The Competition and Markets Authority (CMA) has set out the latest findings and the next steps in its ongoing review of the groceries sector.
The announcement follows an initial assessment that focused on retail competition in the groceries sector published in July 2023. The assessment identified 10 product categories (including milk, baked beans and baby formula) for further analysis in a second phase of work, to gain a deeper understanding of competition across the supply chain, with a particular focus on branded and own label suppliers.
Across the food and groceries sector, the CMA found that high inflation had been driven largely by rising input costs, particularly for energy and key agricultural inputs like fertiliser.
The evidence collected by the CMA indicated that, over the last two years, around three quarters of branded suppliers in products such as infant formula, baked beans and mayonnaise have increased their unit profitability and, in doing so, have contributed to higher food price inflation.
However, own label products often provide cheaper alternatives with suppliers of these products earning lower profit margins and competing to win and retain contracts from retailers, said the research. In all but one of the relevant product categories the CMA looked at, as food prices have risen, many consumers have switched away from brands towards own label alternatives, or reduced their consumption, leading to a decline in brands’ market shares and profits. The CMA said this switching is positive for competition and allows the consumers switching to lessen the impact of high food price inflation.
The CMA reported that overall, profit margins have fallen across most branded manufacturers since 2021, mainly because of a fall in sale volumes due to consumers switching to cheaper alternatives.
It also heard from leading brands that they are aiming to use any future reductions in their input costs to offer customers more promotions, rather than cut the standard price they charge supermarkets for their products.
Baby formula
Similar to other products examined by the CMA, evidence suggested that branded suppliers of baby formula have also increased their prices by more than their input costs.
On top of this, the CMA said that this market is highly concentrated and brands have maintained high profit margins over the last two years – food companies Danone and Nestle hold around 85% of the market share between them.
It was reported that unlike other products examined, parents were reluctant to switch to cheaper branded options as prices have risen. The watchdog also highlighted that there was very limited availability of own-brand alternatives.
The CMA stated that families could make significant savings of more than £500 over the first year of a baby’s life through buying cheaper baby formula options, stressing regulation ensures that all baby formula products, including cheaper options, provide all the nutrients a healthy baby needs.
However, the CMA is concerned that parents may not always have the right information, at the right time, to make effective choices. It is also concerned that suppliers may not have the right incentives to offer infant formula at competitive prices.
The watchdog said it will now undertake further work to better understand consumer behaviour (including what influences choice) and barriers to entry and expansion for baby formula manufacturers and consider whether any changes to the regulatory framework could help the market work better.
An update on the CMA’s work into baby formula will be published in mid-2024.
Loyalty schemes
With the rise in some supermarkets making cheaper prices only available for loyalty card members, the CMA plans to begin a review of the use of loyalty scheme pricing by supermarkets in early 2024. Its work will consider how the growth in loyalty scheme pricing is affecting consumers and competition in the groceries sector.
The CMA said that it will complete work to assess how competition is working overall in the grocery retail market, drawing on publicly available data and information. As well as this, it said it would identify which product categories might merit closer examination across the supply chain, if any.
Sarah Cardell, chief executive of the CMA, said: “Food price inflation has put a huge strain on household budgets, so it is vital competition issues aren’t adding to the problem. While in most cases the leading brands have raised prices more than their own cost increases, own label products are generally providing cheaper alternatives.
“The picture is different when it comes to baby formula, with little evidence that people are switching to cheaper products and limited own label alternatives. We’re concerned that parents may not always have the right information to make informed choices and that suppliers may not have strong incentives to offer infant formula at competitive prices.
“We will investigate this further and consider whether changes to regulations are necessary to ensure parents can get the best deal possible.
“We have also seen an increase in the use of loyalty scheme pricing by supermarkets, which means that price promotions are only available to people who sign up for loyalty cards. This raises a number of questions about the impact of loyalty scheme pricing on consumers and competition and the CMA will launch a review in January 2024.”
