That Tesco is to start yet another price war comes as no surprise. What is surprising, however, is an apparent indifference towards the impact on suppliers. The word ‘supplier’ is conspicuous only by its absence.
While the analysts have identified Ocado and Sainsbury’s as among the biggest losers, they make absolutely no mention of the impact of Tesco’s price cut policy on suppliers.
It will not be Ocado, Tesco, Asda or Sainsbury’s who take the biggest hit. It will, as usual, be the suppliers. Misled by the PR machines of Tesco, I have no doubt that many customers will think it is the retailer that ‘funds’ this kind of price cut activity. The reality, as any supplier knows, is somewhat different.
Whatever the result of Tesco’s move and it is described by its rivals as “classic smoke and mirrors giving with one hand and taking away with the other” it will still make a profit. Compare this with its suppliers, particularly suppliers of pork and bacon.
While retail prices for pork and pork products have actually risen over the past few months, the price paid to farmers for their pigs has fallen. Producers have been making losses for more than a year while intransigent retailers have ignored cost increases and refused to increase prices paid to farmers.
It has been left to Richard Brasher to talk about the impact on suppliers. He claims his price war should be great news for them because it will increase volumes. This is a concept that needs to be comprehensively dismantled. With such a high proportion of our costs being marginal costs (predominantly feed), the typical retailer business model of single-mindedly driving volumes just does not work for us. What is the point of selling more of a loss-making product?
UK pig production has more than halved in the past 10 years. EU production is now starting to follow a similar downward trend. Yet worldwide demand continues to rise inexorably. There will be a price to pay for cheap food. And, just like the bankers didn’t pay the price for the banking crisis, retailers won’t be paying for the food costs crisis.
Richard Longthorp, pig producer, Yorkshire