Speaking at last week’s Food Safety Authority of Ireland (FSAI) conference on ‘‘Safeguarding The Food Chain’’, European Commissioner for Agriculture and Rural Development Phil Hogan highlighted that a clear imbalance of power between producers and retailers, has resulted in the farmer’s share of consumers food spend being continuously squeezed.
Hogan added that supermarkets in particular now enjoy superpower status as a result of increased globalisation and a high level of concentration within Europe. This, he says, gives them disproportionate leverage over primary producers.
The imbalance of bargaining power between price-setters and price-takers is stark
“The imbalance of bargaining power between price-setters and price-takers is stark, leading to a situation where there is a real fear factor for farmers of commercial retaliation, late payments and other headaches,” he said.
Hogan admitted that existing mechanisms such as the EU Supply Chain Initiative are not perceived by farmers to have any real teeth, as they are voluntary, and lack serious consequences for retailers engaging in unfair trading practices.
The European Commission has started a review of fair trade practices in the food and grocery sector. However, there are some flaws. In particular, it has omitted to recognise supermarket dominance and the anti-competitive, anti-supplier practices present in the industry such as below-cost selling or own-label dominance, which are endemic to the grocery sector.
It is widely recognised that supermarket dominance imposes huge barriers and costs on food companies, which increases the cost of innovation and new product development.
This is a result of supermarkets insisting on upfront payments for new product listings and insisting on cheaper own label versions of the innovative products made available to them- after it has proven itself in the market place. Moreover if the new product succeeds, it will be regularly sold below cost to provide a loss leader for the supermarket.
This dominance that limits innovation is unique to the grocery sector
This dominance that limits innovation is unique to the grocery sector. It does not arise in other sectors such as pharmaceutical, mobile phone or computer hardware because retailers do not dominate the route to market.
In these sectors, retailers cannot undermine innovation by requiring product manufacturers to produce cheap own label copycats which erode the market share of the original product. For example, would Apple produce an own-label iPhone to sell for half the price in a Tesco store?
Why then are these anti-competitive practices which are clearly anti-supplier, anti-farmer and anti-manufacturer allowed in the food and grocery sector? And why is the supermarket allowed to become a monopolist in grocery but not in any other consumer product?
Food is the only sector where there is no demonstrable incentive towards innovation. In these other consumer markets, manufacturers can see the possibility of an economic return from investment in new technology. That doesn’t mean that every new product succeeds in these market sectors as the abundance of competition sees that only the best products survive.
In contrast to other consumer markets, the economic risks associated with new product development in grocery or indeed existing brand promotion are clearly prohibitive.
Just because Coca-Cola and a dozen other high-profile brands can survive or stand up to larger retailers does not provide proof that there is competition in the grocery markets.
Route to market
Clearly, supermarkets control the route to market in much the same way as the ESB or Telecom Éireann/Eir controlled the physical network, which was the only route to market for electricity and phone services.
In electricity and telecoms, it was recognised that the owner of the network infrastructure had the ability to distort competition and the decision was made to regulate these companies as natural monopolies.
Regulatory authorities are assigned to strictly control the charges these network companies can levy on other companies for whom their network is the sole route to market. Access rules are also agreed so that a range of service providers can compete on a level playing field.
Today, we see how this has evolved.
The Eir infrastructure carries cable TV offerings from many providers, while ESB Networks carries electricity generated from power stations all across Ireland irrespective of whether they are owned or operated by Airtricity, Bord Gais or Energia.
In the food and grocery sector, real competition could be introduced by insisting that own-label products cannot constitute more than 25% of the product offering in critical categories such as liquid milk.
This measure would ensure that while supermarkets continue to control the route to market they cannot monopolistically reduce consumer choice and innovation by restricting shelf space or access to consumers for food companies by stocking own label products only.
This measure, along with a ban on below-cost selling, would enable food companies to invest in new products and new technology under similar terms and conditions to pharma and technology companies. This would ultimately ensure consumers have access to greater choice and innovation.
It is only by regulatory intervention that we can control the anti-competitive practices of dominant grocery retailers that are undermining the long-term sustainability of food production in Ireland and the rest of the EU.
This is equally important to ensure that consumers of food and grocery products experience real choice and product innovation.