The giant packer Noble Foodsā€”formed by the merger of Deans and Stonegateā€”will still be too small to take on the supermarkets over egg prices.
That is the central argument of the submission by the company to the Competition Commission which is probing the get together of the two biggest egg companies in the country.
The submission argues that the key question for the CC to decide is whether the new company will have the power over its customers to raise prices above competitive levels or to reduce service levels. It declares that it will not.
The idea that the merged companies, which will have a turnover in excess of Ā£400 million, will enjoy market power over the likes of Tescoā€”operating profits Ā£1,952 millionā€”is, says the submission, "counter-intuitive" and "also runs contrary to the experience of all those who have observed the inexorable growth in concentration and market power among the leading UK retailers over the last 15 years."
The proof of this, it says, is that pressure on the margins of the two companies has continued unabated since the merger in June.
"If buyer power had been materially diminished as a result of the merger one would expect to see fewer and smaller price reductions and greater ease for the merged entity in pushing through price increases," says the submission document. "That is not the case."
In addition the terms of trading between packer and supermarkets are loaded heavily in favour of the retailers, says the document.
The arrangements are rarely, if ever, in writing, they never give the supplier the right to adjust prices to meet increased costs, they are rarely for any fixed period and are frequently renegotiated or abandoned. If an order is reduced the cost of disposing of the surplus egg falls on the packer.
"The own-label egg supplier's dependence is illustrated by the crippling impact that a loss of significant business from a customer can have on the economics of its business," says the submission. "Unlike a manufactured goods producer it cannot simply turn off the tap. The hens must go on being fed and they will go on laying." Most likely the packer will have to off-load the surplus supplies at "fire-sale" prices and suffer substantial losses.
As an example the submission reveals the "painful experience" of one of the companies which was told by a major supermarket that, in days, it was to lose a major part of the retailer's business. The packer attempted to invoke the Supermarket Code of Practice which stipulates that a supplier should be given three months' notice in writing of such a move. Believing the supermarket would find it difficult to find alternative supplies it insisted that if the supermarket did not want to give proper notice it would lose its egg supply immediately. The supermarket decided to end the deal on the spot. As a result the packer had to divert large quantities of egg into the processing market. It suffered such substantial losses that it had no option but to return "cap in hand" and ask for a part of its business back. At no stage did the supermarket suffer any loss of supply.