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New Research Finds Supermarkets’ Business Model is on the Knife Edge

A new report from the Food Research Collaboration, based on analysis by Professor Lisa Jack from the University of Portsmouth, shows that the supermarkets’ business model is surprisingly fragile.

According to the report, a look at the research from the past 60 years suggests that the classic supermarket model of cheap prices doesn’t really work. Professor Jack’s investigation finds that the business model of supermarkets is on a knife edge: tiny and heavily protected profit margins applied to large volumes of goods keep the system running. Consumers benefit from a near endless array of cheap food, but the system is left in a balancing act that could easily go awry.

The new report, The Secrets of Supermarketing: A Model Balanced on a Knife Edge, by Professor Lisa Jack from the University of Portsmouth’s Faculty of Business and Law, finds that adding scale actually adds to supermarkets’ expenses. In other words, supermarkets face the costs of running their businesses (stock, premises, IT systems, staff, enticing displays, sophisticated logistics), but need to keep prices down to remain attractive to consumers and keep them coming through the door. The supermarkets therefore keep prices low by enticing customers to buy additional items and by looking to their suppliers to keep costs down. Bargaining power is the one real advantage that size and scale give the supermarkets, but it risks putting financial and emotional burdens onto their suppliers.

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Lisa Jack

Professor Jack, one of the few accountancy academics to focus on the food system, finds that one way supermarkets keep costs low is by charging suppliers fees for marketing and selling their products, generating commercial income which can equal or exceed supermarkets’ bottom line profits. Without the commercial income generated by charging supplier fees, British supermarkets would be running at or near a loss.

This supermarket model of low prices, wide choice, expert marketing, and slim margins, although finely balanced and expertly run at the supermarket end, risks unbalancing the rest of the food system. The supermarkets’ business model has unintentionally left us with a food system characterized by over-purchasing, over-eating, over-production, and waste, according to Jack. Food is transferred to store cupboards in consumers’ homes and then left unused; empty calories are stored in our bodies; and edible food goes into bins.

“Supermarkets have been fantastically successful by selling what are called ‘bundles of convenience’ to shoppers—low prices, convenience, and even entertainment,” Professor Jack said. “The purpose of my research is not to bash the supermarkets. But it does raise important questions about how such a finely balanced model can make the big changes that may be necessary—and are often demanded by campaigners—to achieve a more sustainable food system.”

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