How lower food prices could further boost their profits

Jacob Flanagan investigates Foodstuffs’ latest decision to cut the price of certain items. Photo / 123RF

Previously posted in The Spinoff

Don’t confuse supermarket price changes with real sacrifice or real competition, writes Jacob Flanagan in a follow-up to his analysis of Countdown’s “price freeze”.

Supermarket chain Foodstuffs New Zealand has announced temporary price cuts for some of the most popular items in its New World, Pak’nSave and Four Square stores. Starting today, the price of 110 of its most purchased items will return to its average between January 25 and April 25 of last year, and remain there for 13 weeks.

Foodstuffs has announced lower prices for certain items.  Photo / The spin-off
Foodstuffs has announced lower prices for certain items. Photo / The spin-off

It follows that Countdown temporarily froze prices on a list of items it labeled essentials, a move that has been criticized, including by me, for not including genuine essentials like fresh fruit or toilet paper. It did, however, freeze the prices of a wide range of desserts, confectionery and smoked salmon at $90 per kilogram.

The combination of high global petrol prices, Covid-induced supply disruptions and increases in the minimum wage that many supermarket workers are paid has led to the highest annual inflation since 1990, which is likely to be felt more keenly by low-income people.

“The next few months will be difficult for New Zealand households, so this is something significant we can do as a business to help,” Foodstuffs chief executive Chris Quin said, announcing the move.

The prices of specific “rollback” items, the list of which will be published today, will drop by an average of 10%.

Food prices are currently 6.4% higher than the same time last year, so the 10% drop suggests conglomerate Foodstuffs – which also owns bottle store Liquorland and wholesaler Gilmours – could helping New Zealanders struggling with the cost of living.

Say you spent $100 on groceries at the start of 2021. On average, that same basket of groceries today costs about $106.40 due to inflation. If every thing you bought was cancelled, the price of this basket would drop 10% to around $95.76, or $4.24 less than this time last year – a bargain, right?

However, a deep dive into food rollback is telling. Unfortunately, this involves looking at two very scary things – accounting and marketing.

Professor Hamish Gow, who teaches agribusiness and commerce at the University of Lincoln, says throwback items are likely to be mostly private label; think of Pams owned by Foodstuffs, or “Countdown’s Own” products.

Indeed, of the five items we know will be cancelled, four belong to Foodstuffs’ private labels.

“[Foodstuffs] try to target the most price-sensitive customers,” Gow explained, to convince them to buy more private label products because “food products will be able to benefit because they get double the margin.”

The double margin mentioned by Gow refers to the fact that, on their own brands, supermarkets are both the retailer and the supplier, and therefore can make higher profits.

The Commerce Commission expressed similar concerns about this in its industry report, saying that supermarkets are focusing on private label “because of the potentially higher margins available on these products, as the retailer wins at the both the upstream and downstream margins”.

A 2019 US study found that supermarket gross profit margin was around 35% for house brands, compared to 26% for other brands. (The same higher margin on private labels probably applies to Aotearoa, but with an even higher gross profit – around 33% on all products.)

It’s also why Foodstuffs’ rollback, like Countdown’s price freeze, will likely feature limited fresh produce – it’s harder for supermarkets to sell their own private label fruit and veg, and so they’re not as profitable.

The return’s emphasis on private labels means it’s less of a sacrifice than it first appears for three other reasons.

First, private label items are simply already cheaper, so reducing their prices by 10% on average is less of a real dollar sacrifice than reducing other products by the same amount. For example, reducing the price of 500g of Pams Butter Spread by 10%, from $2.49 to $2.24, is less of a sacrifice than reducing the price of 500g Tararua Butter Blocks by 8.29 $(!) to $7.46. Many of the canceled items will likely already be inexpensive.

Second, the promotion of private labels increases the power of supermarkets over their suppliers. Food suppliers have long complained that the supermarket duopoly’s 90% market share already makes it nearly impossible to compete. Vendors who are brave enough to speak out are intimidated and threatened with having their products cut. By directing customers to more of their private label products, supermarkets will gain even more power over suppliers, allowing Foodstuffs and Woolworths to further increase prices and profits. The Commerce Commission is also concerned about this: private label “serves to reduce inter-brand competition, as consumers are faced with a reduced range of products or higher prices”, it specifies in its report.

Third, the few items Foodstuffs has announced they will be bringing back below cost, as a supposed sign of their sacrifice, are almost certainly “loss leaders” – items they are already selling below cost anyway. . Although Foodstuffs declined to confirm how many or which items would be sold for less than they bought, common loss-making items such as the cheapest milk, egg and bread varieties are likely to be among them. This strategy is not to generously waste money to help you save, but to lure you into the store with the promise of cheap necessities, knowing that you will probably buy chocolates, alcohol or meat, on which they make large profits, so they more than get their money back. That’s why milk, eggs and bread are almost always at the back of the store, so you have to walk past the tempting treats they make big profits on. Have you ever gone to the supermarket to buy a bottle of milk and come back with a full trolley? It’s deliberate.

Last week, Countdown announced a price freeze.  Photo / The spin-off
Last week, Countdown announced a price freeze. Photo / The spin-off

This latest price change also serves to distract from the real problem of the supermarket industry – a lack of competition, allowing for unusually large profits. The Commerce Commission found that Foodstuffs and Woolworths had managed to take around 90% of the market share, which in turn allows for unusually high profits and means smaller competitors are struggling. The use of restrictive land covenants that prevent new competitors from starting, confusing prices and promotions, and a range of marketing tricks mean New Zealanders spend more than most countries, around a fifth the most the OECD. This allows the industry to make about a million dollars a day more profit than if there were fair competition.

Although living in a small, isolated nation like Aotearoa contributes to our high food costs, supermarkets are absolutely skimming it (even during the Alert Level 4 lockdown, supermarkets saw record sales, while nearly every other industry have suffered), and this setback has won, it doesn’t change anything.

The food ruling is decent and could help reduce the cost of living over the next 13 weeks, but it does nothing to solve the long-term problem of lack of competition in supermarkets. The previous example of saving $4.24 on a $100 store was charitable for supermarkets: even the most cautious household would struggle to buy all their groceries from a list that will largely exclude fruits and vegetables, the price of which has risen considerably since last year.

Many New Zealanders will still struggle to feed their families, while supermarket owners flaunt their wealth on the Rich List.

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