Ciaran Fitzgerald: Dominant food pricing is unsustainable

In my last article I highlighted the need to provide improved food pricing and increased farm income supports to offset the increasing regulatory cost burden to be imposed on the agri-sector in the context of the looming climate change and biodiversity challenges.

The case for improved prices for food stands out, particularly against a backdrop of falling food price inflation driven by loss-leading and below-cost selling of food by dominant food retailers including supermarkets and discounters over the last 15 to 20 years.

This debasing of the value of fresh food items has been further exacerbated by the promotion, by food retailers, of their ‘own label’ products and the demolition of producer brands.

Liquid milk

The best illustration of this is probably in the liquid milk sector where own brand now constitutes 80% of the category and branded product – 20%, whereas the mix was 50/50 ten years ago.

There are several major detrimental impacts from this combination of increasing own label categories and chronic margin squeeze:

  • As own brand replaces branded product the margin return for producers and processors is eroded and with this, the ability to promote the integrity of the category disappears and the perception of value is diminished;
  • Moreover the sheer volume in own brand contracts means that the ability to turn down supermarket / discounter contracts is also eroded, so a race to the bottom is inevitable further undermining returns in the category;
  • When, as with plant-based non-dairy or meat substitutes, the very existence of the category is threatened by substitutes, there are no resources to defend the integrity of the ‘natural product’ and the food retailer is indifferent as to whether his/her shelves are filled with own brand dairy / meat or plant-based substitutes.

Supermarkets and discount stores are vested only in their own properties and ultimately in their shelf space. They are indifferent as to how that space is populated between substitute products.

The sole focus of the food retailer is turnover and the maximising of shelf space sales.

Other retail categories

Moreover, looking across the retail landscape, it is clear that no other retail category, from clothes to household to electronics, has this dominant structure.

Only in the case of grocery shopping does price bundling across 100 or so items facilitate the abuse of loss-leading through a small number of categories with margin recovery assured in the remainder of the grocery multibuy.

Department stores do not sell or advertise beds for near nothing all year round in the hope that the customer who buys the bed will buy a whole raft of electronics goods in the same shopping episode!

Yes there are discounts and sales but the concept of chronic below-cost selling just does not apply in these sectors. It is only in food pricing that common sense is absent.

If a product has a real production cost, then persistent selling below that cost or giving it away is a stunt.

Margin capture

It seems very clear looking at a lot of the wishful rhetoric associated with the EU Green Deal that the unique nature of multibuy grocery shopping has been lost in a deluge of free market economics rhetoric which still harks back to the globalisation ideology of the early 2000s.

It’s also clear that the impact of margin capture by dominant food retailers and discounters is not appreciated nor understood.

This miscomprehension is exacerbated by a disconnect between the Directorate-General for Health and Consumers’ (DG SANCO) zero-tolerance approach demanding ever higher, and costly, food safety and food standards in the name of the EU consumer, versus the realities of dominant pricing and supply chain margin squeeze in food retail.

It is hugely important both in the context of the processes set out in the EU Green Deal and the ‘crucial next 10 years for Irish agriculture’ mentioned by the Taoiseach Micheál Martin lately, that the reality of where we are and how we got here on food pricing is fully and comprehensively understood and that future developments are defined and regulated where necessary.

Indeed given the strong regulatory approach set out in the Green Deal in restricting farm inputs including fertiliser usage – and so applying legally enforceable, strengthened, environmental management constraints – a new regulatory approach to food pricing reflecting real costs and the verifiable sustainability characteristics of fresh food products, is vital as a balancing ‘quid pro quo’.

There is a requirement here for balance and joined-up thinking not just in the context of sustainable food production and consumption, but as Covid-19 has indicated, in the context of food security also.