Small food suppliers hit the hardest by supermarket price wars
Britain's small food manufacturers have emerged as the biggest casualties of the supermarket price wars, according to new research out today that reveals how the gap between the profit margins of the suppliers and their bigger competitors is widening.
According to law firm EMW, profit margins at small to medium-sized manufacturers – those with less than £25m of turnover – fell by more than a third in the last year, from 3.5 per cent to 2.1 per cent.
During the same period, the food industry’s biggest manufacturers with over £1bn of turnover saw profit margins increase from 5.2 per cent to 5.4 per cent over the same period.
On average, the profit margin for food manufacturers was 3.9 per cent in 2014, up from 2.9 per cent the previous year.
EMW said smaller food manufacturers lacked the negotiating power that their bigger rivals have, preferring to accept terms offered to them rather than risk losing what could be a significant contract.
“Larger suppliers often feel more confident about pushing back against the supermarkets because they have a stronger market position and greater demand for their products,” Sebastian Calnan, consultant at EMW, said.
He added that suppliers do not feel they are in a position to resist the supermarkets’ demands for rebates for stocking their products.
The supermarket sector has come under fierce scrutiny since Tesco’s accounting scandal last year over how it booked commercial income from suppliers, which caused it to overstate profits by £263m. The grocery has since made efforts to regain trust and simplify its supplier payment terms.
Non-food retailers have also been caught up in rows with suppliers, especially in the run-up to Christmas, with Debenhams yesterday emerging as the last culprit. The department store chain is said to have demanded a discount of up to two per cent on bills in return for paying them earlier.
It is the second time in three years the retailer has clashed with suppliers after sending a so-called Santa tax letter to suppliers in 2013 just eight days before Christmas asking for a 2.5 per cent discount on prices.
A spokesperson for Debenhams said: "In response to requests from some of our suppliers we have this year offered earlier settlement of invoices in return for a small discount. The scheme is entirely optional as was made clear in our communication to our suppliers, and is intended to help their cashflow at peak periods. The offer has been welcomed and we continue to maintain strong relationships with our suppliers."