Who pays for the rising cost of food? It is becoming a growing source of contention between supermarkets and their suppliers around the globe.
Who pays for the rising cost of food? It is becoming a growing source of contention between supermarkets and their suppliers around the globe. One thing is for sure: both parties will do everything in their power to keep from passing these costs on to consumers.
But with commodity prices on the up, it is inevitable that someone will have to bear the brunt. Recently, value-led French retailer Leclerc said it would limit price increases to 2% despite requests from suppliers to raise prices by up to 7% to reflect the higher raw material costs. The retailer will reinvest 0.2 to 0.25 points of profit margin in order to maintain its EDLP status.
This will clearly put a lot of pressure on suppliers to either help fund the price investment or find a clever way of passing these costs on. For example, suppliers can maintain the price of a given product but decrease the pack size. Unit pricing therefore is higher, but to the consumer it is more difficult to spot the increase. During the recession, this was common practice in categories such as cereal and ice cream.
On the other side of the Atlantic, Canadian grocer Metro takes a different view on inflation. This month, the retailer began raising prices in certain categories, and believes that, despite growing price competition in the Canadian grocery sector, other retailers will be forced to follow suit.
Inflation will ultimately put pressure on retailers to re-examine their cost structure to ensure they are operating from the leanest base possible.
Despite limited success with range rationalisation, the world’s global grocers will be forced to continue cutting underperforming SKUs. Provided that the product isn’t an essential component to a loyal shopper’s basket, then this cleansing activity can help retailers to battle rising food prices by lowering their cost base. Yet it is just another example of how the power continues to shift into the hands of the retailer.
We have already seen some high-profile cases of major brands being delisted from grocery retailers because they couldn’t agree on price. In the US, Costco delisted Coca-Cola for three weeks in 2009. In Belgium, Delhaize removed Unilever products for a similar reason. In the UK, Tesco and Premier Foods engaged in a pricing dispute that saw 12 of 18 SKUs removed from shelves.
Inflation is a long-term trend that will require a more collaborative approach between retailers and suppliers. Meanwhile, expect more pricing squabbles in 2011.
Natalie Berg, global research director, Planet Retail. For more information contact us on:
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