Retailers are squeezing food manufacturers

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Related tags: Supermarket

Food prices on both sides of the Atlantic are being held down by a
number of factors, not least highly competitive conditions among
supermarkets, according to a recent report from analyst Ernst &
Young. This is putting a squeeze on food manufacturers, writes
Anthony Fletcher.

"Even with increased prices for commodities such as wheat and soybeans, food prices will be held down in the coming months by highly competitive conditions among supermarkets,"​ said Jay McIntosh, Americas director of retail and consumer products at Ernst & Young."We're starting to see strong price promotions among supermarket chains, which should continue to stabilise inflation in this sector."

It is this price competition that is squeezing the manufacturing sector, which is under intense pressure to cut costs and increase efficiency from retailers such as Wal-Mart. The company has established a retail model, copied extensively in Europe, in which the goal of cutting prices relentlessly is the ultimate objective.

The business model has been a stunning success. According to the McKinsey Global Institute, the company was so efficient that four per cent of the growth in the US economy's productivity from 1995 to 1999 was due to Wal-Mart alone. But to achieve all this, suppliers and manufacturers have been squeezed relentlessly to cut wholesale costs.

At a recent industry conference in Arizona, US, makers of foods from cereal to soup discussed the difficulty of raising prices on food products when discounters like Wal-Mart Stores wield such power over the grocery market.

"Our customers are really slugging it out for retail space, and as long as Wal-Mart and some of the other customers are putting pressure on our customer base, it's going to be a challenging environment for all manufacturers,"​ Campbell Soup chief executive Douglas Conant said in an interview.

Food processors feel that they have little power. For example Mohammad Abughazaleh, chairman of fruit and vegetable producer Fresh Del Monte, told Reuters​ that poor weather in Florida last year hurt tomato harvests. This drove Fresh Del Monte's tomato costs sky-high, but prices on tomatoes at Wal-Mart held firm.

European food processors face the same difficulties, according to Andrew Marshall, chief operating officer of equipment supplier SFT. He believes that if retailers were prepared to work for slightly reduced margins, then billions would be released to create safer products. Farmers would be able to raise safer livestock and manufacturers would not have to take shortcuts.

"If they paid a fairer price in the first place, then they would get a better product,"​ he told​. "Due diligence is about doing something properly. It is not just writing a specification on a packet of chicken saying that there are no bones in this thing."

However, Marshall says that things are getting worse.

"I recently saw an internal memo that some senior buyers for supermarkets had done as part of an exercise,"​ he said. "It said that if three out often five major multiples (in the UK) got together to delist any one brand name, they could do so. In other words, they could break that brand. Over 80 per cent of food sold in the UK is done through the big five [now the big four following Safeway's takeover by Morrisons]. It is essentially a monopolistic situation."

The report from Ernst & Young details other factors, apart from supermarket price competition, that have contributed to the stemming of inflation in the American food and beverage sector. The international ban on US beef in late December for example resulted in a beef surplus that helped to drive down prices.

But despite the fall-off in beef prices, meat consumption has not decrease in the States. This is largely due to the popularity of the low-carb Atkins diet, which encourages the consumption of protein. An estimated 59 million adults in the US are currently on the diet, according to figures from the Valen Group.

"The Atkins diet has had a huge effect on meat demand in North America,"​ Jim Long, meat analyst and CEO of genetics company Genesus told​. "Meat is a good source of protein, and this has been identified as a good thing. And in North America, meat protein is also relatively cheap compared to the rest of the world."

Related topics: Processing & Packaging

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