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UK retailers’ milk price war imminent?

10 April 2014

UK farmers are concerned that the decision of the UK supermarket Tesco “to cut the price of its 4-pint bottles of milk to just £1 could result in a retail ‘price war’ in the UK”, reducing the retail price of milk by 28%. Tesco has now broken ranks with its competitors Sainsbury’s and Morrison’s on staple food prices and “is joining ASDA, which has sold milk at £1 for more than a year”.

Tesco saw its UK market share shrink from 30.9 to 30.2% in the 6 months to October 2013 (although profits on its UK operations actually increased by 1.5%). Coming within a wider strategy to win back customers, the initiative is reportedly part of a move to permanently reduce prices of staple products rather than running regular special offers. All of the big four supermarkets have come under pressure from discount retailers on the one hand and from upmarket retailer Waitrose on the other, and three of the four lost market share in the 12 months to November 2013.

Representatives of Farmers for Action (FFA), a protest group, described the move as “irresponsible”, since a range of other retailers followed suit. It is now feared that Tesco will extend its price reductions to other dairy products.

Following the price reduction, Tesco sought to assure consumers that “its new lower milk price would have no impact on the 650 milk farmers that make up its Tesco Sustainable Dairy Group (TSDG), promising that “our farmers will always be paid a fair and independently agreed price for their milk.” Representatives of FFA, however, pointed out that this ignored the impact of Tesco’s decision on “the other 9,000 dairy farmers that supply their rivals”. FFA representatives stated that “if this price cut is a medium- or long-term plan, protests will begin.”

The UK grocers' market shares (%)

  November 2013 November 2012
Tesco 29.8 30.5
Asda 17.2 17.6
Sainsbury’s 16.8 16.9
Morrison’s 11.5 11.7
The Co-operative 6.3 6.5
Waitrose 4.8 4.6
Aldi 3.9 3.0
Lidl 3.0 2.7
Iceland 2.0 2.0

Source: Kantar Worldpanel, cited in The Guardian, 19 November (see below).

Editorial comment

In implementing the new EU policy framework for strengthening the functioning of dairy supply chains, the UK authorities opted for a code of conduct approach rather than regulatory obligations. The code of conduct was agreed in October 2012 against a background of farmer mobilisation and public campaigning on the inadequacy of farm-gate milk prices (see Agritrade article ‘ More details of UK dairy code of practice emerge’, 4 January 2013).

While the new policy framework initially appeared to have stimulated intensified dialogue along the supply chain and greater sensitivity to farmers’ pricing concerns, the depth of the economic downturn in the UK has intensified competition among retailers and is now testing the effectiveness of the voluntary Code of Conduct framework.

European farmers’ organisations have long called for more effective EU action to curb the power of multiple retailers, particularly the practice of below-cost pricing, which strips value out of particular agricultural supply chains (see Agritrade article ‘ Report on improving functioning of food supply chain released’, 11 March 2013).

This is an area of policy development where ACP banana exporters have a particular interest, given the banana pricing policies adopted by UK retailers, which have led to UK prices for bananas in 2014 being nearly 40% lower than in 2002 (£0.18 per banana in 2002, compared to £0.11 in 2014). As a result, the Fairtrade Foundation has called on the British government to launch an investigation into retail prices of bananas “to assess the long-term impact on the producers and British consumer interests, and to take action” on the basis of the findings. 


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