Super Power for Supermarkets

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1 Super Power for Supermarkets ICSA researcher Gillian Westbrook takes a closer look at the power of supermarkets In the current recessionary times, it seems that price wars for food are going to be an increasing part of the retail landscape. To gain competitive advantage, retailers respond by reducing prices, a strategy that suggests to the shopper that the retailer is making less profit on their goods than in previous times. Consumers are pleased to save a few euro on their weekly shop, and are probably blissfully unaware of just who is taking the hit for the price reduction. Farmers, however, know only too well from whom the margins are being sought. Producer margins have been eroding year on year, leaving many farmers reflecting on how the economics of their business seemed more attractive thirty years ago. The relationship between farm-gate price and the rising high levels of retail and supply concentration are not mutually exclusive and should not be underestimated. There have been many factors that have impacted on farm-gate prices. BSE for example, occurred at a time when there was a major shift in EU retail concentration and very likely created opportunities for retailers to exert their power over suppliers. Various aspects of market consolidation and issues concerning food safety have all had serious detrimental consequences to the farmer. Unlike BSE, however, the matter of eroding farm-gate prices and the power of the retailers to control prices has received limited research. The Retailers The multi-nationals have gained a significant portion of the market share of retail sales in Ireland and in the rest of Europe over the past 15 years. Not surprisingly, a pattern exists between lower prices being paid to farmers and retail dominance. Furthermore, if, as suggested by some large retailers, margins remain the same, one would expect to see parallel price variations between farm-gate and consumer, but this is not the case. To understand the power of the supermarket to control prices, we first need to look at how they became dominant. U.S. Retail: Brief History The United States (U.S.) was the first country to fully embrace the convenience of the supermarkets back in the 1950 s. The key to the supermarket s success lay in their ability to reduce prices, relying on charging gross margins that were 10% to 15% lower than in other grocery outlets. Profit margins were initially achieved by limiting cost of ancillaries, such as store interiors, much like the current day Lidl and Aldi.

2 The supermarket/hypermarket concept became more popular and with more stores opening, margins had to be squeezed to maintain competitive advantage. If profits were to remain high, operational costs needed to be spread over many stores. It is at this time, 1980s, that many mergers occurred and the inevitable pressure to buy food as cheaply as possible emerged. By 1986 the top 5 U.S. retailers accounted for 62% of sales, and 72% by EU Retail Brief History In Europe, however, the supermarket phenomenon was much slower to develop. The main shift in EU retailing concentration occurred in 1997 when Wal-Mart made a dramatic entrance into the European retail scene, initially in Germany and then in 1999 with the acquisition of the British Asda Group. The presence of such a successful and powerful retailer placed immense pressure on their European competitors, especially as Wal-Mart was known for averaging double margins. To remain competitive, other retailers would need to reduce prices and consolidate their business. This resulted in a flurry of mergers and acquisitions with each striving to achieve the ultimate economies of scale, with low cost purchasing policies gaining precedence. In 1998 the top 5 EU retailers accounted for only 20% of the total market, with the top 20 representing 51%. By 2005, the top 5 dominated 70% of the EU grocery market and remains similar today. Across the EU-15, the degree of concentration has grown from an average 21.7% in 1993 to more than 70% by In less than seven years the dramatic growth of the big retailers is clearly evident, greatly influenced by the competitiveness of the two largest players, namely the French company Carrefour and Wal-Mart. The BSE Effect At the same time the retailers battled for competiveness (1995/96), along came the UK BSE crisis, causing a massive reduction of both beef consumption and price. The entire red meat sector was impacted by lack of consumer confidence in food safety, leading to a substantial increase in the retail to producer price margin. Production costs rose due to the additional regulations, affecting both the producer and processor. This placed a disproportionate burden on the smaller processing plants and as a consequence, many of them were forced to close, resulting in higher processor concentration. Many believe that the BSE crisis coupled with retail consolidation created greater potential for retailers to exert buying power towards the less concentrated upstream sectors, i.e. the farmers. The Global Picture The Top 20 grocery retailers generated sales of US $1.95 trillion in 2008, an increase of 10.5% year-on-year and representing 25% of the global market as a whole. Research projections

3 estimate that Wal-Mart banner sales will have increased from $434 billion in 2008 to $603 billion in 2013, and Carrefour and Tesco will double their sales with Asian and Russian markets targeted for expansion. Table 1 shows the Top 5 grocery retailers and their requisite turnover and number of outlets. Table 1: Top 5 Global Grocery retailers, 2008 Company Country of Origin Banner Sales 2008e $ US/mn (includes food & nonfood groceries) Wal-Mart USA 434,691 7,657 Carrefour France 160,988 13,791 Metro Group Germany 115,941 2,334 Tesco UK 109,055 4,332 Schwarz Group Germany 86,139 9,347 Source: Planet retail, 2008 Number of Outlets, 2008 In 2003, the top 30 retailers held 19% of the market in Asia and Oceania and 29% in Latin America. This scale of globalised supply chains provides the supermarkets the ability to source food wherever it is cheapest, and to place pressure on suppliers to accept lower prices. At the end of the supply chain it is the producers who are ultimately squeezed the hardest. This practice takes place all over the world, limiting producer access to markets and seriously limiting consumer choice. The EU The EU picture shows the Top 5 grocery retailers generating sales in excess of 305 Billion in Table 2: Top 5 EU Grocery Retailers, 2008 Company Country of Origin Banner Sales 2008 /million (includes food Carrefour France 85,000 Tesco UK 63,000 Schwarz Group Germany 59,000 Metro Germany 52,000 Rewe Group Germany 46,000 Source: Planet retail, 2009

4 In terms of turnover, first and second place are held by companies that source large quantities of Irish red meat, especially beef. It is estimated that by 2012 the turnover from Carrefour and Tesco will exceed 101 and 75 billion respectively. The retail discounter Aldi, is in seventh position in terms of turnover with annual sales of 41 billion in It is estimated that this company should reach sales of 53 billion by The future turnover projections for large retailers looks set to rise, however, increased market concentration translates into market power exertion over consumers, processors and producers. Intensive price competition offers producers and processors limited opportunities to pass on cost increases to consumers. The only way for processors and producers to increase their margins is to increase their scale of business. Obviously this is not tenable for the majority of farmers and it has contributed to the squeezing out of smaller slaughterhouses. Furthermore, it encourages increased intensity in farming, contrary to consumer demands and the greater good of the countryside. The concentration of the grocery retailers is high in many EU countries. Table 3 shows the EU countries where the top five retailers make up more than 70% of the grocery market (2005). Table 3: Market Share of Top Five Retailers by Country Country Market Share Finland 90.02% Sweden 81.8% Ireland 81.4% Slovenia 81.6% Estonia 78.8% Austria 78.7% Germany 70.1% France 70.0% Source: Global Retail, 2006 Ireland The high retail concentration is not a healthy situation, especially for the Irish export market, as the bargaining powers are heavily weighted towards the retailers. For the Irish farmer, this is exasperated by the concentration of retail sales in the red meat sector. Specific data on the proportion of certain commodities being sold by multinational grocery retailers is lacking, however, within the UK, Tesco alone accounts for 20% of beef retail sales. More than 75% of home consumed beef in the UK comes from supermarkets. In Germany, over 65% of red meat

5 products are supplied through the supermarket, and in Belgium, Netherlands and Luxembourg this figure is over 80% for beef retail sales. This illustrates the vulnerability of Irelands red meat producers, with their strong export market, to the demands of the supermarket and the level of dependency that will exist between meat processors and retailers. Getting a greater understanding of what is going on in the Irish retailing scene is hampered by the efforts made by large retailers to withhold information on margins, profitability etc applying to the Irish market specifically. Indeed, the need for more openness and transparency on supermarket margins are key concerns for both the Tanaiste (in her proposal for a Code of Practice in Grocery undertakings) and for FG spokesperson on agriculture, Michael Creed (in his proposal for a bill on Food-Fair Trade and Information ). The following chart indicates the proportion by which the average price has changed in 2009 compared to 1995 (normalised to 100%). The average price in 1995 for R3 steers was equivalent to 2.88 per kg and in and in 2009 (over the first 7 months) was an average of 2.95 per kg. Farm-gate price for R3 steers has increased by 2.3% in 14 years, whereas the retail price has increased by almost a third in the same period. Proportional price change (as %) on 1995 level Beef Sirloin retail price R3 steers price difference % % difference Year The black line shows the change between the average retail and average farm-gate price with respect to 1995, year on year. For example in 1996, there was a 10% difference in price

6 between the average farm-gate price for R3 steers and the average retail price of sirloin. In 1997 and 1998 the difference remained stable. In 1999 there was a notable drop in farm-gate price, whereas the beef retail price increased steadily until During the same period the farm-gate price recovered slightly in 2000 and then dropped to 1998 levels and remained stable till Between 2003 and 2006 the farm-gate price recovered steadily against a significant drop in the average retail price in The retail price continued to rise steadily until 2008, with the farmgate price volatile and losing ground over this period to date. In Ireland the retail grocery market is estimated to be in the region of 8.5 billion. Tesco s Irish division reported growth of 9.8% for the financial year, with sales reaching billion, representing approximately 26.3% of the market share. Dunnes holds 24% market share and Superquinn 7.3%. SuperValu, as with Superquinn, has lost market share; however, represents a not insignificant 20%. Source: Planet Retail, 2008 The five main supermarkets in Ireland represented a 77.6% collective market share in Irish producers are not alone is their displeasure at farm-gate prices. The Spanish report that while inflation in the grocery sector increased by 3.7%, there was little or no price increases paid to the producer. Clementines, for example, were almost eight times more than the farmgate price and it is common to find retail prices four times that of the price paid to the producer. The EU average retail price increase is reported to be between one and four times

7 the farm-gate. To put some perspective on how this has changed, fifty years ago farmers received half of the retail price. In other member states for example, UK farmers receive an average of 7% and 18% in France. Market dominance of food retailers is inherently tied into the entire farming issue. The way in which large companies dictate the price paid for food is all too worrying to the farmer. It is time to see a Fair Price paid to the producer. More local markets are being developed in Ireland, but on a small scale. Facilitating the increased development of farm shops and use of local produce will go some way to assist in tackling the problem. Small abattoirs should be encouraged. Encouraging more producer groups and co-operatives to use their strength in numbers to negotiate with supermarkets will help, but this requires the backing of a protective legislative process. The regulatory framework needs to be realigned and developed in context, supported and deliver a fair deal to farmers.