Minister for Agriculture, Food and the Marine, Charlie McConalogue has issued a timely reminder to all of those in the agri-food chain, and especially food retailers, to get their act together when it comes to supply chain contracts and practices before the new Unfair Trading Practices (UTPs) legislation kicks in on April 28, this year.
Meanwhile, we are told that the legislative process leading to the appointment of the ‘food ombudsman‘ office is advancing on the same timeline. Albeit perhaps not as swiftly as the agri-sector would have liked.
It is both reassuring and timely to see a greater awareness of the impact of chronically low prices and abusive buying practices in the food and grocery sector being understood as sharp practice, which undermines the long-term sustainability of food production and processing in Ireland.
This is what it clearly has been since 2006, rather than some sort of idealised market signal of the need for greater efficiency on-farm and in food processing, which is what was portrayed as over the last 16 years or so.
Nevertheless, there has to be great concern that the use or abuse of loss leading and below-cost selling by food retailers, both supermarket and discounter, is not prevented in the new legislation nor is it explicitly part of the brief of new ombudsman-style office.
Agri-food pricing
In that sense I think we need to restate explicitly the nature of the fundamental problem with food pricing over the last twenty years or so.
- Since the Groceries Order Ban on below-cost selling was abolished in 2006, fresh food products in particular have consistently been used by supermarkets and discounters to draw in customers;
- The consumer then buys an additional number of items (20 on average in a discounter and 50 in a supermarket), on which the retailer can extract a much higher margin and so ‘compensate’ for the low /no margin on the ‘loss leaders’;
- The food retailer achieves margin compensation across the range of goods on offer but the fresh food supplier is just squeezed relentlessly.
The long-term effect of this use of buying-power dominance is best illustrated in the chart below from the Central Statistics Office (CSO).
It shows that the rate of inflation since 2011 in grocery food has been -10%, whereas the overall rate of inflation or cost of living has been +8%.
In real terms, it effectively means that food prices have fallen by 18%.
So, unless legislation banning below-cost selling and/or loss leading is introduced, I would be concerned that the new legislation becomes not a means to improve margin for food producers and processors, but just a ‘defensive’ annual report that backs up supermarket/discounter statements that they make very small margins on fresh produce also.
Cold comfort doesn’t butter any parsnips.
Unfair Trading Practices legislation
In addition to remedying this omission from the new legislation, the food supply sector, government, food retailers, processors and producers, need to communicate to consumers that the impact of a ban on loss leading (while it clearly involves an increase in fresh food prices), does not automatically mean an increase in the basket of grocery products.
Low fresh-food prices have been subsidising margin-earned across the supermarkets on a large range of other products, and so the ban on loss leading just means that this cross subsidisation will have to stop.
Food retailers may balk at this suggestion, but they might consider that when the Groceries Order was introduced in 1988 and reviewed in the early 90s, the alternative to transparent fair trade regulations was consideration of a limit on the maximum amount of market share that any individual food retailer could constitute at 15-20%.
The food production sector is constantly told that new EU regulations or restrictions on agri inputs, that push up EU food production costs, are not just a requirement in terms of meeting climate and environmental goals, but are demanded by EU consumers.
The key point here for me is that a ban on below-cost selling or loss leading would represent a major piece of joined-up thinking in regard to a real farm to fork EU policy and real fair-trade legislation in Ireland.
Without enforceable legislation on minimum realistic fresh-food prices, or perhaps a limit on retailer market share, the long-term disconnect between an ever increasing regulatory burden versus a ‘laissez faire’ approach to price and cost recovery, will continue to undermine the sustainable credentials of the EU farm to fork chain.