Crisis, what crisis?
The supermarkets are in crisis, or so the narrative of the financial press goes. To anyone familiar with the figures at stake such talk should seem perverse. Tesco’s trading profits, due to be published on Thursday, are expected to have fallen to around £850m for the six months to the end of August, £250m less than the £1.1bn originally forecast. Try explaining that away as a crisis to a debt-ridden dairy farmer or an independent retailer perpetually on the cusp of going bust.
The problems befalling the major supermarkets have to be viewed in the context of the system within which they operate; a system which is fundamentally unsuited to the business of selling food. Forget their public proclamations about putting the interests of consumers first, as publicly listed companies Tesco, Morrisons, Sainsbury’s et al are first and foremost responsible to their shareholders. The need to consistently hit short-term financial targets is at odds with a food system whose stability and sustainability relies on long-term investment and planning. When Tesco offers 6-month contracts and chops and changes suppliers based on who can supply a given commodity at the cheapest price it destabilises the entire upstream supply chain and prevents suppliers from investing for the future with the certainty that comes from long-term contracts and relationships based on trust.
The horsemeat scandal, revelations of the use of slave labour in supply chains, and the profit overstatement at Tesco all had their roots in the constant downward pressure on prices imposed by retailers desperate to satisfy their investors. Consumers benefit to a point through lower prices, but when the strain becomes too much and corners start being cut we all suffer.
The ‘death of the supermarkets’ narrative would be more credible if the big four weren’t leaking share to the discounters who are merely a leaner version of the supermarkets they are trying to usurp. Tesco customers are not fleeing to the local butcher or farmers market in a statistically significant way. Aside from the rise of the discounters, the biggest shift in grocery retailing is the shift away from the weekly ‘big shop’ at an out-of-town store to shopping online and then topping up at local convenience stores. The big four stand to benefit as much as anyone from this trend.
If one good thing is to come out of this annus horribilis for UK supermarkets it’s that never again will a single retailer achieve a 30% share of the UK grocery market. The Groceries Code Adjudicator was installed to prevent retailers wielding their power unfairly over suppliers. With Tesco commanding a near 32% share of the market at its peak, suppliers had little choice but to whistle to its tune. The balance of power is still in favour of the supermarkets but a rebalancing of the market should at least mean suppliers can reject unreasonable terms without compromising their standards or jeopardising their entire business.