The Competition and Markets Authority (CMA) has accused some suppliers of branded grocery products of contributing to the recent surge in inflation in the supermarket sector by raising their prices by more than their costs had increased.
The suggestion was made by the regulator in the latest findings from its inquiry into the grocery sector that was launched in May to examine competition in the context of high price inflation and the cost of living crisis. Back in July, the CMA’s initial findings stated that soaring food prices had not been driven by weak retail competition, vindicating supermarkets’ rejection of claims they have been profiteering during the inflation crisis. But that assessment identified 10 product categories that the CMA wanted to analyse further to gain a deeper understanding of competition across the supply chain.
In an update published today, the regulator agreed that high inflation has been driven mainly by rising input costs, particularly for energy and key agricultural inputs like fertiliser. However, it noted that evidence it had collected suggested around three-quarters of branded suppliers making products such as infant formula, baked beans, mayonnaise, and pet food have increased their unit profitability and, in doing so, have contributed to higher food price inflation.
The CMA highlighted that own-label products often provide a cheaper alternative to consumers, with suppliers of these products earning lower profit margins and competing to win and retain contracts from retailers. In all but one of the product categories the CMA looked at, large numbers of inflation-hit consumers had been switching away from brands towards own-label alternatives or reduced their consumption, leading to a decline in brands’ market shares and profits. The CMA noted that this switching was positive for competition and consumers trying to lessen the impact of high food price inflation.
Meanwhile, the regulator’s investigation found that overall profit margins have decreased across most branded manufacturers since 2021, mainly because of a fall in sale volumes as consumers traded down to cheaper alternatives.
The CMA was told by some leading brands that they were planning to use any future reductions in their input costs to introduce more promotions rather than cut the standard price they charge supermarkets for their products.
Looking at the baby formula category, the CMA noted that different dynamics apply. It found that prices for baby formula in the UK have risen by 25% over the past two years.
Similar to some other products the regulator examined, evidence suggested that suppliers of branded baby formula have also increased their prices by more than their input costs. The CMA highlighted that the market is highly concentrated, and brands have maintained high profit margins over the last couple of years.
It was found that parents weren’t switching to cheaper branded options as prices rose, with very limited availability of own-label alternatives. The CMA stated that it was concerned parents may not always have the right information to make choices that could lead to significant savings, and suppliers may not have the right incentives to offer infant formula at competitive prices.
The CMA announced that it will now undertake further work to better understand consumer behaviour, and barriers to entry and expansion for baby formula manufacturers. It plans to consider whether any changes to the regulatory framework could help the market work better, with an update on its findings to be published in mid-2024.
Meanwhile, with the rise in supermarkets making cheaper prices only available to members of their loyalty schemes, the CMA announced today that it plans to begin a review of the use of loyalty pricing by supermarkets in early 2024. The CMA’s work will consider how the growth in loyalty scheme pricing is affecting consumers and competition in the grocery sector.
“Food price inflation has put huge strain on household budgets, so it is vital competition issues aren’t adding to the problem. While in most cases the leading brands have raised prices more than their own cost increases, own-label products are generally providing cheaper alternatives,” said Sarah Cardell, Chief Executive of the CMA.
“The picture is different when it comes to baby formula, with little evidence that people are switching to cheaper products and limited own-label alternatives. We’re concerned that parents may not always have the right information to make informed choices and that suppliers may not have strong incentives to offer infant formula at competitive prices. We will investigate this further and consider whether changes to regulations are necessary to ensure parents can get the best deal possible.”
She added: “We have also seen an increase in the use of loyalty scheme pricing by supermarkets, which means that price promotions are only available to people who sign up for loyalty cards. This raises a number of questions about the impact of loyalty scheme pricing on consumers and competition and the CMA will launch a review in January 2024.”
Commenting on the CMA’s finding, Jamie Cartwright, Partner at City law firm Charles Russell Speechlys said: “Branded products have always and continue to command a premium; consumers broadly understand that. For manufacturers, the balance is to maintain and increase profit but to retain customer loyalty.
Pushed too far on price, where their consumer budgets are tighter, and there are increasingly good own-label alternatives, branded products’ market share face a real challenge. If that market share is falling, chasing profit shortfall by price increases on individual products may provide only a short-term reset, as more and more consumers adopt the own-label products and like them.”
NAM Implications:
- Well I never!
- Issue is not so much that this occurred…
- …but that it has taken so long to pick up.
- The key will be the negative impact on brand franchise…
- …and probable triggering of ‘Tell a friend’.
- When it comes to Baby Formula, because of the added emotive element…
- …it may be worth factoring in say 2x the potential damage to brand franchise mentioned above.
- Meanwhile, the whole issue of banning promos / price cuts on Baby Formula to encourage breast-feeding needs re-examination….
