The Competition and Markets Authority (CMA) has set out the latest findings and the next steps in its ongoing review of the groceries sector.
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.
The evidence collected by the CMA indicates that, over the past two 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.
The CMA found the the 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 two 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 – two firms holding around 85% of the market share – and brands have maintained high profit margins over the past two 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 said it will now undertake further work to better understand consumer behaviour 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.
In addition, the CMA plans to 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.
She added: “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.”
In response, Andrew Opie, Director of Food & Sustainability at the British Retail Consortium, said: “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.”
