Price Disputes Between UK Supermarkets and Suppliers

The head of the UK's biggest sandwich producer has stated that due to the current inflation crisis, discussions with supermarkets regarding pricing have become so difficult that sometimes the only solution is to end the negotiations.

At Greencore Plc's annual meeting on Thursday, CEO Dalton Philips stated that the company had recently refused to supply a large customer unless they accepted their price.

"If they weren't prepared to take it, we weren't prepared to supply them," he said.

The Dublin-based Philips, formerly in charge of Morrisons supermarket in the UK, declined to name the retailer, but it is evident that there is "significant strain in the supply chain."

The disagreement is the most recent demonstration of the intensifying negotiations between retailers and producers as they both attempt to safeguard their profits from rising expenses. A remarkable surge in food prices at a time when Britons' incomes are decreasing in real terms implies that supermarkets must strive to keep prices low or risk losing customers to more affordable competitors.

Grocery stores are now requiring more information from food manufacturers to explain why their prices are increasing. Suppliers are attempting to submit multiple pricing requests annually, which is a higher frequency than the single annual round that was used prior to the cost-of-living crisis. This pressure is expected to remain in place this year, as food prices are still going up despite indications that the UK's overall inflation rate is beginning to decrease.

At the World Economic Forum in Davos, Unilever Plc Chief Executive Officer Alan Jope recently stated that we are far from reaching peak prices. He went on to explain that consumers will continue to experience an increase in the cost of food, personal care products, and everyday commodities, and that most households in Europe will feel the financial strain.

Consumer groups have been cautioning for a while that increasing energy and labor costs will lead to higher prices in 2023. Last year, Kraft Heinz Co. and Tesco had a disagreement over pricing that caused the former to temporarily stop supplying ketchup and baked beans. Mars Inc. also had a dispute with Tesco that caused them to stop supplying their pet food brands Whiskas and Pedigree.

John Allan, the chairman of Tesco, believes that there is more to the current supply chain tensions than meets the eye. Last week, he declared that Britain's biggest grocer had "lost touch" with "a few suppliers" and proposed that some producers are taking advantage of the highest inflation in four decades by increasing prices more than necessary.

The remarks sparked a strong reaction from The National Farmers Union, who accused Allan of being out of touch. The Food & Drink Federation then pointed out the various expenses that have gone up for suppliers, such as ingredients, energy, transport, packaging, and labor. However, these same costs have also increased for supermarkets, and many of them offer their own versions of branded products, which gives them an idea of how inexpensively they can source items.

The negotiations are fraught with tension due to the disparity between the profit margins of big producers and supermarkets. Unilever's operating margin is around 16%, but has been affected by the cost of price increases. On the other hand, Tesco's margin is only 4% for the first half of the year.

Jope noted that Unilever, the producer of Dove soap and Knorr stock cubes, is very careful when it comes to pricing and always attempts to make cost savings in other areas before making any changes. Additionally, consumer companies must be aware of customers who may switch to cheaper alternatives.

At Davos, he expressed his concern that raising prices would have a negative impact on competitiveness and sales. Despite this, Unilever is still expecting to increase their margin in the next two years through pricing, reducing package sizes, and cost-cutting.

In December, the Office for National Statistics reported that food costs in UK stores had increased at a rate of nearly 17%, the fastest rate since records began in 1989. The conflict in Ukraine has caused the prices of fertilizer, animal feed, and energy to rise, resulting in suppliers having to approach supermarkets more often.

Associated British Foods Plc, the company behind popular products such as Twinings tea, Kingsmill bread, and Silver Spoon sugar, has revealed that they are in frequent contact with supermarkets in order to recoup the rising costs of production. They report that they are engaging with supermarkets two or three times a year on some products.

John Bason, the finance director, noted in a phone interview that engagement with the supermarkets has increased significantly. He also mentioned that food pricing negotiations with the supermarkets are always a difficult commercial discussion.