War in the supply chain - who bears the cost of price increases?

The ripple effect of supply shortages in the UK has the potential to become deflected in favour of consumers by retailers as suppliers seek to implement price increases to cater for increased input costs. The Grocer has recently reported delaying tactics being used by supermarkets to keep prices at current levels. More than that, the reports indicate a much more forensic approach to justifications for price increases meeting with a degree of outrage from suppliers.

Price wars in the supermarkets are part of everyday life. The typical basket cost has been the battleground for some time. However, supply chain pressures are at a level most in the sector will not have seen before and so fighting over market share with the traditional weaponry could prove a challenge to the retailers.

Pricing is a commercial agreement between supplier and customer and the Groceries Supply Code of Practice necessarily has to avoid interfering with the process. The Code provisions can be engaged where a retailer attempts to impose charges for wastage or shrinkage or payments as a condition of supply. Outraged suppliers in the current supply chain crunch may be wondering where in the Code they can look for solace.

It is perhaps unsurprising that some suppliers will feel uncomfortable that their cost bases are being unnecessarily scrutinised, particularly where it is seen as a delaying tactic by retailers. It is nothing new that suppliers are being caught between rising input prices and pressure on retail prices at the checkouts but the pain is particularly acute given current shortages. It may be that suppliers will be scrutinising the over-arching "fair dealing" principle of the Code if they feel they have nowhere to go. This principle states that:

"A Retailer must at all times deal with its Suppliers fairly and lawfully. Fair and lawful dealing will be understood as requiring the Retailer to conduct its trading relationships with Suppliers in good faith, without distinction between formal or informal arrangements, without duress and in recognition of the Suppliers’ need for certainty as regards the risks and costs of trading, particularly in relation to production, delivery and payment issues." 

What is striking about the report from the Grocer is the suggestion that this perfect storm may be putting power into the hands of suppliers to a greater extent than is usually the case. The fact is that if there are significant raw material shortages, the retailers may be faced with the choice of either bearing the price increases or having empty shelves. This is certainly the suggestion from 2 Sisters MD Ronald Kers. If this turns out to be the case, consumers are likely to shoulder some of the pain as retailers seek to protect profit margins. Efforts by retailers to put their suppliers to the task of justifying their input costs in the finest detail may only delay the inevitable hit to the ultimate consumers.