Will agriculture and food ever recapture selling power so as increase its sustainability capability?
A major systems fault has pervaded EU and national agriculture and food policy over the last 30 years. How do we ensure the resilience and sustainability of food supply chains?
Occasionally, the question of how agri-food output is sustained in the context of unrelenting pressure on food suppliers from the price squeeze was posited but dismissed in the context of the threat of competition from low-cost imports or from trade deals.
The disconnect between an ever increasingly high-cost, highly regulated food production policy and a ‘laissez faire’ food pricing policy is not sustainable, economically or environmentally.
Food and selling power
Much of the debate of food pricing policy suffers from the critical error that suggests that consumer food prices are set by producers or at least reflective of producer incomes.
In reality, food prices as measured by the Central Statistics Office (CSO) and Kantar. They represent the return that the retailer gets for particular food items, and uniquely, compared to the broad range of consumer products, may bear no relation to food producers costs or incomes.
In a normal market or economic exchange, the price the consumer pays a retailer, is expected to reflect the cost of the product to the retailer plus the retailer’s margin.
In a normal market or exchange, retailers might discount products e.g., in the clothing business with summer or new year’s sales.
In normal market, this ‘sale’ is likely to involve a retailer selling at reduced mark-up. So, if clothing items are normally sold at retail at 100% mark-up, the sale might mean mark-up being reduced to 50% or less.
The business proposition here is based on the notion that with the sale discount, more product is sold so volume increase covers the retailer’s fixed costs and the retailer may also benefit from a ‘good will’ factor from the sale, with customers remaining loyal over the rest of the year.
The consumer product categories that probably have the strongest selling power I would suggest are in mobile/smartphones and in pharmaceutical drugs.
The quid pro quo here seems to be that consumers want continuous innovation from these products – new smartphones annually with new and better cameras, music etc., and new and ever more effective drugs from the pharma sector.
From a consumer perspective, there is rarely a mention that there is too little competition in the sector.
There is also no mention that while mobile phones are sold in supermarkets and supermarkets also act as network service providers, there is no pent up demand for own label smartphones.
In the pharma sector, many high-performing drugs have a long patent that means that competing products cannot enter the market until such time as the original drug developer has covered investment costs and more, so no own label products in reality here.
The quid pro quo seems very explicit – in the case of pharma drugs, the huge investment in development and drug trials just would not happen if the product was used as loss leader or had to compete with cheap own-label versions right from the product launch.
Cost of production
While by no means perfect, these consumer price constructs make sense, in complete contrast to what happens across the food sector.
As we know, food products are not just continuously sold at a discount but are continuously sold as a loss leader i.e., a price below or at cost price, with the food retailer recovering margin on other products.
So in a shopping basket of 50 to 80 products, five or six Known Value Items (KVIs) such as bread, bananas, liquid milk or meat, might be sold below cost with retailer margin recovered on the up to 74 items bought at the same time.
The clear downside issue here is that the supplier of the five or six KVIs is getting a low or no margin on her/his product and is effectively subsidising the food retailer business.
In addition, across many product categories, retailer own-brand products have an 80% or more market share which constrains the price level achievable for branded food products in the category, liquid milk being perhaps the biggest example.
The real concern has to be that in comparison to a broad range of consumer products, the pricing of food is detrimental to both the local supply chain and food innovation.
This is not sustainable.
A consumer food pricing model which reflects sustainability and other regulatory costs and encourages investment in innovation is not that hard to imagine but seems miles away.
Examples from other vital consumer product categories, and even from the domestic energy sector may show the way. All we need is the will.