New research proves that buying alliances do lead to lower prices for consumers: customers of German supermarket chain Edeka paid on average 12% less for products the retailer purchased through retail alliance AgeCore.
Controversial alliances
International buying alliances of European food retailers are controversial: according to some brand manufacturers, they only serve to increase the profit margins of the retailers involved, and only add costs to the supply chain. According to retailers, however, alliances are a necessity in order to create a more level playing field in negotiations with multinationals and lead to lower sales prices in the stores.
Until now, there has not been much empirical evidence to support this claim. A recently published study by Professor Marcel Corstjens of business school INSEAD changes all that. The study, entitled International Retail Buying Groups: A Force for the Good? The case of AgeCore/EDEKA, examines whether the membership of German market leader Edeka in the international purchasing alliance AgeCore has led to lower consumer prices as a result of better purchasing conditions (in the meantime Edeka has left the alliance to found the new purchasing group Epic Partners).
On average 12% lower prices
The study compares retail prices for products negotiated by AgeCore with prices for products that were not negotiated by the alliance. No half measures: the study includes a total of over six million scanner data items for 138,000 stock-keeping units (SKUs) from twenty food categories based on monthly observations over a six-year period. The method was refined according to turnover and product category, to avoid unwanted overestimates.
What does it show? Average monthly consumer prices for SKUs in a specific product category negotiated by AgeCore were on average 12% lower than those of similar SKUs outside the AgeCore negotiations. The effect varies from -36% in the frozen food category to -6% for snacks. In a few categories – beverages, for instance – AgeCore prices are higher. Only three product categories show no statistically significant effect: bakery products, plant-based dairy products and delicatessen.
“Trickle-down effect”
The results of this study are in line with previous studies on the impact of purchasing alliances. In 2019, research showed that bottled water in France became 7% cheaper as a result of negotiations by three national purchasing groups. And a 2020 study of the alliance between Metro and Auchan indicated a reduction in consumer prices of 5% to 7% – also in France.
This new study is by far the most comprehensive of its kind. Even though more research is needed on factors that may cause exceptions in some categories, “it seems reasonable to state that international retail buying groups do in fact contribute to enhanced competition and level playing field negotiations between (predominantly) national food retailers and multinational brand owners, and that better buying conditions do result, via a ‘trickle-down effect’, in lower average consumer prices,” the paper concludes.
