The cost of living crisis remains topical as we move to O3 2023. In response to pervasive high food price inflation, the CMA announced in May 2023 that it would be stepping up its work on the grocery sector. The CMA published a 90-page update in July on its work to date, focussing on retail competition between the major supermarkets and discounters.   

The CMA has indicated that it intends to scrutinise a number of grocery products (including bread, dairy products, pet food and baby formula) in the near future so suppliers need to be alive to the possibility of a targeted CMA investigation or further review. 

Key findings  

The CMA has concluded from the evidence seen so far that recent high price inflation for groceries ‘does not appear to have been driven at an aggregate level by weak or ineffective competition between retailers’. The CMA’s conclusion is based on the following factors:  

• The growth of the discounters (Aldi and Lidl): between January 2022 and May 2023, Aldi’s UK market share grew by 15.4% and Lidl’s by 11.3%. The CMA notes that this growth has coincided with a decline in the major supermarkets’ average operating margins.  
• Aggregate operating profits falling by 41.5% in 2022/2023: the CMA has taken this as an indication that retailers have not passed through all cost increases to consumers.  
• Market share losses: retailers which allow their prices to become materially higher than their competitors tend to lose market share, suggesting that retailers are ‘constrained in their ability to raise prices without losing market share’. 
• Consumers are shopping around: ONS data indicates that 49% of people are shopping around more due to the increased cost of living. Additionally, the CMA’s own analysis (comparing grocery prices from the major supermarkets plus Lidl against Aldi’s basket price) indicate that retailers’ market shares are not static, and that consumers are price sensitive and switching to the discounters to access lower prices. 
• Retailers respond competitively to price differences: this is particularly the case for ‘known value items’, these being popular groceries like milk and bread. If such items are not priced competitively, consumers may therefore see a retailer as being bad value and choose to go elsewhere.  

The CMA caveats the above findings by acknowledging that not all consumers are receiving the full benefits of strong retail competition. This is because the discounters (who generally offer the lowest prices) do not offer online shopping. Furthermore, consumers who rely on convenience stores (which usually charge higher prices and offer fewer own-label products) may be disadvantaged. The CMA also points out that own-label products are seeing higher inflation than branded goods, which means that consumers who are already cutting down on their grocery spending have faced the highest increases and have fewer options to reduce their food spend.   

Next steps  

The impact of must stock brands 

The CMA has signalled that it will investigate the metrics of branded versus own-label suppliers in the next phase of its work. As the CMA explains, retailers’ relationships with branded suppliers are different to relationships with own-label suppliers for several reasons: 

• Impact of ‘must stock’ items: certain branded products are seen as ‘must stock’ items, and retailers may appear uncompetitive and potentially suffer a market share loss if they fail to stock these. 
• Brand premium: prices charged by branded suppliers include a brand premium reflecting a (real or perceived) difference in product quality. In some cases, consumers perceive that there only one credible brand for a particular product category – the CMA cites baked beans as an example of this, where the Heinz brand demands strong customer loyalty.  
• One supplier: there is usually only a single supplier of a branded good, whereas retailers can often choose between different suppliers for own-label products. 
• Scale: large brands benefit from significant economies of scale compared to own label manufacturers.   
• Information asymmetry: retailers are less able to obtain the information necessary to scrutinise branded suppliers’ costs. This contrasts the assessment of own-label suppliers’ costs, where retailers often benefit from ‘open book’ models which allow full visibility of suppliers’ costs. 
• Branded goods are identical: it is easier for customers to compare prices for branded products (which are identical in quality wherever purchased) than for own-label products (which may differ in quality across supermarkets). 

The CMA has concluded from the above factors that retailers may have limited ability to successfully negotiate with branded suppliers over cost or volumes.   

Future scrutiny  

To assess whether the wider supply chain is working well for consumers, the CMA has identified product categories which may merit further consideration.  This is an indicative list so branded suppliers would need to watch out for what the CMA adds to its shopping basket next. 

The preliminary list currently includes: 

• baby formula,  
• bread,  
• pet food,  
• poultry,  
• milk,  
• mayonnaise,  
• baked beans,  
• chilled desserts, 
• ready meals and  
• lemonade.  

Many of these categories feature both own-label product versions, but brands tend to play an important role. For example, the CMA mentions bread as a category where the own-label product versions account for 38% of sales, but Warburton’s, Hovis and Kingsmill stand out as important brands. The impact of brands is also evident in baby formula, where the CMA observes that “own label versions are rare despite the fact that regulations mean that all products are virtually identical”. The CMA notes that Danone (which owns the popular Aptamil brand) accounts for over 70% of sales.  

The CMA’s criteria for choosing these included: 

• Price inflation rate for individual grocery items in the CPI basket. 
• Extent to which price inflation for the product differed from input and output inflation faced by producers. 
• Extent to which price inflation for the product differed from inflation across the wider product class.  Importance to consumers, judged by reference to the product’s weight in the CPI basket and a qualitative assessment of its substitutability.