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Cost of living crises are a PR nightmare for supermarkets. In straitened times, high street juggernauts become a magnet for the ire of consumers and politicians alike. In the past year, they have variously been accused of greedflation — raising prices higher than increased costs warrant — and fleecing small farmers.
Carrefour, which has fallen out with PepsiCo over the price it pays for products such as soft drinks and Doritos crisps, is trying to turn this narrative on its head. The French retail giant has signs in stores accusing Pepsi of “unacceptable price increases”. The negotiation is billed as an attempt to bring greedy consumer brands to heel and fight the little guy’s corner.
Bust-ups between food manufacturers and retailers are nothing new, especially when rising inflation squeezes everyone’s margins. Supermarket buyers negotiate with consumer brands to obtain discounts, which they can either pass on to consumers in the hope of gaining market share or use to bolster their own profitability. When the talks get tough, a bit of posturing does not go amiss. Tesco famously rowed with Unilever over the price of Marmite in 2016, and went without baked beans and ketchup in an argument with Heinz in 2022.
Who wins such stand-offs? Supermarkets have some clout: after all, the bigger ones tend to get better deals from suppliers. By way of example, gross margins at the UK’s Wm Morrison — the fourth largest grocer — were below 4 per cent before it was bought out by private equity. Sainsbury’s and Tesco hover around 6-7 per cent. The growth of private label categories helps keep consumer goods groups honest.
But supermarkets don’t command much in terms of consumer loyalty. Regulators ensure that people have a broad choice in terms of convenient outlets. Returns on capital of about 5-6 per cent speak to a world of cut-throat competition.
Brands, meanwhile, seem much closer to consumers’ hearts. See, for instance, the resilience of consumer goods’ volumes, which have remained roughly flat despite double-digit price inflation. Such loyalty translates into healthy profits. The likes of Nestlé, Unilever, Lindt and L’Oreal sport an average return on capital employed of about 15-20 per cent, says Bruno Monteyne at Bernstein. PepsiCo’s is 14 per cent.
That suggests that, in a row over pricing, it is brands that hold most of the cards. If consumers find that their desired titbit is off the shelf for too long, they will probably go to the supermarket across the road to buy it. Ultimately, Carrefour may have little to hope for from the current negotiation — except, of course, that the skirmish itself is something of a media coup.
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