Supermarket Squeeze

While food and drink overall, especially in Scotland, is showing a surge in export led growth, much of this is exaggerated by the dominance of the whisky industry. Within the "general" supply chain the journey from field to fork exhibits increasing competitive pressure.

8th February 2013

No, not a game show, but the reality of where many in the food and drink supply chain may find themselves as we look to a still uncertain 2013.

While food and drink overall, especially in Scotland, is showing a surge in export led growth, much of this is exaggerated by the dominance of the whisky industry. Within the "general" supply chain the journey from field to fork exhibits increasing competitive pressure e.g.

• Commodity price volatility exacerbated by growing worldwide demand and volatile weather patterns;
• Medium and long range - demand/supply/price fluctuations in consequence;
• Inflationary pressures - driven by above;
• Consumers fickle and price sensitive - trading down due to inflation impact on households;
• Regulatory pressures e.g. food safety, waste, recycling targets;
• Sustainability issues/greening including low carbon targets.

What are the implications for suppliers in the food chain?
They are many, they are profound. On the demand side -
• Consumers - seek out better value but will sacrifice convenience for price;
• Supermarkets - quality and value paramount, price promotion and 'listing' demands incessant;
• Wholesalers/Large Producers - passing on the above to their sub-contractors;
• Primary Producers - need to survive - witness UK farmers' "Milk Rebellion".

If, in order to be a supplier these days, the minimum requirements are to offer Product, Price and Quality to certain standards, then we know that supermarkets (as with their consumers) will seek out the highest quality for the lowest price.

What are the likely out turns that we might see?
• Volatility and instability may drive companies towards greater collaboration and ideally long term contracts with, perhaps, greater scope for smoothing out of price fluctuations - ideally on an open book basis. Ensure you take advice on contract terms;
• Supplier flexibility will be key - and over dependence on any sole sources of inward supply or uptake of production will be risky - dual sourcing and spread will be needed to hedge risk;
• Commodity price inflation met with margin pressure from supermarkets - will mean greater working capital pressure, and may be helped by invoice discounting rather than conventional overdraft. Consider whether this might help you;
• Consolidation in the supply chain - might we see greater M+A activity (as well as, potentially, insolvencies in the sector), as players need to upscale to reduce overhead, modernise production, and meet supermarket listing criteria?

Take advice early
Any and all of the above may happen, and an open discussion on how these issues may impact on you and others near you in your supply chain may well be fruitful; especially if looking to enter into greater committed rather than "spot" contracts.

For further information, contact:
George Frier - Head of Food and Drink Services

For further information on S+W Low Carbon Advice to assist with coping with GHG and sustainability targets, contact:
Kevin Taylor, Head of Low Carbon