Life in the jaws of commodity price death
Advisor Blog Post: Steve Wall
In April 2019 there was a collective sigh of relief from the 8,000 suppliers to UK retailers. The Competition and Markets Authority ‘CMA’ had just blocked the Sainsbury’s-Asda merger.
Retail suppliers live their lives caught in the jaws of death – between the inevitable force of commodity price fluctuations and the immovable object of supermarket buyers.
The ultimate demand for groceries in the UK is distributed over 25 million households. Something like 8,000 suppliers eagerly compete for their business. But the problem for suppliers is that just 8 supermarkets stand between them and 93% of their consumer market.
This makes negotiating prices tough – even for the largest suppliers. So when commodity prices change, unfavourably, there is almost zero opportunity for suppliers to pass on price corrections to their clients.
Commodity Price Volatility
In the last 12 months wheat prices have changed by 20%, onion prices have doubled, rapeseed oil is up by 7%, Italian olive oil production has collapsed by 57% and prices increased by 3,000 Euro/tonne.
That’s not to mention energy, metals and other commodities subject to the vagaries of weather, politics and biological hazards.
So far, 2019 has been a story of relentless rise. Unless you were amongst the most astute of suppliers and factored these changes into your last price – you could be in big trouble.
Most suppliers to supermarkets are heavily exposed to commodity prices. As well as the obvious oil, plastics and metal-related costs built into packaging and feedstocks, there are literally thousands of grown products that are hugely dependent on weather and biological effects.
Weather and biological effects
Extreme weather events are becoming more common. Recent heat waves damaged several crops including potatoes and rapeseed – driving prices up. Potatoes were significantly affected – the Beast from the East in 2018 delayed planting and then a heatwave stunted growth. Net result is a 13% harvest shortfall and 20% price hike.
Meanwhile in Italy, nature itself is the problem. Along with the aforementioned Eastern Beast and freakishly intense downpours of rain, the Xylella fastidiosa bacterium swept through the Puglia region, on the backs of its insect hosts. Puglia has ancient olive groves that produce 65% of national output, usually about 400,000 tonnes. It is predicted that 2019 harvests will be 57% lower than expected – and you can guess what that will do to olive oil prices.
Politics can play its own part - Brexit has already driven up prices by driving down the value of the pound. However, the prospect of a no-deal exit is expected to drive up sugar prices by 100% - as WTO tariffs cut in. Good news for your teeth. Bad news for the soft drinks and cereal industries.
Supermarket buyers and suppliers
These are the immovable forces, battering at the underbelly of the supermarket supply base. But, this holds no sway with buyers. If suppliers are looking for sympathy – they are looking in the wrong place.
A recent advert in a trade magazine, looking to recruit buyers, went: "Honesty, fairness and truthfulness .... can lead to you being punished during negotiation ... This is where behaviour such as being inconsiderate, selfish and unfair can be required .. During the negotiation you take on a new persona, someone who wants to get the best deals possible, who will not back down, will be aggressive, selfish, even rejecting."
While there are only 8 major supermarket players, they are of course in relentless competition with each other. The mind of a supermarket boss is the mind of a trader. Buy low, sell high.
Buyers are recruited young, moulded and incentivised into ruthless negotiating machines. I have faced them. They arrive at the table – and for the first few minutes are the epitome of charm. But underneath the table they are fully armed with a data set and a series of well practiced tactics – cocked and aimed at your nethers.
The most vulnerable of suppliers are own-label manufacturers. They have huge fixed costs staked on single customers, making products for which they don’t own the IP nor the route to market. One such company that I worked for supplied Sainsbury’s who boasted “M&S quality at Tesco prices”. They omitted to mention that their supplier was picking up the tab for this. After frequent, fruitless negotiation and pleading the factory making the products closed – as did other factories for similar reasons. Did this matter to the supermarket customers? I think not. The supply was moved to another source, at a temporary higher price – and then the squeeze continues.
The big boys of the supply base can punch their weight. They can survive de-listing. They have data, research bases and hedging operations. They give as good as they get. SMEs on the other hand are vulnerable. The recent establishment of the Grocery Code Adjudicator (an independent statutory office responsible for regulating the relationship between supermarkets and their direct suppliers ) may help. It is a watchdog, but is yet to show its teeth. The GCA head, Christine Tacon, recently warned that she “could not prevent suppliers being squeezed by a new bigger retailer after the merger as she did not have the power to intervene when suppliers were agreeing prices with retailers.” At the end of the day, suppliers need to look elsewhere for help with the commodity price squeeze they are in. This is where ChAI can be of help, predicting commodity prices with AI and alternative data we mitigate the pain of commodity price volatility.