Supermarket Price Wars Struggles and Consequences for Food Suppliers in the UK

Section B - Data Response Question Supermarket price war, food waste and possible mergers Figure 1: Market shares by total revenue in the UK supermarket sector, 2010 and 2015 2010 Lidl 2.2% Others 7.7% Aldi 2.8% Waitrose 4.1% Co-op 7.1% Morrisons 11.6% Sainbury's 15.1% Tesco 30.8% Asda 17.6% 2015 Others 6.7% Aldi 5.5% Waitrose 5.19% Co-op 6.29% Morrisons 10.9% Lidi 4.09% Sainbury's 16.5% Tesco 28.6% Ascda 16.5% Figure 2: Proportion of food suppliers reporting that the following supermarkets fail to meet the Groceries Code of Conduct, 2015. Aldi Sainsbury's Lidl Waitrose Asda Co-op Morrisons Tesco 10 15 20 25 30 35 Extract A (Source: YouGov poll of more than 1100 food suppliers to supermarkets. Reported in The Times, 23 June 2015) Supermarket price war puts pressure on their food suppliers The number of food suppliers (to supermarkets) struggling to remain in business has increased by more than 50% over the past year as supermarkets engage in an intense price war. It has never been tougher for the UK's food suppliers according to a study by accountants Begbies Traynor. It blames aggressive price-cutting by the supermarkets and delays in payments to food suppliers as the main causes of the difficulties. Further problems include food suppliers being forced to pay excessive amounts for packaging specified by supermarkets and funding in-store promotions. Almost 90% of struggling food suppliers are small and medium-sized businesses. The price war has contributed to food prices paid by consumers falling by 1.7% over the past two years The market shares of the big four supermarkets-Tesco, Asda, Sainsbury's and Morrisons - are under pressure as shopping habits change. Many consumers are switching from one main weekly shop to shopping more frequently at local discount stores such as Aldi and Lidl or purchasing goods online from other grocery retailers. The big four supermarkets have responded by putting more pressure on their suppliers despite an investigation by the Groceries Code Adjudicator (GCA). The GCA has the power to fine supermarkets up to 1% of their annual sales revenue if they break the Groceries Code of Conduct. A YouGov study found considerable differences between the supermarkets in meeting the Code with Aldi performing well but Tesco badly. Despite the Groceries Code, many food suppliers are reluctant to complain for fear of losing contracts with the supermarkets. Source: adapted from "Supermarket price war takes toll on UK food suppliers. Rupert Jones, The Guardian, 20th July 2015) 10 15 20 Extract B Food waste in the supply chain A report from the British Retail Consortium reveals that supermarkets are directly responsible for around 0.2 million tonnes of food waste every year. This is due to the expiry of use-by-dates and poor handling of stock However, 4.1 million tonnes of food waste occurs annually in the food supply chain before it even reaches the supermarkets, indicating the existence of information gaps. The supermarkets are cooperating with food suppliers and farmers to try to reduce this waste. This involves improving forecasts for supply and demand of food and increasing the reliability of transportation and storage. Consumers, the final stage of the supply chain, waste a further 7 million tonnes of food each year. This suggests irrational behaviour. Supermarkets are also working with consumers to reduce the waste by providing advice on how to store and use leftover food. The development of packaging designs to keep food fresher for longer is one of the innovations under way to reduce waste Source: adapted from Supermarkets tally up food waste bill. Will Nicholls, in Businessgreen, 19th January 2015. http://www.businessgreen.com/ bg/news/2390792/supermarkets-tally-up-food-waste-bill) Extract C Proposed merger activity in the supermarket sector Analysts at Société Générale, an Investment bank, have recommended a merger between Sainsbury's and Morrisons. They claim it would lead to increased economies of scale and market power for the combined business. Such a merger between the third and fourth largest supermarkets in Britain would have been unrealistic a few years ago due to concerns of its impact in reducing competition. However, the chances of getting permission from the Competition and Markets Authority have increased following the growth of Aldi and Lidl. Giant mergers have been approved in other sectors such as Lloyds-HBOS (banking) and British Telecom-EE (telecommunications). The suggested merger would have its challenges. There is considerable overlap between the locations of the stores and the enlarged company would require the rationalisation and co-ordination of hundreds of thousands of employees. A new expensive IT system is likely to be required and the underlying difficult market trends would remain in the food retailing industry. (Source: adapted from Tesco-bury and AS-Morrisons. Could Britain's supermarkets be about to merge Graham Ruddick, in The Telegraph, 16th December 2015, http://www.telegraph. co.uk/finance/newstysector/retallandconsumer/11699724/Tesco-burys-and-AS-Mormons Could-Britains-supermarkets-be-about-to-merge.html) Answers the questions on the next page 10 5 10