Europe's retail suppliers face pricing pinch

By Gavin Haycock

LONDON (Reuters) - If suppliers to Europe's retailers think they are already feeling the pinch, the future promises to get even tighter.

"There is no doubt that pressure on suppliers to cut their costs, improve their quality and do all the other things that retailers want them to do will grow," said Kevin Hawkins, Director General of the British Retail Consortium.

Hawkins, speaking at the Reuters Consumer and Retail Summit in London, paints a pretty bleak picture when it comes to assessing the state of the UK retail market.

He highlights ongoing margin pressures due to intense competition, higher minimum wages, soaring energy prices, rising commercial rents, price deflation, the prospect of rising interest rates and relatively subdued consumer spending.

Such pressures mean retailers will increasingly look to suppliers as a route to cutting costs, particularly in the UK and Europe where input costs are higher than in Asia.

"More and more of what retailers are selling is coming in now from low-cost suppliers in the Far East, particularly China," said Hawkins. "That is not just textiles but a whole range of manufactured consumer products. More of that will come through in the future because China's competitive advantages are growing exponentially."

Tesco Plc's (TSCO.L: Quote, Profile, Research, Stock Buzz) Finance Director and Strategy Director Andrew Higginson agreed.

"The only way we can become more efficient is to have all of our business -- and that includes our suppliers and the whole supply chain -- really looking for ways all the time of trying to improve and get more efficient ... Those benefits do get passed on to the customer," he told Reuters at the summit.

COMPETITION IN THE SPOTLIGHT

The behavior of Britain's grocery retailers toward suppliers in a market worth 95 billion pounds ($175 billion) is one of three areas currently being studied by the Competition Commission.

On May 9, the Office of Fair Trading referred the UK's groceries market, dominated by Tesco, Asda, (WMT.N: Quote, Profile, Research, Stock Buzz), J Sainsbury Plc (SBRY.L: Quote, Profile, Research, Stock Buzz) and Wm Morrison Supermarkets Plc (MRW.L: Quote, Profile, Research, Stock Buzz) to the Commission.

The Commission's Chief Executive Martin Stanley told Reuters at the summit that the findings would probably be published within 18 months, though initial views should be out by the end of the year.

"Our job is simply to stop things that will be damaging to competition and allow things that are not damaging to competition," Stanley said.

Tesco, Britain's biggest foodseller, has often found itself on the receiving end of unfavorable comment about the way it deals with suppliers.

Higginson said such views needed to take account of the pressures of operating in a low-margin business in a competitive market enduring price deflation of 1-2 percent a year.  Continued...