Price shock in the supermarket
Traders and producers fight for returns
02/19/2022, 11:48 am
Expensive supply chains and raw materials have sparked a bitter price war in the food industry. According to a purchasing manager, consumers would have to adjust to “sportingly increasing prices”. Manufacturers try to pass on additional costs, but also to exploit their market power.
Supermarket chains and food companies are fighting bitterly for purchase prices. The companies are under increasing pressure. They groan under rising raw material costs, higher energy prices, more expensive logistics chains and the consequences of Corona. Against the background of high price demands by food companies, individual supermarket chains are temporarily throwing items off the shelves. Manufacturers are stopping deliveries in order to put pressure on retailers. This can have unpleasant consequences for customers in Europe: “Consumers have to be prepared for rising prices,” said a purchasing manager at a large retail chain.
The trading companies themselves are under pressure. The profit margins in retail are traditionally low, and the chains fight bitter price wars among themselves. But rising costs are also weighing on the producers – even if they still have much higher margins. “There are extraordinary price increases for retail companies and practically no product group that would be exempt,” said a Rewe spokesman.
Grocery giants like Nestle and Kellogg are trying to push through higher prices for their products, from instant coffee to muesli. The big supermarket chains and discounters, on the other hand, aim to keep these increases within bounds in order to secure their margins and not alienate customers. There is no improvement in sight: Purchasing costs are likely to rise more sharply in 2022 than in the previous year, Nestle boss Mark Schneider predicted on Thursday: “That’s something we have to reflect in our pricing.”
On the other side of the negotiating table is the retail giant Ahold Delhaize – which says it has managed to keep its profit margins at 4.4 percent despite the price pressure. In the past, Nestle also felt that the group was serious. Ahold Delhaize temporarily removed Swiss group products such as Maggi, KitKat and Nescafe from the shelves of its Dutch supermarket chain Albert Heijn.
In the Federal Republic of Germany too, retailers are showing their teeth again and again and temporarily forgoing branded products in the price war with the manufacturers. At Edeka, products from L’Oreal temporarily disappeared from the shelves in the past, and the chain is currently at loggerheads with Eckes-Granini. In the past, consumers also searched in vain for articles from individual manufacturers at the competitor Rewe. “In theory, you can say goodbye to almost any brand,” said Rewe: “But as a retailer, we naturally focus on the wishes of our customers and try to fulfill them.”
“Great saber-rattling on all sides”
Brand manufacturers, for their part, use it as a means of pressure to simply stop deliveries if their price demands are not met, according to the industry. “There is a lot of saber rattling on all sides,” summed up a trade manager. “We had tough negotiations with Nestle,” reported Ahold CFO Natalie Knight from practice – but there was a good agreement. All in all, it is a constant struggle, in which Ahold was able to ensure that only unavoidable cost increases had to be passed on to consumers. And she too complains that the negotiations are dragging on more and more.
A German retail manager sees it that way too. As a result of shortages caused by the Corona crisis and stagnant logistics chains at manufacturers, as well as suddenly rising costs for raw materials, companies suddenly demanded renegotiations. And on the other hand, it happens again and again that due to the consequences of the Corona crisis, delivery promises are not kept or are only kept late. The retailers would also know exactly where the prices for the food companies were really rising. Because many chains offer their own brands and are therefore aware of how the costs for packaging materials, for example, are developing.
“There is a bitter battle raging in Europe between food retailers and manufacturers,” said Cyrille Filott, who is responsible for the sector at Rabobank. In autumn, individual food companies wanted to push through price increases for some products in a range of five to seven percent, later it was another three to five percent. The negotiations are tough, according to the Belgian discounter Colruyt. The chain stands for low prices for its customers – “if the margins come under pressure for one or two quarters, then that’s just the way it is”.
“An avoidable price driver is the market power of the global brand industry,” said an Edeka spokesman. In the past few months, the Edeka association has been “confronted with demands for price increases, some of which are drastic, from almost all the dominant suppliers on whom we depend”. Edeka knows from the annual talks that many of these demands are not based on increased costs. “Instead, the reference to general inflation is used as a welcome argument to improve one’s own profit margin – in the interests of shareholders”. Edeka will not simply accept this. In the worst case – if Edeka cannot come to an agreement with its industrial partners – “it will also refrain from selling individual items”.
The food companies are also demanding higher prices from the wholesaler Metro, said Metro boss Steffen Greubel recently. Food price inflation for Düsseldorf residents is around five percent. But Metro can handle it – the group has experience from high-inflation countries like Turkey. In view of the price war, consumers in Europe could be in an even better position than customers on other continents. Knorr manufacturer Unilever recently explained that Europe is a difficult market given the high level of competitive pressure. CFO Graeme Pitkethly admitted that Unilever could not raise prices there as it could in other parts of the world.