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Supermarket price wars hits SME food suppliers hardest as profit margins fall

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Supermarket price wars hits SME food suppliers hardest as profit margins fall

Supermarket price wars hits SME food suppliers hardest as profit margins fall

Profit margins for SMEs drop by more than a third whilst big businesses’ margins saw a rise. Negotiating powers of big businesses provide valuable advantage.

The supermarket price war is hitting small food manufacturers hardest, with new research from EMW, the commercial law firm, showing that the gap between the profit margins of SME food suppliers and their bigger competitors is widening.

SME food manufacturers* saw profit margins fall by more than a third in the last year, from 3.5% to 2.1%. During the same period, the biggest food manufacturers** saw profit margins increase from 5.2% to 5.4% last year. On average, the profit margin for food manufacturers was 3.9% in 2014, an increase from 2.9% in the previous year.

EMW explains that smaller food manufacturers are at a disadvantage compared to larger rivals because they lack the superior negotiating power that bigger suppliers possess.

Sebastian Calnan, Consultant at EMW, explains

“Smaller suppliers are one of the main casualties of the supermarket price war. These SMEs tend to have a smaller number of contracts so find themselves in an impossible position when they come to the negotiating table. Larger suppliers often feel more confident about pushing back against the supermarkets because they have a stronger market position and greater demand for their products. SMEs are often too afraid of losing what may be their biggest contract so there is often significant pressure from the supermarkets on smaller suppliers to accept contracts with unfavourable terms.”

EMW adds that many supermarkets and large retailers are reliant upon “commercial income”, the revenue received from suppliers to stock certain products, to boost profits. This often takes the form of a supplier paying rebates to the retailer based on the quantity of a product that has been sold.

Sebastian Calnan continues

“Many suppliers do not feel they are in a position to resist the supermarkets’ demands for rebates. Currently, the relationship between supermarkets and their smaller suppliers is not as equitable as it should be. In many cases, there is the perverse situation where the more popular a product is with customers, the more money the supplier has to return to the supermarket.”

The latest figures*** from the Groceries Code Adjudicator (GCA) suggest that there has been a decrease in the number of suppliers reporting issues with supermarkets, however this has not yet led to any improvement in the fortunes of the smaller end of the sector.

SMEs have been hit hardest by the supermarket price war – profit margins have fallen unlike those of their bigger competitors

* Food manufacturers with a turnover below £25m from an analysis of Companies House data of over 13,000 food manufacturers. Analysis of company reports from the latest available year.
** Food manufacturers with a turnover in excess of £1bn.
*** YouGov survey on behalf of the Groceries Code Adjudicator (GCA), June 2015.

For more information, contact Sebastian Calnan.