Blog: Dean BestThe chips are down at Sainsbury's

Dean Best | 17 March 2008

Sundays are generally quiet for the national business press here in the UK. Articles tend to be comment and analysis on the hot financial stories of the last seven days, while column inches are also given to previewing the week ahead.

Yesterday (16 March), however, there was a bolt from the blue that served to cast the eyes of City hacks onto the retail sector.

A buyer at Sainsbury’s, the UK’s third-largest retailer, has been arrested on suspicion of accepting some GBP3m (US$6.1m) in backhanders from a potato supplier. The news raises inevitable questions about whether such alleged illegal payments are made elsewhere in the system and whether suppliers have to resort to those kinds of measures to gain shelf space. It also puts the spotlight – once again – on the relationship between supplier and retailer.

Last month, the UK’s Competition Commission outlined a series of measures it hopes will help protect suppliers from any abuse of power from the country’s larger retailers. The Commission wants to replace the existing code of practice between retailers and suppliers with a new code. It has also mooted the establishment of an independent ombudsman to enforce the new arrangements. Some have questioned whether these measures would go far enough to regulate the buying power of supermarkets; the allegations of bungs will only add to concerns over whether an ombudsman would be strong enough.

Elsewhere, last week, Nestle displayed its strength with a surprise trading update. The world’s largest food group raised its organic growth forecast for 2008 after successfully raising prices to offset soaring commodity costs. The news proved a popular topic of debate on our forums but, ultimately, it serves to allow outgoing Nestle chairman and CEO Peter Brabeck-Letmathe to bow out in a blaze of glory next month.

Commodity costs, unsurprisingly, are continuing to be the dominant theme right across the food industry. Bakers in the US marched on Washington to draw attention to spiralling wheat costs, which, according to some estimates, have tripled in recent months.

The rising cost of corn has caused Pilgrim’s Pride, the largest poultry producer in the US, to scale back its operations, with the disposal of its turkey unit and cuts to its core chicken business. It has proved a baptism of fire for recently-appointed CEO Clint Rivers and it seems he will have to make more tough decisions in the weeks ahead. 

Unfortunately for much of the food industry, it also seems likely that Rivers will not be alone in facing some tough choices throughout 2008.


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