Status: 04/25/2022 08:19 a.m
Some groceries are now more expensive than ever. The price negotiations between manufacturers and retailers are tough – which could soon be noticeable on the supermarket shelves.
About a third more for sunflower or rapeseed oil, about 18 percent more for salad or potatoes, and fresh vegetables are also almost 15 percent more expensive: consumers currently have to dig deeper into their pockets for their groceries than they did a year ago.
“In addition to the increases in energy and raw material prices, which have been exacerbated by the Ukraine war, the global supply chains are also still strained due to problems with container transport and a lack of truck drivers,” explains Carsten Kortum, head of the trade course at the Baden-Württemberg Cooperative State University. Württemberg (DHBW) compared the reasons tagesschau.de. In addition, there is a weak euro, which makes imported goods such as coffee or bananas more expensive.
Groceries are more than 6 percent more expensive
Overall, according to the Federal Statistical Office, food prices rose by 6.2 percent in March compared to the same month last year. The consumer price index for food and non-alcoholic beverages was 5.9 percent last month. For comparison: in 2021, the rate at this point was just 1.6 percent.
And it could get worse. For example, the world’s largest food company Nestlé, with brands such as Nespresso, Maggi and KitKat, announced that it would raise prices again in view of rising costs for raw materials and logistics. The first retail chains such as Aldi have recently passed the increases on to customers.
At the same time, the large retail groups Rewe and Edeka accuse the manufacturers of making excessive demands in the price negotiations and thus wanting to generate extra returns. Unavoidable increases should not only be imposed on consumers, but should be distributed along the entire value chain. But how are the prices in the supermarkets formed?
Limited bargaining power for small manufacturers
“Basically, the prices arise as part of the so-called annual talks, i.e. the annual condition negotiations between dealers and manufacturers,” says Thomas Roeb, Professor of Marketing and Retail Management at the Bonn-Rhein-Sieg University of Applied Sciences, in an interview with tagesschau.de. It’s not just about the price, but also about delivery quantities, advertising campaigns and logistics.
The negotiations went very differently. If the product offered – such as apple juice or meat from a local manufacturer – does not play a major role in the supermarket chain’s overall sales, a single call can be sufficient. “In the other extreme case, we have big players like Coca Cola or Nestlé, where the representatives negotiate hard in personal discussions and several rounds,” says the trade expert. A result is not always achieved immediately. The meetings sometimes drag on for months.
Who has the greater bargaining power depends on the size of the manufacturer, says DHBW Professor Kortum. “The producers of own brands and also smaller manufacturers of interchangeable products are heavily dependent on the trade and in principle have no chance if the negotiations collapse because some of them only produce exclusively for individual dealers.” Producers of own-brand detergents and diapers recently went bankrupt because the trade did not accept higher prices.
Big brands have more influence
The four large retail groups account for more than 80 percent of the market turnover: the Schwarz Group around Lidl and Kaufland, the Aldi sisters, Edeka and Rewe. “In many cases, the retailer is stronger in the discussions. For a certain product, they sometimes have half a dozen or a dozen different suppliers,” says Roeb. The possibilities for them to set prices are limited.
The situation is different in the big brand industries around Nestlé, Unilever or Danone. There, the position of power of the manufacturers is on a similar level to that of the trade, says Kortum: “The trade cannot do without strong A-brands like Nutella because there are no real alternatives in the product group. Conversely, a strong A-brand can also not do without Edeka, which has a market share of over 30 percent in Germany.”
Nevertheless, some industry insiders see changes in the negotiations. “So far, retailers have always been very strong,” says René Schumann, founder and managing director of the Negotiation Advisory Group in Düsseldorf. Among other things, the company advises food manufacturers on annual appraisals and trains executives for negotiations.
According to Schumann, however, some manufacturers are now getting into price negotiations with increasing research. At the beginning of the year, Nestlé pushed through price increases of 5.2 percent worldwide. “The dealers were simply overwhelmed by the group’s good arguments and therefore passed the prices on,” he says tagesschau.de.
More flexibility in contracts
The industry is currently experiencing tough and escalating negotiations. “Manufacturers like Nestlé, who do not follow a partnership approach and actually push through higher prices, continue to turn the spiral,” says Schumann. The increase only ends when consumers stop buying the product in question.
Economic expert Roeb describes it in a similar way: “A manufacturer who has popular branded products in its range can of course get things done.” Some producers are currently testing whether a retailer would rather sort out products or give in and accept the higher prices, says negotiation expert Schumann.
Carsten Kortum points to another trend: “I see a tendency that many more flexible components – so-called price escalation clauses – are built in because many price components can no longer be calculated.” If the world market price or the glass and packaging price of products changes, the sales price can also be adjusted and does not have to be renegotiated.
Manufacturers are forced to raise prices
According to the expert Schumann, more and more so-called free riders are appearing, who are taking advantage of the current situation and trying to top the unavoidable increases. However, Kortum excludes a large number of these free riders: “The buyers in retail are all professionals. They can calculate individual product prices pretty precisely down to the last cent and have a lot of comparative figures.”
But there is no doubt that suppliers and industry would have to demand higher prices. According to the scientist, Nestlé’s or Danone’s profit margins have not increased recently and may actually decrease somewhat in the future. Schumann also confirms this: “Due to the high energy costs and problems in the logistics chains, many manufacturers are no longer making any profits.” In order not to have to stop deliveries completely, they are dependent on prices going up.
And what’s next? “In the past, deliveries were only continued if there was no agreement,” says Schumann. In the meantime, however, non-agreement means delisting: either because there are no more deliveries or the retailers are boycotting the product. “As consumers, we will see that the product range at many retailers will change over the next 12 months.”
Expert expects more price adjustments
Kortum, on the other hand, considers delistings to be relatively unlikely – above all because of the sometimes problematic availability of goods. “To accept even more gaps on the shelves for reasons of negotiation tactics is a high risk for retailers.” A retailer wants to avoid consumers changing stores due to a lack of variety when shopping.
The chains are already worried about losing customers and market share to cheaper discounters. “There has never been such a price increase in food. Retailers are completely unsure how consumers will react,” says Kortum. According to market researcher IRI, discounters have had significantly more customers since the start of the Ukraine war.
The length of the negotiations and the contract period with the producers could therefore be shorter. “Because planning has become so difficult, there will be significantly more price adjustments in the future.” The price wave is far from over.