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That’s supermarket price
Can there be many adverts that have insinuated themselves into public consciousness more effectively than ‘That’s Asda price’ (chink, chink)? The tune is as instantly recalled as a Coca-Cola jingle but the message is more focused. Usually an attractive, reasonably prosperous-looking woman, savvy and just a little bit sexy, smacks the change in her pocket to produce that now familiar coin-chinking sound that sums up Asda’s message. Shop in Asda, and you’ll be left with more change in your pocket. It’s cheap to shop at Asda. You get more for less at Asda. Shopping at Asda allows you to spend less on food and more on everything else. Food at Asda is cheaper than anywhere else and cheap food is obviously a good thing, end of story. It’s a clear and simple message, uncomplicated by any possibly contradictory subtext or disclaimer. It doesn’t attempt to tell you anything about whether Asda offers quality, range or even value for money. The only thing that puts that contented smile on this Asda shopper’s face is the thought of the money she can save. There was a time when our larger supermarkets tried to give a more rounded account of themselves. They wanted to tell us about what good food they sold or what good service they gave. In the 1980s and 1990s, they seemed to be moving inexorably upmarket. Bragging about bargain-basement prices was territory 258
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best left to foreign-owned ‘hard discounters’ like Aldi, Lidl or Netto. Our indigenous chains didn’t want to be seen as undignified barrow boys, scrapping over grocery business. Tesco, remember, actively wanted to get away from its traditional ‘pile it high and sell it cheap’ image and pull its brand upmarket. But these days, the supermarket chains whose financial performance makes them the darlings of city analysts are those whose dominant message is low prices. Now Asda with its ‘everyday low prices . . . pocket the pennies . . . more for your money . . . rolling back prices’ slogans has company from Tesco, ‘Where every little counts . . . Helping you to spend less every day’, and Morrison’s, offering ‘the very best for less’. Sainsbury’s, which in 1995 was the UK’s leading supermarket chain, had dropped by 2003 to number three position in the supermarket superpower league table – a chilling warning that chains not sufficiently priceconscious can expect to suffer. Sainsbury’s has altered its customary quality-centred message to keep up with its price-slashing rivals. It is emphasising that it is the place where ‘good food costs less’ and where prices are ‘chopped’. Even Waitrose, with its well-heeled clientele, has a new slogan, ‘Quality food attractively priced’. To put it bluntly, if you want to be a player in the supermarket first division, you have to be keenly focused on price. In theory, this is all tremendously good news for consumers. Asda has even managed to make its relentless price cutting sound like a philanthropic mission: ‘Our purpose is to make goods and services more affordable for everyone,’ it says. And indeed it does seem that we have never spent so little on food. In 1958, 26 per cent of consumer spending went on food; by 1998, it was only 10.3 per cent. Supermarkets and their supporters regularly take credit for this. ‘The ability of the modern British food chain to deliver increased choice at reducing real prices has been a significant contributor to improvements in living standards,’ said Richard Ali, spokesperson for the British Retail Consortium. 259
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Elsewhere in Europe, if a retailer consistently offered low prices on all food lines, consumers’ first instinct might be to wonder what was wrong with the food, or suppose that prices had been too high to start with. In Europe, buying cheap food may be seen as a necessity, but not automatically as a virtue. But now in the UK, thanks largely to the price-cutting climate fostered by supermarkets, spending as little as possible on food has become a matter of personal pride. A lower bill at the checkout is seen as evidence of shopper thriftiness and wise domestic economy, even if you aren’t hard up. Nationally, Britain stands out as the country that makes a virtue out of spending as little as possible on feeding itself. The proportion of our budget that goes on food has also steadily declined. In the year 2001–2002, the average UK household spent less on food than it did on transport (buying and running cars, public transport) or on recreation and culture (televisions, computers, newspapers, books, leisure services, package holidays). In the UK pecking order of life’s essentials, food now comes lower down the list of spending priorities of the average household than a better car or a second television. Is that any surprise when increasingly our supermarkets have encouraged us to think that the most important thing about food is its price? And we have implicitly been led to believe that apparently low prices at the checkout can be achieved without causing any unwelcome fallout further back in the food chain. The world, according to our big supermarkets, is a place where they can go on sourcing food for less and less, pretty much indefinitely. We have been spun the line that supermarkets are consumer champions, driving down unjustifiably high prices on our behalf without compromising on quality or safety or endangering the environment and the livelihoods of producers. Food at ever lower prices with no downside whatsoever? Everybody likes a bargain. Who could say no to that supermarket proposition? Even consumers who suspect that it is a partial truth are happy 260
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to go along with it, in the absence of evidence to the contrary. But many smell a rat. When consumers were asked to agree or disagree with the statement ‘I trust UK stores to charge the best possible prices they can to their customers’, only 16 per cent could agree; 83 per cent felt that UK stores were being greedy in the prices they charged and 86 per cent thought that the fact that there were so many special offers around made them think full prices must be too high. Another market analysis report concluded that although supermarkets are generally regarded as offering lower-priced groceries than convenience stores or small retailers, this perception did not extend to fresh foods such as fruit, vegetables and meat. And indeed in 2002, when researchers from Which? compared prices at farmers’ markets and supermarkets, they confirmed that supermarkets were charging either the same, or frequently more, for fresh food. All the fruit and vegetables sold at farmers’ markets were cheaper, as were freerange and organic eggs. At one stall eggs were half the price of those on sale at the Safeway store up the road. In June 2004, the journalist Dominic Prince, writing in the Spectator, decided to conduct his own investigation into supermarket pricing. He bought the same list of food items from market stalls and independent shops in his home town of Shaftesbury in Dorset and then from his nearest Tesco in Blandford. He found that Tesco charged 42.98 per cent more. He also remarked that several of the Tesco items, such as pork chops and all the fruit and vegetables, were inferior on taste grounds. ‘We are all being done,’ he concluded. ‘We are being misled, brainwashed, cheated and we don’t even know it’s happening.’ Later that month, a Sunday Times investigation exposed how supermarket consumers buying in bigger sizes in the belief that they are more economical were being conned because supermarkets were charging up to 30 per cent more for some products bought in bulk than for the same products purchased in smaller quantities. The Sunday Times listed overpriced items bearing a 261
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‘bulk penalty’ in Waitrose, Sainsbury’s, Safeway, Tesco and Asda. At about the same time, a mailshot for Tesco’s ‘Helping you spend less every day’ Value campaign featuring special offers popped through my letter box. I was inspired by Mr Prince’s example to carry out my own one-woman price comparison. Many of the offers were for items such as sweets or fizzy drinks that I do not buy, but I was attracted by the idea of the boldly marked ‘half price’ raspberries and strawberries. So I pricechecked these against my local greengrocer’s, only to find that the Tesco berries were roughly 100 per cent more expensive. My greengrocer’s berries were fresh, prime Scottish fruits in peak condition, so at least as good as Tesco’s if not better. Then in September, the Sunday Times accused Tesco of raising prices on hundreds of items while at the same time claiming that it was slashing prices, effectively paying for price cuts on low-volume items by hiking up the price on bestsellers. Tesco dismissed claims that it was running a ‘phoney’ price war as nonsense, saying that some of its price rises were on seasonal products. But the Sunday Times pointed out that this scarcely applied to items like Heinz baked beans (up from 69 to 78 pence) or boxes of Tetley tea-bags (up 8 pence). But if consumers are not entirely sure what to make of the rafts of low prices and apparent price cuts emanating from our grocery chains, supermarket suppliers are much, much clearer. When they hear those Asda coins chinking, they wince. When they hear other supermarkets promising unbeatable value to consumers, they shudder. The supermarket’s price cut, they believe, is the supermarket supplier’s destitution. Low prices to shoppers, they insist, are being financed not by the supermarket chains but by the farmers, growers and manufacturers who produce for them. UK pig farmers, angry at the decimation of the national pig herd by the impossibly low prices paid to farmers by supermarkets and the chains’ willingness to import cheaper product from abroad, have hijacked one of our supermarkets’ favourite 262
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mantras. ‘Every Day Low Prices’ or EDLP (now the key supermarket pricing strategy), they say, really stands for ‘Every Day Less Pigs’: EDLP is putting farmers out of business. It’s not just UK producers who are complaining. In 2002, three of the largest Spanish lettuce co-operatives claimed publicly that they were being paid below the cost of production by supermarket chains, to such an extent that the future of their industry was under threat. ‘Paradoxically, these [low] prices do not filter through to the end consumer and the only result is increased margins for the retailers at the expense of the Spanish growers,’ they said. Are these claims true? Or are supermarkets just a convenient enemy whom producers can blame for everything from their own inefficiencies, through farming disasters such as BSE or foot-andmouth disease, to worldwide economic forces? One way to probe what role, if any, supermarkets play in contributing to food producers’ current woes is to look into the mysterious black hole that exists between what the producer is paid and what the supermarket charges. In 2002, when the National Farmers Union carried out such an exercise, it discovered not so much a gap as a yawning abyss. It found that a basket of farmed produce, including beef, eggs, milk, bread, tomatoes and apples, typically cost £37 in supermarkets but a farmer got only £11 for it – less than a third of its retail value. Farmers got only 26 per cent of what shoppers paid for beef, 20 per cent of what they paid for pork loin and 23 per cent of what they paid for onions. Cereal farmers got only 8 per cent of the price of a loaf of bread and pig farmers typically received only 14 per cent of the final sale value of bacon. An analysis of UK price changes, carried out in 2003 by the Liberal Democrats, using House of Commons statistics, also illustrated this gulf. Between 1985 and 2002, the retail price of shopping trolley favourites – chicken, tomatoes, eggs and potatoes – rose by a whopping 47 per cent while farmers saw a rise of only 12 per cent for their produce. In the seven years from 1995 to 263
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2002 ( just as the big supermarkets’ price war was hotting up), this disparity seemed to intensify. Checkout prices were up 21 per cent but farmgate prices were up only 2 per cent. Andrew George MP, the Lib Dem shadow Food and Rural Affairs Secretary, didn’t pull his punches. ‘Somebody must be making money here, and it isn’t the farmers. People are paying more for their food, yet British farmers are not getting their fair share. The record of these four items is indicative of a wider trend, adding to the pressure that puts farmers and growers out of business while the supermarkets profit.’ Looking at one of these four items, potatoes, I asked a grower to give me an instance of the differential between what he was paid and what a supermarket might charge. ‘The mark-up on my ordinary potatoes is about six to seven times but salad potatoes can be much more. Last season I only got £100 a tonne for waxy salad potatoes and they were selling for over £2,000 in the store,’ he told me. The mystery of supermarket milk prices has raised eyebrows too. It costs the dairy farmer on average 21 pence to produce a litre of milk on the farm, yet the farmgate price for milk, dictated by the supermarkets, is below the cost of production – at only 18.5 pence. It is generally understood that milk processors take about 4 pence on every litre. Meanwhile, you won’t find a litre of milk on sale in supermarkets much below 42 pence. So, if you follow the arithmetic, you can see that somebody is raking in a bucketload of money from the white stuff, and it isn’t the farmers. The Milk Development Council claims that while farmers’ margins on milk have slumped over the last decade and processors’ margins have remained roughly the same, retailers’ margins have shot up. Supermarkets defend themselves against charges of profiteering by saying that a price comparison between farm gate and supermarket shelf is too crude, and that only a fraction of the mark-up they put on products turns into profit once all 264
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their costs are paid. Some products go through a long and complex food chain before reaching supermarket shelves, with processing, packaging and transport all adding on costs. Post-BSE, for example, a welter of regulations has placed huge additional costs on abattoirs and processors, which all affect the cost of meat. However, research that takes into account processing and other costs does suggest that supermarkets are doing disproportionately well out of deals with suppliers. In 2003, Banana Link, an organisation that campaigns to improve the conditions of banana producers, looked at how much of every £1 spent by UK consumers on loose Ecuadorian bananas went to each link in the supply chain. Bananas are the number-one contributor to British supermarket profits and third in terms of sales volume after lottery tickets and petrol. It found that plantation workers got 1.5 pence, plantation owners got 10 pence, the international trading company got 31 pence (which included a 5-pence EU tariff ), the ripener distributor got 17 pence, while the retailer (supermarket) took 40 pence. A similar pattern emerges with other foods. For every pack of Zimbabwean mangetouts sold in UK supermarkets, the producer gets 12 per cent of the retail value and the supermarket gets 45 per cent, which is more than all export, packaging, air freight, handling and import charges put together. The same applies to fresh vegetables sent from Kenya to the UK – those neatly trimmed baby corns, miniature asparagus, green beans and so on. Producers get 14 per cent of the retail value, while supermarkets take 46 per cent. This phenomenon is not just restricted to imported produce. It is estimated that supermarkets make a retail margin of 36 per cent on UK top fruit (apples, pears) while the grower sees only a 16 per cent return. As price competition between the big chains has intensified in recent years and low price has become king, suppliers have found what they consider to be already depressed prices squeezed even 265
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further. Most consumers think that when a supermarket cuts its prices, it must be cutting its margins to give them a better deal. Supermarket suppliers see matters somewhat differently. They widely believe that it is they who are funding the supermarkets’ much-trumpeted price cuts. ‘When retail groups [supermarkets] determine that they wish to implement a price reduction or promotion, they seek to recover the cost from their suppliers, thereby maintaining their gross profit margin,’ one supplier told the Competition Commission. Several suppliers told me that supermarket price promotions, such as ‘Buy One Get One Free’ or ‘Multibuys’ sound good in theory for the supplier, offering the prospect of more sales, but rarely produce any real benefit in practice. ‘If the supermarket sells something on promotion one week, all that happens is that shoppers take advantage and stock up on it, which means that they buy less of it in subsequent weeks,’ one supplier explained. Patrick Holden, director of the Soil Association, summed up the effect of promotions as follows: ‘All the suppliers tell me that they have higher sales during the promotion but no long-term net gain.’ Nevertheless, such promotions allow supermarkets to score brownie points with the consumer by offering them a cheap deal and are generally popular with consumers, although some more sceptical shoppers do wonder whether they are really saving money in the long run, or whether they are just being encouraged to spend money sooner than they otherwise would have done. The run-up to Christmas is a traditional period for supermarket price cuts. Some chains like to send out mail shots trumpeting low Christmas prices. As a result, pressure on suppliers to cut prices then and maintain them through the hard-up months of January and February can be intense. In November 2002 Sainsbury’s, for example, wrote to suppliers asking them to try to cut costs by 5 per cent and pass on the savings to Sainsbury’s in the form of lower prices. This caused consternation amongst suppliers, who already regarded their margins as well and truly 266
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pared to the bone. The Financial Times translated Sainsbury’s plan to ‘help’ suppliers drive their cost base down by 5 per cent as ‘cut your prices or else’. Even big international brands complain publicly about supermarkets’ ‘commoditisation’ of products, warning that the supermarkets’ obsession with price is driving value out of the UK grocery market and could cause permanent damage. Artisan producers have for some time been complaining that price cutting is cheapening the value of their products in the eyes of consumers and making it harder for them to charge what they need to earn a decent living. How can they keep going, they ask, when supermarkets’ loss leaders make products priced at a sustainable and fair price look like a rip-off ? Most of this goes over the heads of shoppers wheeling their trolleys round stores, bombarded with prominent signs on products that scream out ‘Why pay more?’ or ‘Wow! That’s amazing!’ Most of us are inexorably drawn to the supermarket ‘hot spots’ such as shelf ends with their eye-grabbing, price-slashing deals. Increasingly, such offers may include non-food items. As one market analysis report concluded, ‘A competitively-priced nonfood offer provides a halo over the rest of the offer and supports the price perception that the food offer is also keenly priced.’ Best-selling books are candidates for supermarket price cutting. Supermarkets offer popular titles at massive reductions. The average book price in a supermarket is £4.50, compared to £7.45 elsewhere. How are these prices financed? According to the Bookseller, supermarkets demand massive discounts from publishers – as high as 65 per cent through distributors. ‘If this situation continues,’ the Bookseller noted, ‘supermarkets could soon be selling books more cheaply than high street booksellers can buy them from publishers.’ By the end of 2003, some publishers were threatening to walk away from deals with supermarkets, even if that meant saying no to the prospect of high-volume sales. They felt that the discounts demanded by supermarkets, combined 267
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with rocketing levels of stock ordered by them and then returned, made supermarket deals uneconomic. Traditionally, though, the most aggressive price promotions are conducted on ‘known-value items’ (KVIs) – food lines such as milk, bread, baked beans and bananas. KVIs are core grocery lines and weekly staples, products that are considered to be most price sensitive. Supermarkets call them ‘traffic generators’ because they have to be purchased frequently. They figure that consumers’ price awareness is partial and our impression of value for money is largely formed by a few benchmark items. So supermarkets price-cut ruthlessly on KVIs while hiking up margins on items that nobody has a clue about. Higher prices on non-KVIs can be used to ‘cross-subsidise’ losses on KVIs. Who has any idea what South African grapes should really cost ? Or own-label focaccia, for that matter? Cheap bananas, though? That sounds great, doesn’t it? Until you hear what the people who grow them have to say about it, that is. In 2003, the Windward Islands Banana Development and Exporting Company gave the Competition Commission an illustration of what KVI cost-cutting had meant for its producers: ‘A decision by Asda in 2002 to award its entire business to a single banana supplier – Del Monte – was followed by a banana price war which still continued, creating hardship across the spectrum for banana producers.’ As the Prime Minister of St Vincent and the Grenadines, Ralph Gonsalves, put it, ‘What is at stake is not just the sale of a few thousand boxes of bananas but the future of the banana industry and the livelihood of thousands of small producers and the economies of the Windward Islands.’ The Windward Islands banana growers said that because their bananas were produced in an environmentally friendly way, and workers were better paid than is typical in the global banana industry, they could not compete in a price war against countries producing bananas more cheaply. Bananas that had cost £1 a pound the year before were now selling at 85 268
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pence but sales had not risen as a result of the price cut. In effect, Windward Islands banana growers had been hit twice, first by falling prices and then by the loss of a major customer. Banana Link has also catalogued the consequences of the present banana price war for people in ‘competitive’ banana zones: falling wages (below a living wage), casualisation of the labour force, worsening social benefits (such as maternity pay) and an onslaught against organised labour (trade unions). Banana Link alleges, drawing on information from industry sources, that suppliers to one major chain saw the price they were paid for a box of bananas slashed from £11 at the end of 2001 to around £7.75 by the summer of 2003, as the chain sought to preserve its profit margins while cutting the retail price. UK banana wars demonstrate that rival supermarket chains appear effortlessly to co-ordinate their KVI price-cutting activities. If one cuts, they all cut. Each wants to be seen to be as cheap as competitors on these vital products which consumers compare. But heaven help producers on the receiving end of UK supermarkets’ KVI ‘price co-ordination’. British bakers have first-hand experience of it. There have been times where UK supermarkets have set the price of sliced bread so low that farmers have found it cheaper to feed to their stock than animal feed. In 1999, when supermarket white sliced bread was being sold for as little at 7 pence a loaf, independent bakers claimed that this price didn’t even cover the cost of flour. By then, the independent craft baking industry was already looking lean. In 1996, when major multiples cut instore bread prices by 30 per cent to capture a bigger share of the bread market, their prolonged price-cutting had caused a wave of bankruptcies and closures amongst high-street bakers. Supermarkets were selling for 50 pence crusty loaves that looked the same as those that sold for 80 pence on the high street. Dubbing the practice ‘predatory pricing’, independent bakers argued that however chuffed some consumers might be with their cheap loaves, supermarkets were 269
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selling them below cost to grab market share. De facto, supermarket instore bakeries’ share has increased dramatically over recent years to account for 18 per cent of all bread sales, largely at the expense of the high-street craft baker, whose share has dropped to around 7 per cent or even less, depending on the statistics you look at. By sheer force of capital and market pressure, supermarkets have devastated the UK’s craft baking industry. Another British staple, baked beans, was the subject of the most aggressive price cutting ever witnessed in the UK. Throughout the early 1990s, a 420-gram tin of beans cost between 16 and 19 pence. Then a supermarket ‘baked beans war’ started, and the price dropped first to 9 pence and then to an astonishing 3 pence, when the hard discounter Kwik Save slashed its price in 1996, quickly followed by Tesco. The direct consequence was factory closures and loss of jobs. ‘We literally could not can fresh air for the price they wanted to retail it at . . . the cans were costing us more than [that],’ Nestle´ told the Competition Commission. Nestle´ closed its Crosse & Blackwell canning operations and withdrew from that area of business. The human cost of supermarkets’ quest for ever lower prices from suppliers was hammered home again in September 2003, when the House of Commons Environment, Food and Rural Affairs Committee reported its findings on casual labour in agriculture and horticulture. MPs blamed the supermarkets for fostering an environment that allows gangmasters to recruit foreign casual workers to pick fruit and vegetables for a pittance. ‘Gangmasters told us that suppliers are often heavily reliant on individual supermarkets and could not therefore risk antagonising their major customer by trying to negotiate over price or why produce was being rejected. The main variable cost that suppliers have is the cost of labour. It follows that they will seek to reduce this cost when their costs are under pressure.’ More coins in our pockets? Wow! But who put them there? And what did it cost them? 270