Discounting the food industry
An insatiable appetite for discounted food has left consumers with the wrong message about the real cost of food production, writes Fionnuala Carolan
16 June 2010
An interesting fact to consider is that in 1980, Irish people were spending 30% of their income on food. Fifty years prior to this, they were spending 50% of their income on food. Today that figure stands at approximately 12%. Food has become a whole lot cheaper over time and the recent downturn has accentuated this even further. After years of vulgar spending during the boom, consumers can’t and won’t pay over the odds for goods or services anymore. Unfortunately food was pinpointed as an area that could be discounted heavily. The food industry came under pressure and what ensued can only be described as a war on food. Ireland’s greatest asset is our food sector yet we are in grave danger of compromising this in order to give in to an insatiable public desire for value. John Bryan, president of the Irish Farmers Association(IFA), is of the opinion that major retailers are training consumers to believe that food is cheap and worthless through the countless promotions and special offers touted in supermarkets.
Farmers seek equity
The IFA has spent the first half of this year calling for equity in the food supply chain. Bryan is well documented voicing his concerns about farmers receiving too small a cut in times when output costs have risen substantially. The average farm income last year was said to be just €13,000, which according to Bryan included direct payments like the single farm payment.
Even though things have begun to improve he said “there are certain products still being sold below the cost of production”.
“The whole fresh produce area is very difficult. The supermarkets tend to sell fresh produce as loss leaders and are training the consumer to think that food is free. Somebody has to produce it at a cost. There is a huge amount of discounting and promotion on food and it’s working against the primary producer all the time. The multiples are trying to persuade people that food is worthless and it’s the wrong concept. It hardly paid the farmer to package the potatoes last year.”
The competition has been fierce between the supermarkets due to cross-border shopping and the onward march of the discounters so the primary producer, the processors and the suppliers have been bearing the brunt. Bryan said: “From our point, as primary producers, we’ve a cost of production based on income and there’s nothing we can do about that. In the last couple of months we’ve met every major retailer, delivering the message that if they want a sustainable supply of local food, which they all say they do, they are going to have a pay a more realistic price.”
He argued that when retailers have promotions the farmers and suppliers are forced to take the cut yet they don’t see any return. “If there are to be promotions on vegetables, lamb, beef or anything else you cannot expect the producer to sell it at half price. If there are to be promotions, the price needs to be borne by the retailer.”
Bryan pointed out that the reason the farmers are finding themselves in such dire straits is that fuel costs have rocketed along with other resources like carbon tax, machinery, fertiliser, veterinary costs and medicines. “All our costs went up and there was a small reflection of this in the market place but when the recession hit, our costs didn’t go down. The retailers’ margin has been measured by several independent bodies which shows that it rose slightly, so they maintained their margin. But if there is going to be a sustainable supply of food there needs to be a change in the balance. The farmer has to get his cost of production and a margin. They(the retailers) are selling beef below cost price and yet every supermarket will tell us that beef is a good draw.”
Code of practice
Since the abolition of the Groceries Order in 2005, the industry has had no legal restrictions to selling food below the invoice price and this has resulted in increased buying power for the multiples. To curb the reported unethical practices such as ‘hello money’ that are said to exist in the market, the farmers, suppliers and processors have lobbied the government to introduce a code of practice with John Travers, the former Forfás chief executive brought in to oversee proceedings. Predictably the major retailers are not behind the move and want the concept abolished. The supermarkets claim that a code and an ombudsman would simply add more costs to the industry and drive shoppers back across the border. Several attempts by ShelfLife to contact Tesco to seek its opinion rendered fruitless.
Tesco have argued in its submissions to government that 60% of purchases by Irish supermarkets are from large suppliers such as Glanbia, Unilever and Procter Gamble, which are often as big or bigger than the retailers they deal with.
Joe Collum, marketing director for Glanbia told ShelfLife that he didn’t feel the company has been subjected to any more arduous pressure than usual from the supermarkets. He cited the change in the value of sterling as having a greater effect on business than the supermarkets.
Superquinn warned that the proposed code would only serve as an extra tax on groceries which would likely lead to higher prices.
FDII seeks legislation
Paul Kelly, director of Food and Drink Industry Ireland said that suppliers and processors have always felt pressure in one form or another but he would distinguish what has been happening in the past year to “standard hard commercial negotiations which you’d expect in any business with a supplier/customer relationship”.
“A certain amount of competitiveness is good because it drives efficiency but there is a need for a framework to be there for a degree of balance so you don’t go over the top because if you do, it will become unsustainable to produce it in the first place.”
Kelly said that in certain instances the processors have been under worse pressure than the farmers “because they are the ones dealing with the retailers on an on-going basis.”
Farmers and suppliers unite
Shane Dempsey, head of consumer foods at Food and Drink Industry Ireland said they initially called for a code of practice in 2008 and said they were quickly supported by the farmers. “The farmer is one step away from the retailer and they recognise that the pressure processors were under from retailers was getting transported back up the line to farmers and when farmers had to deal directly with the retailers they realised how difficult it was.”
There is no doubt that the huge increase in promotionals on food last year kept consumers happy but the long term effects of this kind of discounting could have devastating effects on the food supply.
Dempsey said that if things don’t change a few retailers will keep accumulating power resulting in diminished choice for consumers. He said it’s the responsibility of the government to ensure this doesn’t happen. “It’s hard for policy makers to see the effects of continual discounting because it won’t be tomorrow, it’s a bit down the line.”
Kelly felt that the industry was being compromised due to conflicting legislation and would like to see the symmetry in government improve. “We want a situation where every TD and government minister, should examine the impact on the agri food sector in each decision that is made and this should be done out of economic self interest for the country. One in eight jobs in the country are associated with the food industry and that’s not even taking into account retail jobs”.
Kelly said it made sense to go down the voluntary code route first because “in practical and logistical terms, it would take longer to get something in on a statutory basis.”
If all parties complied with the terms of the voluntary code there may be no need to make it statutory but this is unlikely according to Dempsey. “The key thing is to verify during the voluntary period if anything has changed. This is why the ombudsman needs to be in pace from the start”.
However Bryan was sceptical of the impact of a voluntary code his feeling being that parties that do things right will obey a voluntary code but the ones already engaging in unethical practices won’t and that’s why a statutory code offers more. One thing he believed should help the sector is the change in the price of sterling considering we sell 50% of our beef and 40% of our dairy to the UK.
Whether the code is a success or not remains to be seen but protecting the country’s most important industry is something that needs to become a priority for everyone in the food chain. The onus is now on the Government to ensure this happens.