ever similar stores and a new point of comparison with the expansion of discou

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Last Updated: 31 Aug 2010

On top of all of this, a refocusing of the eye on price seems inescapable. The consumer, given more choice of ever similar stores and a new point of comparison with the expansion of discounters like Kwik Save, Aldi and Netto, will be scrutinising prices more. The retailer, facing more intense competition for market share, while finding some relief from the need to spend heavily on new stores, will be tempted to reconsider.

Pricing is unlikely to get venomous. But it is conceivable that tighter pricing could be brought in and thereby squeeze the higher-geared, less efficient and smaller volume groups. An even smaller club of retailers could result.

For the consumer even short-term keener pricing would be a blessing. But the housewife might feel justified in asking why this did not happen before, instead of the manic building of stores, if it was a truly competitive market. If prices do not budge, the same old question remains. Is this due to the commercial needs of each individual supermarket company - or due to the commercial desires of the companies as a too-powerful whole?

On a larger scale, similar concerns are growing in Europe, in terms of both food retailers and manufacturers. In the past decade, as UK retailers' margins grew, so did food suppliers' - according to County NatWest WoodMac analyst John Campbell, from an average of 4.6% in 1980 to about 7% today. And likewise, food suppliers shrunk in number. Today over 70% of UK food categories, including bread, sugar and margarine, are supplied by just two operators, jointly holding more than a 50% share.

This kind of concentration on both sides of the food game might suggest fierce bullying across the negotiating table. Instead we are seeing a harmonising of interests that is good for the food industry, but again niggles on the question of competitive service of the consumer. As new computer technology is introduced to ease the flow of goods and money this co-operation will increase.

From here on, as Europe opens up, the big players are certain to become even bigger. Three large groupings of retailers, including the European Retail Alliance, of which Argyll is a member, are already formed to co-ordinate buying programmes, ie. to demand a better deal from food giants like Unilever, Nestle and Kellogg.

As County NatWest WoodMac comments: "The whole price structure of the grocery trade is based on volume-related discounts, which have become increasingly unrelated to the real cost savings that the manufacturer can achieve via increased volume. Hence the manufacturers are rightly worried that the new groupings will lead to a shift in the balance of power to the retailer." Thus suppliers are again scrambling to cut costs, one option being to centralise where they make each product, eg. all sausages in Hamburg.

While these further economies of scale should spell good news for the consumer, the UK experience with big-time players leaves one a little wary. The success of a business is magic to watch. But when you are talking about a commodity as basic as food, the price of which ripples throughout an economy, the watchdogs had better be on guard.

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