How do we break out of the cheap food spiral?

The Agri-Food Regulator (An Rialálaí Agraibhia) recently gained new powers to compel the provision of price and market information from agri-food businesses. The enhanced powers relate specifically to the regulator’s price and market analysis function, which is entirely separate from its enforcement role in relation to unfair trading practices.
The aim, according to the office, is ‘to enhance transparency in the supply chain, supplementing existing EU rules on unfair trading practices’. The intent, according to the Department of Agriculture, Food and the Marine, is to go beyond existing EU market transparency regulations and to strengthen the position of smaller suppliers who may face larger buyers with greater bargaining power’. But the big question is this: will it deliver a more equitable and sustainable food chain?

Retailer buying power

It is critically important when looking at the evolution of food prices to understand that food pricing, and particularly the pricing of fresh foods like milk, fresh meat and vegetables, is dictated by retailer buying power. That buying power has been ‘gifted’ to food retailers through legislation even if it is usually presented as a natural evolution of scale economics. Legislation forbidding resale price maintenance by food producers and manufacturers in the late 1960s combined with competition regulations, abolished suppliers’ selling power and created the current pattern whereby discounted fresh food drives retail footfall.
This combination of regulation and deregulation is, in essence, a Faustian pact between Government/competition authorities and the large grocery retailers to deliver everyday low food prices. Politics has trumped economics.

Policy indifference

Critically, this cheap food policy is firmly detached from and indifferent to farm incomes or indeed any sense of the long-term sustainability of local food supply chains. This detachment is facilitated by the reality that the Department of Agriculture, Food and the Marine is responsible for farm incomes while the Department of Enterprise, Tourism and Employment is responsible for consumer prices and, importantly, competition policy.
Indeed, when the food industry/farmers have complained that everyday low-pricing/loss-leading, combined with increasing food production regulation, directly leads to systemic margin reduction, we have been told that this is a market signal driving supply chain efficiency.
Furthermore, when retailers are asked about low milk and meat/vegetable prices they will respond that they are making no or low margins on these products, omitting, of course, to add that they will recover profits from the remaining 15,000 items a typical supermarket stocks, while the fresh food supplier does not have this option.
The investigation of margin from farm to supermarket/discounter shelf then may well show that every part of the chain is making low margins on fresh food with the key point of difference being that large retailers can recover profit from the vast array of other goods they sell across the store.

Rebalance buying power

For the food supplier, better price information on margins up and down the chain may be a moot point. Will it merely confirm long-term subsidisation/footfall creation driven by below-cost or loss-leading of fresh food products for the dubious privilege of securing shelf space? When the Groceries Order was introduced in the late 1980s (following the collapse of the H Williams supermarket group), it reflected concerns about the need to rebalance the buying power inherent in the developing scale of supermarkets. This debate reflected a concern that the profits from dominant retail buying power might not be passed on to consumers or that the concentration of buying power could undermine the food supply chain.
Balancing potential abuse of dominance meant controlling retail pricing behaviour or, more radically but unrealistically, controlling retailer market share. In the end, laissez-faire economics and deregulation triumphed. The result has been that the current deregulated pro-retail policy amounts to category capture with the broad fresh food range effectively subsidising food retailer profits.

Breakout from margin squeeze?

So can the new powers of the regulator deliver a breakout from what is a systemic downward spiral with highly regulated, locally produced food undergoing relentless margin squeeze and increasingly being replaced by less regulated imports as typified in the Mercosur deal? While I can understand the wish for greater transparency, I honestly don’t see anything in the new powers that address the core issue whereby fresh food suppliers, through chronic low pricing, are subsidising retail footfall and profits. Moreover, this mistreatment of food producers is exceptional.
The reality for a large range of consumer products from pharmaceutical drugs to smart phones and cars is that these much-cherished, consumer products possess selling power, and the manufacturers cannot be forced to provide cheap own-label versions for the retailer as with grocery suppliers. The producers of these products get a positive return from the sales of their products. This encourages continuous investment and innovation and a long-term commitment to ever higher quality standards. In essence these are the core demands of Irish and EU consumers.