As reported by The Financial Times (FT) Chancellor Jeremy Hunt, together with the governor of the Bank of England, Andrew Bailey are to look at profit margins of companies in the food industry supply chain alongside other sectors to mitigate inflationary pressures on households.
The FT said that Bailey had informed a central banking conference that one of the reasons food retail prices did not mirror the falls in world prices for raw materials was that food manufacturers were locked into long-term contracts with retailers.
An opposing view is held by international procurement and supply chain management consultancy, Inverto, which is calling on retailers to develop strategic partnerships with suppliers.
Sushank Agarwal, managing director at Inverto, said that many of the food products still seeing the highest levels of inflation are those where supermarkets have traditionally only had ‘transactional’ relationships with suppliers, and in particular producers.
According to the Office for National Statistics, these products include:
- Eggs – 37% inflation
- Low fat milk – 33.5% inflation
- Cheese – 30.6% inflation
- Yoghurt – 23.4% inflation
Agarwal said these relationships need to become more ‘strategic’ in order to address inefficiencies, improve productivity and cut waste, to bring prices under control.
He added: “For many years, supermarkets have procured a lot of staple foods in a very transactional way – based mainly on price, with short-term contracts. That resulted in suppliers not being able to invest in their businesses, which is one reason why food inflation is not going away.
“Along with the effects of the war in Ukraine, geopolitical tensions affecting global supply chains and the UK’s labour shortage, the inefficiency of some food producers is the fourth major component of food inflation.
“Farmers cannot be blamed for not investing in automation and increased efficiency when they only had short-term contracts at minimal margin. That limited their ability to re-invest profits. Supermarkets need to move away from this model and towards a more strategic approach where they partner with suppliers to deliver long-term mutually beneficial relationships.
“That means not only working with farmers to increase their yields, but also with their supply chain – packaging, feed producers, waste handling and transportation may all need to be addressed. Supermarkets should look at the entire support chain as being in partnership with them.
“Food producers will only be able to make those investments if they have longer-term certainty over their income. That means longer-term partnerships, not just three months commitment.”
The full report in The Financial Times can be read here.
