Grocery suppliers may face new squeeze on margins

Developments in the British multiples sector are likely to lead to increased pressures on Irish suppliers, according to IBEC, the Irish Business and Employers Confederation.

Approximately 28 per cent of total food exports from the Republic go to British multiples. These were worth an estimated £1,442 million (€1,830 million) last year.

Wal-Mart, the world largest retailer, moved into the British market in June with its purchase of Asda, the UK's third-largest supermarket group. It has announced that it is cutting £30 million off prices. The group is introducing 600 price cuts, which will include 100 top brands on Asda shelves. The move is the latest sign of aggressive US-style supermarket pricing being introduced by the US chain.

Tesco, the UK's largest supermarket group, is reported to be planning a fundamental shift in trading strategy which will see increased pressure on suppliers to cut prices. The group has been holding meetings with suppliers and urging them to divert spending away from promotions into permanent low prices on certain products.

The group says the major shift in pricing strategy is not a reaction to the arrival of Wal-Mart, though British analysts are not convinced. Wal-Mart's arrival is seen as inevitably changing the balance of relationships throughout the industry.

"It's early days yet but if the indigenous UK retailers decide they have to cut supplier margins then that is bound to have an effect," said a spokeswoman for IBEC. "The UK is our largest export market for food and a huge amount of that goes through the multiples. They control the market.

"All these changes are very recent but there's bound to be a ripple effect," she said. She added that Britain did not have any ban on below-cost selling, and the development of predatory pricing would have "negative effects for some suppliers".

A further reduction in the size of the margins available to suppliers into this already highly competitive sector could seep into the market in the Republic by way of companies like Tesco, which operates both here and in Britain.

The IBEC spokeswoman said Asda was a major customer for Irish suppliers, especially for primary products such as meat and dairy products. She said a new company coming onto a new market would try to increase market share by squeezing prices.

Irish suppliers selling into Britain were at a disadvantage because of the transport costs involved, and the higher income tax and PRSI costs they had to meet, the spokeswoman said. However, the weakness of the pound against sterling has been offsetting that in recent times.