With the number of profit warnings given by food suppliers increasing in recent years some commentators have pointed to the dominance of retailers as the root cause, suggesting that they are squeezing suppliers to the point of collapse. However, other analysts do not view the retailer-supplier relationship as such a one-sided affair, instead arguing that the political activity of supplier organisations has twisted and obscured the issue.
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According to James Edwardes Jones, consumer analyst and partner at Execution Limited, “the notion that large retailers have it all their own way is flawed.” He suggests that supplier profit margins are higher than those of retailers and food manufacturers generally report a better return on invested capital.
“The stock market has recognised supplier superiority through higher stock price because large food manufacturers offer better returns to shareholders than large retailers,” Edwerdes Jones commented. This phenomenon, he continued, can be explained by looking at brands – “big suppliers view themselves as brand managers as much as manufacturers,” he suggested.
However, smaller suppliers often lack the brand name necessary to generate high profit margins and, some analysts have argued, they lack the necessary bulk to negotiate with retailers on an equal footing. As Keith McGregor, Ernst and Young’s head of UK restructuring, told The Business: ““Profit warnings from food producers have shot up because none of the businesses are large enough to conduct a grown-up relationship with the supermarkets.”
McGregor suggested that small suppliers failure to establish profitable relationships with supermarkets will result in further consolidation of the food industry. “One of the obvious routes is to consolidate and we are beginning to see that in the frozen food industry, which is starting to be bought by private equity,” he said.
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By GlobalData
