An almost impossible equilibrium

The distribution sector is probably one of the most competitive owing to 1) the large number of highly qualified companies, 2) the competition of players who sell exclusively in the online universe and also in the world of food distribution and 3) low sales margins.

This week, a report by the ratings agency Moody’shighlighted that the impact on the price decrease unleashed by a food distribution company triggered a fall in prices in other distribution companies with the resultant impact on the income statement. Whilst it is true that for the customer falling prices are more than welcome, and all distributors always work toward this end, it is also true that unsustainable competition would lead to some competitors pulling out of the market; leading to less competition and, make no mistake; the dominant operators would end up raising prices.

This situation has even led some food distributors to raise this issue publicly—whether this model is sustainable in the medium or long term. And it has gone even further, suggesting that some competitors were selling at a loss. Without this point being discussed here, what must be considered are its consequences and the reason why price readjustments cause this situation in the food distribution sector and not in others. The answer is simple, the margins.

Lately large conglomerates have enjoyed high earnings, making it clear that the margins they work with are not the same. Mondelez, with 26 billion euros in sales, has turned a profit of 2.338 billion euros, or Unilever with 53.700 billion in sales has exceeded 6 billion in profits. In the case of Coca Cola European Partners, profits total 688 million euros with sales exceeding 11 billion euros, or Nestlé with more than 6.2 billion in profits and sales of 77.7 billion euros.

Another industry whose income statements are not released to the media or for public scrutiny, also plays a large part of the country’s industrial food sector. We’re talking about the myriad number of SMEs (99.5% of the food industry in Spain) that compete with these large multinationals.

Both industries impact the raw materials market in different ways.

It is positive for society as a whole for businesses in the agri-food chain to be sustainable in the long term; the wealth this generates is not in question, but we need to be aware of the narrow margin the food distribution sector works with, which is always in theory blamed for all evils. Either because it does not innovate, or because it raises prices or because it supposedly lowers them, it always squeezes industry. That same industry with margins no distributor can even hope to achieve. (more information: notice 1 and notice 2), because the business distribution is based on the rotation of low unit value products and ultimately it is the sale of the product and the choice of the consumer who will decide if your business will be sustainable.