Goodbody says food bills may fall by 4%

The end of the below-cost selling ban on groceries will ultimately cut prices in the Republic by between 3 per cent and 4 per cent, an industry expert says.

Goodbody analyst, Liam Igoe points out in a research note published yesterday that the €481 saving a year per household, quoted by the Competition Authority, is based on a 9.2 per cent a year saving on food bills.

"This is equivalent to the combined total profits (in respect of their Irish businesses) of all Irish food manufacturers combined," he says.

He predicts that the net impact of the end of the ban will be that big manufacturers and retailers will get bigger, costs in the food chain will be squeezed and "in time, overall retail costs in Ireland should fall by 3 per cent to 4 per cent".

Mr Igoe argues that it is unlikely that dropping the ban will bring prices in line with the UK, where they are 10 per cent cheaper because the Republic is an island, has a dispersed population and has small market buying power.

He points out that achieving grocery price cuts will mean reducing costs somewhere along the supply chain, which will happen in time. "At retail level, the consumers should see differences in headline prices for certain goods," he says.

"In the absence of changes in the cost chain, however, the price of a total basket of goods will likely change more gradually."

However, he adds that the ban's removal will result in higher discounts in some grocery products, which the chains will use as a way of attracting customers.

This could in turn lead to a shift from smaller shops to the big multiples.

Mr Igoe says that manufacturers will be hit in two ways, one by the fact that some of their products will be singled out by the big supermarket chains for discounting, and they will be selling more through the multiples, where their margins are already vulnerable.

"Intensified pressure on the cost chain will force manufacturers to seek new ways to cut costs," he says.

"Apart from normal improved efficiency measures, increased mergers and acquisitions activity will likely result, with some less efficient players being acquired or merging with market leaders," he says.