Sharp practices in the Irish grocery sector will cost jobs and harm the consumer

The Government is about to introduce a code of practice to curtail large retailers' sharp practices in the grocery sector. This comes after several years of complaints, by food companies and producers, that they are forced to meet huge financial demands imposed by retailers.

If food companies could speak out, they would tell you about the most recent round of demands from customers but they can’t because of fears that they will lose business.

This newspaper recently reported that one large retailer threatened to delist food companies if they didn’t hand over 2 per cent of the contract value. This demand was not agreed on during normal negotiations at the beginning of the trading year.

Privately, they will tell you that these sorts of demands are common and can amount to hundreds of thousands of euro a year. In 2008, it was reported that such practices cost a group of 10 suppliers – a fraction of the thousands of food companies operating in the grocery sector – over €30 million.

Meeting these demands means that companies cannot invest in their businesses or develop new products. This has cost thousands of jobs in food companies over the past decade.

These demands are known as “buyer income” and they give large retailers a competitive advantage over their suppliers, smaller retailers and food producers. Ultimately, these practices negatively affect consumers as large retailers become the only game in town in the grocery sector.

Unfortunately, successive governments have allowed Ireland's top five retailers to accumulate a market share of over 90 per cent in the domestic grocery sector and their power is growing. In 2008, the top three retailers controlled 72 per cent of the market: this grew to over 80 per cent in 2012.

Unsustainable power asymmetry
This huge market share drives an unsustainable power imbalance between retailer and all other stakeholders in the grocery sector. Even the largest supplier is dependent on any of one of the large retailers for at least 30 per cent of its business. However, the same retailer will depend on the largest supplier, even a global brand, for, at most, around 1 per cent of its business.

Last week, two of Ireland's largest retailers faced the joint Oireachtas committee on Agriculture, Food and the Marine. In light of the significant amount of money that suppliers appear to hand over, it's not surprising that retailers ( as with other sectors where we have had problems in the recent past) sought light touch self-regulation, rather than a statutory code. What was surprising was that neither retailer denied that these practices were occurring and needed to be addressed.

This tacit admission that the Irish grocery sector is rendered dysfunctional by retailer buying power should be the last piece of evidence that the Minister for Enterprise Richard Bruton needs in order to push a statutory code over the line in the near future. Every delay that the Minister oversees puts more jobs in the food and small retail sector at risk.

At EU level, retail organisations have also acknowledged unfair retailer practices as a major issue across the EU. They have worked with the Commission, the food industry and farming organisations to create a voluntary code. At the same time, most European countries have put, or are in the process of putting, in place national regulation to address the issue.

The closest example is the UK where earlier this year the Government appointed a grocery sector adjudicator to enforce its long-standing code of practice. The cost of the UK code is estimated to be less than a penny per shop. The Irish sector is 15 times smaller than the UK’s so the cost of a code would be minimal.

In that context, one retailer’s statement, at the Dáil committee last week, that the UK’s code has caused food inflation there since 2006, rather than by the devaluation of sterling against the dollar and euro, is false and indicates how far retailers are willing to go to stave off real regulation.

I would encourage the remaining suppliers and producers to talk to their TDs, particularly in the coming weeks as the legislation makes its way through the Dáil.

The supposed benefit of large retailers is they deliver lower prices. However, the Central Statistics Office shows that consumer spending in the grocery sector has increased by 3.5 per cent. In all other forms of retail, spending has declined dramatically and in areas such as electronics it is down 50 per cent.

Grocery prices, which retailers set, have remained high. During the recession, large grocery retailers have actually increased their market share and profit margins. They are notoriously reticent to talk about how much they make in Ireland. Yet it's widely thought that they make more from Irish consumers than other jurisdictions where they operate.

Large retailers do this by hiding higher prices and higher margins by loss-leading on particular items to attract consumers into stores. They can afford to use fresh products as loss leaders and then recoup margin through the higher prices of other products.

Food companies feel let down that when a demand for thousands of euro is made, it’s still an offer they can’t refuse. Bizarrely, Minister Bruton is preparing to apply the code of practice to suppliers too, despite them being the victims of this problem for decades. The code should apply to large retailers, not suppliers or small retailers.

Large retailers have a valuable role to play in a properly functioning grocery sector. However, without any regulation, their buying power negatively affects consumers and damages other stakeholders in the sector including small retailers, food companies and producers.

The consumer has the right to demand value, quality and convenience. This is a healthy dynamic that makes retailers, suppliers and producers strive to be as competitive as possible. They shouldn’t have to consider the impact of where they shop on Irish food companies or small retailers.

A statutory code, enforced by an adjudicator, will benefit the consumer as large retailers will not have the buffer of buyer income and will focus more exclusively on delivering value to the consumer.

Shane Dempsey is head of consumer foods in Food and Drink Industries Ireland.