Retail: Is The Grocery Sector Doomed?

Yesterday’s announcement that the Competition Commission is to focus its attention on local markets across the UK as the next stage of its investigation into the power of supermarkets and its effects on the market for the supply of groceries has promoted the industry to react with criticism.

According to Duncan Swift, head of Grant Thornton’s Food and Agribusiness recovery group, the Competition Commission’s enquiry must be accelerated as disproportionate supermarket power is contributing to the decline of smaller food retailers, wholesalers, manufacturers and agri-businesses at an alarming rate.

Indeed, an analysis by Grant Thornton’s Recovery and Reorganisation practice can reveal that since 1994 the grocery supply chain has shrunk by nearly a third, and by two thirds if farmers and agricultural businesses are taken out of the equation.

At the beginning of 1994 there were 246,555 VAT registered businesses in food, drink and tobacco retail; food processing and manufacturing; food, beverage and tobacco wholesaling and farming and agriculture. However, by
1st January 2006, the number had fallen by 29% to 191,390. The drop approaches 64% if farming and agricultural businesses are taken out of the equation. These statistics are against a broader economic backdrop where VAT registrations as a whole have increased by 14% between 1994 and 2006.

“In recent years, supermarkets have become ever more successful, increasing their size, and crucially buying power and widening their offerings and presence. As a result, shoppers have undoubtedly benefited from cheaper prices. The flip side of the coin has been a crucial contribution to a major shake out in the fabric of the UK grocery supply chain, the resulting reduction in market choice and a huge contribution to the phenomenon of clone high streets”, claims Mr Swift.

He continues, “Over the past 12 years, many grocery supply chain operators will have simply dissolved, perhaps due to a lack of succession and some will have been bought out. However, this supply chain has also suffered almost 8,500 insolvencies since 1994, largely as a result of businesses failing to cope with a market where consumer taste was rapidly changing, but crucially, the ever stronger competition from the supermarkets.”

Mr Swift explains that the number of brand names in the supply chain has also diminished, with operators such as Safeway and Alldays being bought out by bigger names. He says, “Broader economic issues aside, the key battlegrounds have been on price, convenience and mainstream choice - areas where supermarkets win hands down.

“The reality in the market is one of grocery suppliers to UK supermarkets that are increasingly finding themselves under major financial distress caused by the market power wielded by the major multiples. These are demanding ever cheaper products with longer payment periods and other supplier contributions as part of the unwritten agreements they readily pull out of when it suits them,” he adds.

With urgent action needed, Mr Swift explains that “a radical reform and the introduction of a Supermarket Ombudsman, might be the answer. “Only this way will we be able to ensure the long-term future of the UK’s food industry,” he argues.