CMA Sets Out Autumn Update In Review Of Competition In Groceries Sector

1st December 2023

Some branded suppliers have pushed up prices by more than their costs increased, but in most cases, shoppers can find cheaper alternatives.

CMA to examine further whether ineffective competition in the baby formula market could be leading to parents paying higher prices.

CMA to launch review of loyalty scheme pricing by supermarkets, considering its impact on consumers and competition in the groceries sector.

The Competition and Markets Authority (CMA) has set out the latest findings and the next steps in its ongoing review of the groceries sector today.

It follows an initial assessment that focused on retail competition in the groceries sector published in July. That 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 food suppliers.

Competition and price dynamics in the supply chain
Food price inflation continues to be at historically high levels, despite falling to 10.1% in October 2023.

Across the food and groceries sector, the CMA found that high inflation has been driven largely by rising input costs, particularly for energy and key agricultural inputs like fertiliser. But the evidence collected by the CMA indicates that, over the last 2 years, around three-quarters of branded suppliers in products such as infant formula, baked beans, mayonnaise, and pet food 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. 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. This switching is positive for competition and allows those able to switch, to lessen the impact of high food price inflation.

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.

The CMA has 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
Baby formula is a product category where different dynamics seem to apply. The prices for baby formula in the UK have risen by 25% over the past 2 years.

Similar to other products the CMA examined, evidence suggests that branded suppliers of baby formula have also increased their prices by more than their input costs. On top of this, the market is highly concentrated (2 firms have around 85% of the market share) and brands have maintained high profit margins over the last 2 years.

Unlike other products examined, there is little evidence of parents switching to cheaper branded options as prices have risen and very limited availability of own-brand alternatives.

Families could make significant savings of more than £500 over the first year of a baby's life, through buying cheaper baby formula options. Regulation ensures that all baby formula products, including cheaper options, provide all the nutrients a healthy baby needs. Despite this, 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 CMA 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 pricing
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. The CMA's work will consider how the growth in loyalty scheme pricing is affecting consumers and competition in the groceries sector.

Sarah Cardell, Chief Executive of the CMA, said, "Food price inflation has put 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.

Responding to today’s CMA report, "Price inflation and competition in food and grocery manufacturing and supply", Andrew Opie, Director of Food & Sustainability at the British Retail Consortium, said, "We welcome today’s CMA report, which confirms many of the BRC’s own findings about the grocery sector. The CMA found that own-label goods offer competitive prices for consumers, with margins falling from 4% in 2020 to less than 2% in 2022. While many branded manufacturers had increased their unit profitability during the cost of living crisis, savvy consumers have been trading down to supermarket own-label brands in order to get the best possible value. The increased availability of own-label products is just one way in which food retailers have supported their customers with the rising cost of living."

"We acknowledge the CMA’s concerns on baby formula - a market dominated by two brands. The CMA notes that consumers could make significant savings by switching to cheaper brands or own-label products, all of which provide the necessary nutrition for a healthy baby.

“Retailers will continue to deliver excellent value for their customers. Whether it’s everyday low value, or genuine bargains through loyalty schemes discounts, retailers know they have to demonstrate clear value to get customers through their door. However, this continues to be challenged by rising costs, from hundreds of millions in additional business rates, to higher labour costs from the rising NLW. “

More information and the full report can be found on the CMA Groceries case page
https://www.gov.uk/government/publications/cma-action-to-help-contain-cost-of-living-pressures