The tone is hardening in the price discussions with food retailers: manufacturers do not seem afraid of delistings and are speaking out openly in the media. That is unprecedented. Is the balance of power shifting? “Buyers have very few options.”
Battle of perceptions
Across Europe, trade relations between retailers and their suppliers are currently very tense, it is well known. Manufacturers want to pass on the higher costs for raw materials, energy and transport, but often come up against a refusal by the supermarket chains, which suspect their trading partners of taking advantage of the situation to inflate margins.
In a highly competitive sector, food retailers are reluctant to raise selling prices, but they are also reluctant to see their already razor-thin margins shrink any further. In addition, a battle of perceptions is raging: who is “guilty” of the price increases and who is defending the consumer’s purchasing power? Recently, new conflicts came to light in France and the UK, among others.
That disagreements sometimes lead to delistings is nothing new. But the fact that retailers and manufacturers are not afraid to accuse each other and fight it out in the media is unprecedented. Last month, Albert Heijn publicly accused Nestlé of wanting to raise prices by more than 20%. The manufacturer had to issue a press release formally denying this accusation.
Sharp statements
Earlier this week top executive Jan Boone of biscuit manufacturer Lotus Bakeries also spoke out in no uncertain terms: “We need higher prices to maintain our profit margins and to invest. If a customer doesn’t want to accept the higher rates, we won’t release any production capacity for them.” For now, no products have been taken off the shelves and talks are constructive, he added.
But the sharp statements are more than remarkable. Especially since it has often been the manufacturer that stopped deliveries in recent months – and not the retailer who boycotted. It is usually assumed that the buyer has the upper hand in the negotiations and that manufacturers ultimately have no choice but to make (at least partial) concessions if they want to stay on the shelves. However, it is not as simple as that.
Dominant positions
One explanation lies in the strong consolidation movement that has taken place over the past decades. The number of brand suppliers has shrunk dramatically as a result of mergers and acquisitions, and ranges have been rationalised. Ultimately, the supermarkets negotiate with a relatively small number of very large multinationals – much larger than the retailers – which occupy dominant positions with strong brands in crucial categories.
Imagine a chocolate shelf without Mondelez, a biscuit shelf without LU and Lotus Bakeries, a snack aisle without Lay’s or a soft drinks shelf without Coca-Cola. You can’t just leave them at the door. Although the recent conflict between Colruyt and Nutella does show that no brand is immune.
Few alternatives
Consolidation also takes place among private label manufacturers, who are also confronted with rising costs. Negotiations are just as tough as with the brand manufacturers, and here too we hear about temporary interruptions of deliveries.
When a retailer is looking for an alternative supplier for a specific assortment, they do not have dozens of equivalent candidates to choose from. Moreover, by switching suppliers they are taking serious risks: the continuity of the supply may be jeopardised. “In the end, it comes down to this: purchasers actually have far fewer options than they usually claim,” a private label consultant tells us. This puts manufacturers in a stronger negotiating position. And they seem to be aware of this now more than ever.
