Supermarkets gird for price war as inflation bites

After two bumper years of the pandemic, the €13 billion grocery retail sector seemed to be gliding back to relative normality at the beginning of 2022.

Shoppers had splurged €3 billion in the three months running up to Christmas 12 months ago. Sales were falling year-on-year as the hospitality sector reopened but were still up 11 per cent on pre-pandemic times.

Supermarkets’ premium private label offerings were flying off the shelves at record rates, as many customers treated themselves for the first family Christmas spent together in two years.

But the war in Ukraine set in train a large spike in inflation at the tills, throwing the sector out of shape all over again. The cost-of-living crisis has affected few other sectors as acutely as food retailing.

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The big news in the sector in January 2022 was the introduction of minimum unit pricing (MUP) for alcohol, which came into effect in the Republic on the 4th of the month. The new pricing rules, which were aimed at reducing problem drinking, forced supermarkets to quit using their traditional cheap booze offers to tempt customers.

Under the new MUP regulations, an average bottle of wine cannot be sold for less than €7.40, while a can of beer must be priced at a minimum of €1.70. Bottles of vodka or gin must be a minimum of €20.70, while whiskey has to be at least €22.09.

The big retailers were able to pocket the extra margin created by MUP, which was essentially a once in a lifetime industrywide price rise that immediately inflated bottom lines. There was little pay-off for the State in the form of extra taxes.

But by the summer the wisdom of the move was coming under scrutiny. Research published in the British Medical Journal, based on data gleaned from the introduction of MUP in Scotland in 2018, found it did not necessarily curb consumption among the heaviest and most vulnerable drinkers. There were large reductions in consumption among many heavy drinkers. Women, who generally drink less, cut consumption more than men, the data suggested. Meanwhile, men in deprived areas who were prime targets for the measure “had no decrease in consumption associated with MUP”.

The breakout of war in Europe the following month squeezed commodity markets and sent energy bills soaring, which was quickly reflected in higher prices on the shelves for processed foods made with energy-intensive production methods.

By the end of the year grocery price inflation was running at 14.7 per cent, data from Kantar showed. This added up to €1,000 to the average household’s annual grocery bill, which now stands at a record €8,071.

During the pandemic shoppers took fewer trips to the supermarket but they spent more on each visit. In the cost-of-living crisis, this trend has gone into reverse.

Kantar’s data shows private label sales up 9.6 per cent, while supermarkets’ value own label ranges are up by about 29 per cent. The research agency has predicted that December 2022 sales were heading for a record €1.25 billion, but inflation is driving much of this, with retailers’ profits expected to take a hit.

[ Shopping habits are shifting with inflation, supermarket data shows ]

[ Minimum prices for alcohol fail to curb intake by most vulnerable, study finds ]

The impact of the crisis is discernible in the respective market shares of the sector’s biggest players. Dunnes Stores has held the number one spot all year, apart from a brief period during the summer when it surrendered it to Tesco. Dunnes’s share stands at 23.3 per cent.

Tesco started 2022 behind SuperValu in the rankings but soon overtook it and since slowly pulled away. The British retailer recently issued a profit warning for Ireland and the UK, but is now the second-largest player here with 22.2 per cent of the market.

It also appointed a new chief executive for Ireland this year, Natasha Adams, a Kerry native who was the group’s human resources manager. Her first act upon her appointment in April was to sanction a chunky 6 per cent pay rise for staff in April, to be followed by a further 4 per cent in April 2023.

SuperValu was the number one player throughout most of the pandemic but the inflation crisis seems to have suited it least among the big chains. When it was top dog its share peaked at 22.2 per cent but it was down at 20.9 per cent in the latest Kantar rankings. The company’s fortunes this year were not helped by the decision of its former chief financial officer, Myles O’Grady, to quit after barely four months to return to his old employer, Bank of Ireland, where he is now chief executive.

The new price competition sparked by inflation has, however, played into the hands of the two German discounters, Aldi and Lidl. Aldi has risen from 11.6 per cent to 12.4 per cent, while Lidl has surged even more, from 11.8 to 12.8 per cent.

All of the big players have announced significant investments in their store networks for the year ahead. Meanwhile, Kantar’s data suggests 32 per cent of shoppers are now struggling to make ends meet, up from 23 per cent in March shortly after the war started. The year may be over but the price war caused by inflation has barely begun.