A report by the UK’s competition watchdog has found some branded suppliers pushed up prices during the cost of living crisis by more than their costs increased.

The Competition & Markets Authority named baked beans as an area where “prices have risen by more than production costs, leading to increases in unit profitability”.

The report is likely to reopen the row sparked in January when then Tesco chairman John Allan claimed it was “entirely possible” that suppliers were taking advantage of the supply chain crisis to artificially raise prices.

Heinz beans and tomato ketchup were among the products Tesco temporarily removed from shelves last year in a row over pricing. The CMA report also singled out other product areas including petfood, mayonnaise and baby formula. The latter will now be probed further by the watchdog.

It said that branded cost hikes had seen consumers switch to competitive supermarket own brand alternatives.

Today’s report follows an initial assessment by the CMA after it announced a probe focusing on retail competition in May. That report, published in July, cleared supermarkets of profiteering, following accusations from across the political spectrum that retailers were deliberately keeping prices high to bolster their margins.

The CMA today confirmed that high levels of competition in the UK food and drink sector had helped protect consumers against inflation which, despite falling to 10.1% in October, remains at “historically” high levels.

It found high inflation had been driven across the sector by rising input costs, including energy price hikes but that own label products providing cheaper alternatives had providing cmpetition allowing retailers to switch to cheaper suppliers to limit price increases.

Although for some product categories (eg milk and poultry), there are relatively few own-label manufacturers, competition to win and retain supply contracts appears to be strong, switching does occur, and retailers generally appear to obtain competitive prices, assisted by the transparency of the costs of their own-label suppliers,” found the report. This has continued to be the case as input costs have risen.

That some branded suppliers with major influence over supermarkets have been able to maintain higher margins is one of the key findings of the report.

“For branded manufacturers, the relationship with retailers is different,” it says. “The most successful branded products across our product categories (for example, Heinz Beanz, Hellmann’s mayonnaise and Felix cat food) are ‘must-stock’ items for retailers, meaning that some customers will expect to see them in a store and might decide to shop elsewhere if they are consistently unavailable.

Retailers also have limited visibility of the costs of their branded suppliers.

“These features give branded manufacturers a source of pricing power that is not typically available to own-label suppliers”

The report finds in total around three-quarters of brands that provided comparable data have increased their unit profitability during the recent period of high food price inflation. However, in doing so, many have seen a reduction in volumes as customers shopped elsewhere.

Both branded and own-label manufacturers remained broadly within normal ranges of net profitability when compared with recent performance.

“Our profitability analysis shows that around three-quarters of brands that provided comparable data have increased their unit profitability during the recent period of high food price inflation: that is, for the relevant product categories, they have pushed up the prices they charge to retailers by more than the rise in their input costs. However, in doing so, many have seen a reduction in volumes, market share (see below) and overall profits.

Although retailers are able to take measures to counteract the pricing power of branded manufacturers as part of their negotiations with them, the key constraint that prevents ‘must-stock’ brands charging what they like comes from consumer behaviour, and their preparedness to switch away to cheaper alternatives, including own-label products.

 “Food price inflation has put huge strain on household budgets, so it is vital competition issues aren’t adding to the problem,” said CMA CEO Sarah Cardell.

“While in most cases the leading brands have raised prices more than their own cost increases, own label products are generally providing cheaper alternatives.

“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.”

As well as the probe into baby formula, the CMA also today announced it would launch a new report into supermarket loyalty cards, amid concerns some shoppers, such as those living in so called “food deserts”, are unable to take advantage of loyalty card schemes.

The Grocer understands that the probe could also explore the rise of Aldi price match schemes among many retailers, with fears having previously been expressed that such schemes may sometimes have had the unintended consequences of keeping prices locked at higher levels than they would otherwise have been.

Cardell said: “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.”

Sainsbury's Aldi price match

FDF CEO Karen Betts said suppliers had gone to great lengths to shield shoppers from inflation.

“Companies across our sector are acutely aware of the cost of food and drink and the pressure this is putting on household budgets, adding to raised energy, mortgage and other costs.

“Food and drink manufacturers have been grappling with rising input costs since September 2020, and they have done all they can over the past three years to absorb these costs to shield shoppers from the full impact of inflation.

“However, with inflation hitting a 40-year high earlier this year, some price rises have been unavoidable, which have varied according to product and manufacturer.

“The huge rises in input costs we’ve seen have undoubtedly been very challenging – one shock would have been difficult, but the successive shocks of Covid-19, Brexit and the war in Ukraine, alongside droughts, wildfires and flooding in Europe in particular, have eroded our sector’s resilience significantly. As a result, across our sector margins are at a 40-year low, insolvencies have doubled and investment has dropped by more than a third.”

Ged Futter, founder of The Retail Mind, said far from finding examples of profiteering, the CMA’s probes had so far unearthed a fundamental problem with low levels of profit levels posing a threat to food security.

“The report highlights the low level of profitability in the industry. This should be a wake-up call to the fragility of our food supply system.

“The real question is how many suppliers will go bust”

“The fact is suppliers are living on a knife edge and they are not getting support from retailers or the government.”

BRC director of food and sustainability Andrew Opie said: “We welcome today’s CMA report, which confirms many of the BRC’s own findings about the grocery sector.

“The CMA found that own-label goods offer competitive prices for consumers, with margins falling from 4% in 2020 to less than 2% in 2022.

“While many branded manufacturers had increased their unit profitability during the cost of living crisis, savvy consumers have been trading down to supermarket own-label brands in order to get the best possible value. The increased availability of own-label products is just one way in which food retailers have supported their customers with the rising cost of living.

“We acknowledge the CMA’s concerns on baby formula – a market dominated by two brands. The CMA notes that consumers could make significant savings by switching to cheaper brands or own-label products, all of which provide the necessary nutrition for a healthy baby.

“Retailers will continue to deliver excellent value for their customers. Whether it’s everyday low value, or genuine bargains through loyalty schemes discounts, retailers know they have to demonstrate clear value to get customers through their door. However, this continues to be challenged by rising costs, from hundreds of millions in additional business rates, to higher labour costs from the rising NLW.”