Opinion: Supermarkets must take a stand against overmighty suppliers

Tesco has recently taken a very public stand against the US multinational food giant Kraft Heinz, by deciding to stop the sale of market-leading products including Heinz Beanz and Ketchup rather than agree to the substantial price increases their manufacturer demanded.

At Iceland, we have always deplored bullying by big players, whoever they may be (and, while the whole of the UK Groceries Code is constructed on the presumption that it is always retailers that bully manufacturers, and not vice-versa, it has to be said that some of our suppliers are a great deal larger than we are).

There is an important and wider issue here that we need to address, and that is the long-term viability of brands - and the need for brand owners to be realistic about what they can demand from the market during a cost of living crisis such as the one we are all experiencing right now.

Decades of investment in product development and marketing mean that customers trust brands. They like the assurance of the familiar name and distinctive packaging. No matter how many blind taste tests demonstrate that supermarket own labels offer equal or even better quality at a lower price, many customers will still opt for the brand they know.

The risk for brand owners is clearly that, as living standards come under increasing pressure, the temptation to trade down to own labels will become overwhelming, and their sales will be eroded. Seeking to maintain their profit margins through unrealistically aggressive price increases can only heighten this danger.

Supermarkets like brands, too. They are a draw to customers and, for the ‘Big Four’ UK food retailers, they are a key point of differentiation from the growing German discount chains that major on tertiary brands of their own invention.

At Iceland, we have developed our own iconic brand for frozen food but we still offer our customers leading brand alternatives like Birds Eye in our freezers, and have deliberately not developed an own label grocery range. On our ambient shelves, we seek to work in tandem with them to give our customers the food and household essentials they need at a price they can afford.

So long as we can continue to negotiate sensibly on future pricing this commitment to brands will continue – but we need brand owners to recognise that they as well as we have a responsibility to customers to keep the pressure on household finances under control.

I am an unrepentant capitalist but, as I argued in my book The Green Grocer, capitalism needs to be pursued responsibly, and with empathy. It also needs to take a very much longer-term view that has become normal in a climate where shares change hands every few seconds and both institutional investors and private equity owners are relentlessly applying pressure for consistently improving returns and equity values, quarter after quarter.

At the root of the Tesco – Kraft Heinz spat is the fact that both are publicly quoted companies with demanding shareholders (and, no doubt, senior executives whose own remuneration is critically influenced by share price performance).

Both are striving to maintain their own profitability in the face of an absolute tsunami of cost pressures, greatly exacerbated by the war in Ukraine.

This is entirely understandable. But it is also unachievable in a climate where their ultimate consumers are under the financial cosh as they are today.

It seems certain that everyone involved in retailing petrol and diesel in the UK is currently enjoying supernormal profits – and I suspect that those supermarkets with filling stations may well be using these profits to cross-subsidise food to ease the pressure on their customers.

At Iceland we don’t sell fuel, but we do have the advantage of being insulated to a large degree from the pressures of the financial markets. We are a private company, wholly family-owned, and we take an exceptionally long-term view on the returns we need to make.

When our customers are suffering, as they are now, we are committed to being there for them and to supporting them as best we can. We have frozen the price of our wide range of £1 value lines to the end of the year, even at the cost of turning these into loss-leaders.

While we are naturally doing our best to cover cost increases through increased efficiencies, in the absence of a business price cap for energy we have to accept that our total profits will be squeezed somewhat in the short term.

Sensible brand owners will accept this too, and moderate their demands for higher prices to reflect what consumers can actually bear.

We are all in this cost of living crisis together. In the long run, retailers and their customers alike will remember who did their best to help them out when times were tough.

About the Author: Richard Walker is managing director of Iceland

Source: The Telegraph