ANALYSIS:FEW SECTORS are as massive or secretive or central to people's lives as the grocery trade. Worth almost €12 billion a year at retail level and €4 billion at wholesale level, the sector is also central to the agri-food industry and our image as a "food island", writes PAUL CULLEN
Irish consumers have been paying through the nose for the goods they buy. Average prices are about one-quarter higher than the EU average. Since the beginning of the year, however, prices have been falling sharply, and nowhere more than in our supermarkets. Encouraged by the exodus to shops in the North, and then a vigorous price war between the large retailers, food prices have dropped by up to 20 per cent since January.
That’s the good news. The question that many people have posed, and which has not been convincingly answered, is why prices were so high for so long. If the big stores were able to lop up to 50 per cent off the price of some goods at a stroke, how was it they were able to charge the higher prices for so long?
Answers have been suggested, and some have been discounted. Consumers were slow to shop around during the Celtic Tiger years, it is true. The high cost of doing business was cited, particularly wages; however, a Forfás report last year put this premium at less than 10 per cent, far less than the North-South price differential of about 30 per cent.
The price war has broken up the cosy relations that existed between many retailers and suppliers up to now. Retailers have claimed they are unable to source products cheaply in Ireland and, led by the market leader Tesco, some are now importing brands from the UK rather than sourcing them from local distributors. Prices have tumbled on the back of a strong euro, but could go back up again when sterling strengthens.
Suppliers have complained loudly that the powerful retailers have forced them to bear the cost of price cuts by insisting on reductions in the price of goods they supply. Irish suppliers say they are being squeezed off supermarket shelves by cheaper imports. Consumers are happy with the lower prices but jobs are undoubtedly being shed in supply and distribution.
Minister for Enterprise and Employment Mary Coughlan now steps into this fraught environment with her proposals, published yesterday, for a code of practice and an ombudsman for the grocery sector. The Minister says she wants to achieve a balance between the competing interests of suppliers, retailers and consumers and to ensure nothing stops the passing-on of lower prices to the customer.
This will be a difficult trick to pull off. As well as being lucrative, the grocery sector is highly secretive. None of the foreign-owned retailers publishes profit figures for their Irish operations. The main Irish-owned multiple, Dunnes Stores, is obsessive about secrecy. The retail sector is highly concentrated and the all-powerful multiples are unlikely to welcome an ombudsman nosing about their business especially if, as the Minister suggests, they have to pay for the privilege.
But the secrecy doesn’t stop with profit figures. Over the years, the practice of suppliers making secret payments to retailers to secure a listing (“hello money”) or preferential placement in a store has become rife. Fine Gael agriculture spokesman Michael Creed claimed this week that many individual food suppliers are paying up to €1 million in hello money each year, while 10 companies were forced to pay €30 million over a four-month period.
Then there are long-term arrangements (LTAs) which enable retailers to claim discounts from suppliers of branded goods. LTAs started in the 1970s when chains first demanded rebates of 1 per cent or so from suppliers; but what started as a reward for high-volume trade went out of control during the boom, with the 2005 Consumer Strategy Report mentioning LTAs of 18 per cent. In a €12 billion market, that equates to windfalls of hundreds of millions for the multiples.
None of this posed a problem during the good times, when the costs of these hidden arrangements could be passed on to the consumer – hence our high prices. But as business leaked to shops in the North and to the new discount stores such as Lidl and Aldi, a rethink was called for. The big retailers, again led by Tesco, decided prices had to come down, and resolved to achieve this through cheaper imports. Irish suppliers, lumbered by years of bad practice and having to bear the promotional costs of their products on supermarket shelves, cried foul, but hardly any have gone public or complained to the Competition Authority.
In any case, it’s far from clear that these payments are illegal; they certainly haven’t been tested in the courts. It is true that in some cases what started as an exercise in mutual back-scratching between suppliers and retailers gradually, because of the massive power of the multiples, involved more and more coercion, and this could be illegal. Equally, though, the giant multinationals that make the best-known brands we buy every day are well placed to fight their own corner.
Coughlan is now proposing to ban many of these payments, and to allow others only when they are included in written agreements. An ombudsman would have the power to investigate complaints and inspect such agreements, though it isn’t clear whether s/he would also have access to internal company information such as profit figures.
Consumers have gained a lot from the price war between the supermarkets this year, but the job won’t be complete until the layers of secrecy around retailers’ operations is penetrated, and a proper assessment can be made of whether all the fat has been taken off the Irish grocery market.
- Paul Cullen is Consumer Affairs Correspondent of The Irish Times