Squeezing Processors Will Lead to Higher Prices and Less Choice
Food retailers are getting a lot of attention lately related to increases in supply chain fees imposed on their suppliers. These fees are the cost of doing business with large retailers who have significant shares of the market. It forces suppliers to buy access to large shares of the food customers. Retailers cite the costs of PPE and other COVID safety measures and investments in store upgrades and ecommerce as rising costs and a desire not to raise prices as a reason for downloading onto suppliers. While it may sound great to consumers that they are being protected from price increases, these costs will eventually be passed on to consumers (with the blame falling on processors) and increased costs of business will also likely lead to less choice on retail shelves.
To be clear, there are increased costs in the system. Retailers and processors have all had costs associated with COVID. Retailers have also seen significant increases in sales as we've eaten out less so some of those fixed costs are spread over a wider sales base. Retailers are also scrambling to participate in the growth of online ordering. This is not yet a huge portion of retail sales but every sale counts and online customers are more loyal than those in the store. Once someone is on an online platform, subsequent orders are easier on that platform. This is a competitive issue and acquiring these customers as they go online is critically important. They can still switch but they are less likely to do so. Store upgrades are also important to maintain competitive position. What is less clear is why those investments in retail should be made by suppliers to those retailers. If the store enhancements and ecommerce platforms do not create extra value for consumers then perhaps they are not worthwhile. If they do, then asking consumers to pay for that investment (amortized over time) would be reasonable.
The food business is not a high margin one. Volume drives profitability at all stages of the value chain. Squeezing suppliers means one of two things. The first option is that product costs go up. These costs will be passed on to consumers but the fingers will likely be pointed at suppliers rather than retailers. The second option is that changes happen at the supplier level. We could see a reduction in investment in processing capacity as the Canadian market becomes less profitable. Processing is already endangered in Canada and is critical to the viability of the production sector. Loss of processing would not only hurt Canadian producers but would also reduce the local options available to Canadians. There could be a reduction in research and development investment which would lead to less innovation and reduced choice for Canadians. We could also see a reduction in the number of sku's (stock keeping units) offered by suppliers as lower volume or lower margin products are discontinued as margins are squeezed by retailer charges. None of these choices are good for consumers.
If all of this is true, then why are retailers doing this? Retailers are afraid of losing share. Large retailers have more leverage with suppliers and are using that leverage to maintain and enhance their competitive position in the market place. They understand that this might drive prices up but it will be shared by all retailers and all consumers, not just their own. They also likely believe that processors will absorb some of the costs in their own drives to maintain volume so total prices increases will be less than they might be. In the end, costs for consumers will go up, choice will go down, and Canadian value add will be further imperiled. There has to be a better way.
Recommended citation format: von Massow, Michael. "Squeezing Processors Will Lead to Higher Prices and Less Choice". Food Focus Guelph (103), Department of Food, Agricultural and Resource Economics, University of Guelph, October 28, 2020.