Makers of branded products in key categories have in most cases put up their prices by more than their input costs during the past two years, according to the competition watchdog, thus contributing to spiralling food prices.

Releasing findings from the latest phase in its review of the groceries sector, the Competition & Markets Authority (CMA) found that high inflation has been driven largely by rising input costs, particularly for energy and key agricultural inputs like fertiliser. However, the evidence collected also indicates that 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.

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Leading branded manufacturers further indicated that they aim to use future reductions in input costs to offer customers more promotions, rather than cut standard prices.

According to the Office for National Statistics (ONS), annual food price inflation fell to 10.1% in October from 12.2% in September. It marked the 16th consecutive month of double-digit percentage increases, with prices approximately 30% higher in than in October 2021.

The CMA said overall profit margins have fallen across most branded manufacturers since 2021, mainly because of a fall in sales volumes as consumers have switched to cheaper own-label alternatives.

In all but one of the 10 product categories where the CMA conducted a deeper examination, consumers have either reduced their consumption or switched away to own-label alternatives. The exception was baby formula, where prices in the UK have increased by 25% during 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. In addition, the watchdog noted that the market is highly concentrated with two firms commanding an 85% share of sales. 

With limited availability of own-brand alternatives, the CMA found limited evidence of parents switching to cheaper options. This has allowed the brands to maintain high profit margins during the past two years.

According to market share figures, Danone, which makes the Cow & Gate and Aptamil brands, has a 71% share of the UK baby formula market. Nestlé, which owns SMA and Little Steps, has a 14% share.

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The CMA is launching a further investigation into the baby formula market, and will report its findings next year.

“Food price inflation has put huge strain on household budgets, so it is vital competition issues aren't adding to the problem," CMA chief executive Sarah Cardell said. "While in most cases the leading brands have raised prices more than their own cost increases, own label products are generally providing cheaper alternatives.

“The picture is different when it comes to baby formula, with little evidence that people are switching to cheaper products and limited own label alternatives. We’re 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."

The watchdog is also set to launch an examination of the use of loyalty card schemes in supermarket pricing, which is due to get underway early next year.

“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," Ms Cardell said. "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.”

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