UK Supermarkets Face Power Balance Shift with Suppliers, says Fitch

Falling sales for the UK’s big four supermarkets in the face of rising competition from hard discounters will accelerate the decline in the sector’s profitability and change the power balance between UK retailers and some of their suppliers, Fitch Ratings says.

The credit ratings agency (CRA) notes that sales data from Kantar Worldpanel released on November 18 points to intensifying competition in the UK ahead of the crucial Christmas trading period, with price cuts helping to drive the first drop in total sales in at least 20 years. Discounters Aldi and Lidl continued to grab market share from bigger rivals, recording double-digit sales increases while sales at the UK’s ‘big four’ of Tesco, Sainsbury, Morrison and Asda all fell.

The data confirm that the UK food retail sector faces cyclical and structural challenges as price deflation and competition accelerates and consumer habits change, preferring value and convenience as well as dining out. Large hypermarket formats are out of favour with the UK shopper. Fitch expects negative like-for-like sales to continue for the established UK players.

The CRA comments that structural changes affecting the profitability in the sector and the move towards more transparency in food origin and quality are also starting to affect the industry’s supply chain and this will alter the balance of negotiating power between retailers and those food manufacturing groups that enjoy ‘must-have’ brands and high quality products.

Over the last decade large UK supermarket groups have put heavy pressure on suppliers to reduce purchase prices or offer discounts and rebates on purchases. Other tactics have included charging suppliers for promotional campaigns and even for displaying goods on premium eye-height shelf space. This has been possible due to the oligopolistic position of large food retailers within the industry.

The recent trend may partially shift the balance of power as supermarkets continue to review and adapt their ranges in line with the changing consumer preferences. This could put pressure on smaller/regional suppliers such as Premier Foods, which might be required to share some of the margin reduction as well as giving supermarkets greater incentive to invest in private label ranges as these offer greater control over profitability and lower scope for direct price comparisons.

However, major suppliers like Nestle, Unilever and The Coca Cola Company have own brands that are universally recognised by consumers and hence Fitch believes they might well be able to regain some market power vis-a-vis food retail groups, as competition in the market increases and the oligopolistic industry structure weakens.

These companies are sufficiently large to be able to negotiate successfully, often on a global scale, as they produce food ranges and brands that the customers prefer and want to buy, some of which are increasingly available in discounters as well. They have also demonstrated greater cost flexibility than retailers.

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