This article focuses on the contractual pressures faced by food suppliers in the wake of price cuts by the major supermarkets.
It has been a tough number of months for the ‘big four’ supermarkets who have reported a drop in sales up to 12 January 2015. The discounters however continue to post strong sales revenues, with high-end retailer Waitrose also seeing a gain in like-for-like sales.
As we head into 2015, the question remains as to how the major supermarkets will address the increasing numbers of customers heading towards the discounters .
Price cuts and efficiency savings
The most recent move by the supermarkets to become more competitive has come following recent announcements by the ‘big four’ to make huge efficiency savings resulting in lower prices on the shelves. This is a clear sign of intent from the major supermarkets that the battle to drive down costs has well and truly begun.
By reducing prices on both own brand and branded goods to fund these efficiency savings, the major supermarkets may begin to see a change in fortune which could go some way to winning back customers. However, this move could have a major impact on suppliers, who will be all too aware of the financial issues of increasingly lower priced goods, driven by consumer demand.
Reports in the past few months have highlighted the common industry methods of driving additional payments from suppliers. This can come in many forms, but the more common contractual mechanisms include investment payments, marketing contributions and listing fees.
Investigations into such accounting practices and market forces driving lower costs in the food sector will most likely mean that major supermarkets will look to simplify their contractual arrangements with suppliers. This could signal a change from the use of complex methods of payments between supplier and supermarket, and instead be replaced with a simpler bottom line price negotiation. Although such simplification may be preferable from a contractual point of view, there are undoubtedly issues over bargaining power between the parties, competition between other suppliers and a squeezing of supplier profit margins.
The knock-on effects of this drive down in prices presents a real risk that 2015 could be one of the toughest years of trading in recent times for suppliers to the supermarkets.
Agreements between the major supermarkets and suppliers of groceries are subject to the rules of the Grocery Supply Code of Practice (GSCOP), under which some of the practices referred to above such, as positioning payments or stocking fees, are prohibited. However, these can be used in contracts with suppliers where both parties have agreed otherwise. As a result, this supposed protection limits the bargaining power of the supplier in commercial negotiations.
The argument remains as to whether such a prohibition, meant to support suppliers, can be fit for purpose when some suppliers are facing difficult financial circumstances. It would not be a surprise to see the Groceries Code Adjudicator (GCA) taking a more active role in 2015 over the issue of cost cutting and the difficulties facing suppliers in meeting the demands from the major supermarkets.
Another supposed protection provided by GSCOP is against ‘de-listing’ unless for ‘genuine commercial reasons’; whereby a supermarket either ceases to supply a product altogether or significantly lowers volumes. This potential to lose huge sums of revenue streams remains the ultimate fear for suppliers.
From the supermarkets perspective, it is arguable that seeking the lowest price to pass on to consumers is in fact, a ‘genuine commercial reason’. The major supermarkets will most likely find this argument easier to justify in light of their cost cutting practices.
Yet for suppliers, their relative bargaining position may have little weight as they will not want to be seen to be ‘rocking the boat’ for fear of losing out on future orders. This leaves the supplier in a “Catch 22” situation of either risking a firmer stance on price or risk losing out on key contracts.
For as long as the supermarket price war continues, we will see further actions by supermarkets to pass on savings and price cuts to suppliers, which may have various knock on effects. Both supermarkets and suppliers need to be mindful of GSCOP and how it may be used as a bargaining tool.
Whilst the investigation into the accountancy practices of certain supermarkets might result in the reduction of those practices, such as supplier payments, the GSCOP may afford even less protection when it comes to a straightforward battle on price negotiation.
Author: Joseph WelchThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.