The End of Supermarket Price Wars?

Jeremey Smith, Director of UK Consulting at 4C Associates, considers the impact of the recent ‘milk price row’ and explains why it could mark a significant change in retail products and supply chains. 

Supermarkets waging price wars is nothing new, however, the sustainability of the practice has long been called into question. The past two years, and the previous Tesco-dominated era, have been all about slashing costs and delivering the cheapest products possible. While this has proved advantageous for cash-strapped customers, and the growth of the likes of Aldi and Lidl, it has put an inordinate amount of pressure on suppliers.

A recent report produced by Begbies Traynor found that 1,622 growers and suppliers in the UK are in significant financial distress – an increase of more than 50 percent compared to last year. This highlights just how competitive the supermarket industry has become, as more established companies struggle to reclaim market share from new, cheaper rivals such as Aldi and Lidl.

There have been attempts to develop USPs outside of price points, such as a focus on organic products, but these initiatives failed to gain much traction at a time characterised by austerity. Now, as the economy emerges from the recession, supermarkets are beginning to look into the development of sustainable practices.

Got milk?

This situation recently made the headlines when the National Farmers Union warned that dairy producers are facing a ‘state of emergency.’ Falling milk prices, which dropped by almost a quarter in the past year, saw farmers organise protests against many of the UK’s leading supermarket chains, including Asda, Morrisons, Aldi and Lidl.

As a result of the pressure, Asda, Aldi, Lidl and Morrisons have all agreed to raise the price they pay for milk. Each supermarket has agreed to pay between 26p and 28p per litre, up from an average of 23.66p. This represents an increase of roughly 15%. Despite the higher price point, it is estimated that the production costs for one litre of milk are 30p.

Morrisons has announced that it will give customers the option to pay an extra 10p, through the ‘Milk for Famers’ brand. Shoppers who purchase this product, will see the extra 10p per litre paid directly to dairy farmers.

A new direction

In some cases, the move from cost leadership to product differentiation has been forced on supermarkets. The ‘milk price row’ underlines just how difficult the situation had become for dairy farmers, but there are other examples. It was not too long ago, that the ‘horse-gate’ scandal was front page news. The latter highlighted the dangers of putting suppliers under excessive cost pressure.

As the economy begins to improve, I would not be surprised to see more instances of supermarkets and suppliers working together to create sustainable, yet innovative, relationships. Other SKUs will be looking at what has happened with milk prices and think that they are due similar responses. Lobbying will increase, yet the consumer will be demanding something more for their money than just helping already subsidised industries. If this trend takes off, then we may witness the start of real product differentiation across other sectors and a change in how supply chains supporting major retailers operate.

Prices would increase across the board, suppliers would diversify and consumers would have a wider choice of both premium and low-cost options. Everyone would be a winner. Hopeful thinking? Perhaps, but certainly a trend worth keeping an eye on in the near future.

Share on Procurious

Voices (2)

  1. Sibby Smith:

    A really important article, and a topic I have recently been giving a great deal of thought to myself. Whilst this is focussed on the retail sector, it’s a pan-industry issue which needs to be considered. Working on major engineering and construction programmes, I have seen the effects of squeezing the supply chain to constantly offer better “value”… we need to start reassessing what “value” means because it goes well beyond hard cash.

    1. Jeremy Smith:

      Hi Sibby. I agree entirely. This goes way beyond retail and is something we are coming across in many sectors as the economy tentatively recovers. People need to protect their existing value and move forwards in a way to expand capability and market share rather than reduce cost. Construction and heavy manufacturing are actually leading this charge even if they are borrowing the ideas from other sectors. Jeremy

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.