UK watchdog accuses food brands of increasing prices by more than costs

The UK’s competition watchdog has accused manufacturers of branded products of contributing to food price inflation by pushing up their prices by more than their costs.

The Competition and Markets Authority said on Wednesday that its inquiry into the food and groceries sector, launched in July, found that record food inflation had been driven largely by rising input costs.

But it added that about three-quarters of branded goods makers, notably baby formula manufacturers, had increased their profitability and contributed to higher food price growth.

The infant formula industry is dominated by consumer goods groups Danone and Nestlé, which hold roughly 71 per cent and 14 per cent of market share respectively in the UK. The CMA said it would “examine further” whether parents were paying too much for infant formula as a result of weak competition.

Price growth of food and non-alcoholic beverages hit a 45-year high of 19.2 per cent in March this year, according to the Office for National Statistics. Wholesale food prices soared in the summer of 2022 following Russia’s full-scale invasion of Ukraine, hitting the poorest households hardest.

ONS and other measures show grocery inflation has since slowed, with research company Kantar registering 9.7 per cent in the four weeks to October 29.

Sarah Cardell, CMA chief executive, said food price inflation had “put a huge strain on household budgets, so it is vital competition issues aren’t adding to the problem”.

The watchdog opened its inquiry into attempts by grocery retailers to build back their profit margins as inflation fell after it detected signs of profiteering during a probe.

The CMA did not accuse any manufacturers by name but in its report it said “the most successful branded products” like Heinz Beanz, Unilever’s Hellmann’s mayonnaise and Nestlé’s Felix cat food were “must-stock” items for retailers, and that consumers might shop elsewhere if they are consistently unavailable — giving manufacturers “pricing power” over retailers.

The inquiry came after chancellor Jeremy Hunt said he would scrutinise profits in the food industry supply chain to try to help households.

The review, which examined 10 different branded products — including infant formula, baked beans, mayonnaise and pet food — concluded that competition was not under threat as consumers could for the most part find cheaper alternatives, reducing the impact on food price inflation.

Except in the case of baby formula, the CMA found that consumers had often traded down from branded goods to supermarket own-label products, or reduced consumption entirely. This had led to a decline in the market share of large branded food manufacturers, it said.

Private-label products have been gaining share from branded goods as consumers have been looking to offset rising living costs.

Discount supermarkets meanwhile have grown sales faster than traditional retailers, with Lidl and Aldi registering annual sales growth of 14.7 per cent and 13.2 per cent, respectively, compared with a sector average of 7.9 per cent, according to Kantar.

Infant formula prices have risen 25 per cent over the past two years, and brands have maintained high profit margins in that time because parents do not have many options to trade down.

Cardell said the regulator was “concerned that parents may not always have the right information to make informed choices and that suppliers may not have strong incentives to offer infant formula at competitive prices”.

Families could save more than £500 over the first year of a baby’s life by buying cheaper infant formula, the CMA added.

A new review, to begin in January next year, will examine loyalty schemes, which grant holders of a supermarket club card access to lower prices.

Nestlé said it welcomed the review and was open to “all constructive dialogue”, adding that it had only raised prices as a last resort.

“Our goal has always been to keep products affordable and accessible for parents while still paying fair prices to our suppliers, including farmers. There have been significant increases in costs but we have been working to cut our costs wherever possible and only increase prices as a last resort.”

A spokesperson for Danone UK & Ireland said the company had launched larger formats to help parents and that it currently offered the best value milk pack on the market.
 
“In Danone’s experience the formula milk market is competitive. We are committed to best practices to maintain this and will work constructively on ways we can continue to deliver value and innovation to parents,” they said.