This paper is written as a summary to the UK Food Chain chapter in the initial Cabinet Office’s discussion paper entitled ‘Food: an analysis on the issues’1with further analysis of the supply chain conducted through an interpretation and commentary on additional papers on the topic. The main issues addressed will include an analysis of the current market trends highlighting upon several literatures including the Competition Commissions ‘supermarkets’ report published in 20002 and by taking this into a supply chain perspective, trends and concerns in the UK Food Chain will be outlined.
The paper then offers some potential recommendations into ways the Government can act to prevent distortion of competition within the market and ensure the protection of suppliers. Solutions to the trends in the market will be drawn and adapted from the Competition Commission’s ‘Provisional Notice of Remedies’ publication released in early 2008. Competition within grocery retailing has consolidated over time and as a result, selections of large food retailers have acquired 75% of the market share according to TNS (2007).
In relation to this, fifty percent of the larger suppliers have to rely upon supermarkets to make up a vast majority of their sales. Since then, multiple retailers now lead the supply chain. They are able to negotiate with suppliers as market trends meant that it became easier for a large supermarket to obtain a new supplier rather then a supplier to obtain a new retailer to sell to. This was confirmed by the Competition Commission (2000 and 2003), who stated that the top five supermarkets accounted for 65. 5% of sales from a group of suppliers and that out of Tesco’s 2,600 suppliers, their largest supplier only contributed 2.
6% of its purchases. This proportion shows that suppliers are relying heavily on the sales of the multiple supermarkets. Lloyd, McCorriston, Morgan and Weldegebriel, (2006) noted these concerns in their paper addressing buyer market power. They noted that there was sufficient evidence to suggest buyer power within the UK grocery retailing market. This was justified through the use of a derived empirical analysis of six products. This coincides with the Cabinet Office’s (2008) concerns regards the ‘vigorous competition among the supermarkets…
and their influence extend(s) down the supply chain. ‘ Other related papers to be used in this paper include Lloyd and Morgan (2006), Defra (2006) and the Office of Fair Trading (OFT), (2004) The UK Grocery Retailing Market was estimated to be worth around i?? 120bn in 2005. This figure was published by the IGD and DEFRA (2005 and 2006). The market is dominated by large supermarket chains. In a direct attempt to gain sales and consumer loyalty, the general food price inflation over the last decade has accumulated to around half that of general inflation.
As a result of this, the market has seen labour costs increase which, in addition to the severe competition within the market, has seen the food chain squeezed to increase efficiency and maintain high levels of profit. This is aided by the large retailers’ attempts to acquiring economies of scale and critical mass (Cabinet Office, 2008). This has meant that the range carried by supermarkets has changed rapidly in both food and non-food items. This strain on the supply chain has meant that buyer groups have managed to extract further buyer power and consequently increased the strain on suppliers further.
In 2004, the Department for International Development (DfID) conducted a detailed analysis of supply chain and retailing trends in the food industry. It was noted that the main issues affecting the supply chain included re-negotiations of trade terms between supermarkets and suppliers that would exacerbate the terms given to the suppliers and that the pressures from input factors such as seeds and agrichemicals and output factors (manufacturers and retailers) will lead to the creation of barriers to entry.
This would be heightened by the exclusion of certain suppliers due to an inability to produce the product range demanded by supermarkets and consumers. This would be an effect of diseconomies of scale and could lead to market exclusion for several small-scale suppliers. Although the Competition Commission’s findings in its ‘supermarkets’ paper found that the majority of suppliers were happy with their relationship with the large retailers, underlying concerns raised showed a different case.
It was the concern that trade terms are favouring supermarkets that the Competition Commission conducted an investigation into the supply of groceries. The findings found that suppliers were concerned with the supermarkets ability to drive down prices to ‘uneconomic’ levels and display characteristics of being the dominant partner. Other issues raised by suppliers were that retailers were able to dictate terms of space allocations, display characteristics, and dictate pricing and margins.