The 5p Loss Leader

So today I see Morrisons advertise vegetables for the Christmas dinner at 5p providing you use the loyalty card. There has already been outrage by farmers over the pricing of vegetables at 8p. Whilst I understand the outrage of undervaluing produce, and believe that a race to the bottom on price is a bad thing for all, I do wonder if their outrage at this loss-leader is misplaced?

The low price of vegetables by supermarkets at Christmas is a marketing tool call loss leading. That is, a pricing strategy where a product is sold at a price below it's production costs to attract customers and stimulate sales of more profitable goods or services. 

This does not just apply to supermarkets and has been a strategy used by many firms, some of which farmers will have benefitted from:

Mitsubishi commercial vehicles used to be sold in the UK as a loss leader because the servicing and parts supply was highly profitable and outweighed the loss. By creating a viable and profitable market share they ensured future profit on an item that would last many years. In addition profit was made on the finance by Mitsubishi finance Company.

Nearly every large manufacturer of agricultural vehicles and machinery has in the past sold their machines, or at least certain machines at marginal profits in the UK to ensure market share, and future profit from finance, leases, parts and servicing.

Even financial services have been sold on loss leading basis. It's hard to believe today, but when I first worked for Barclays Bank in 1986 free personal banking was not the norm, but a staff perk. This rapidly changed and today a personal Bank account is free typically incurring a loss of a few hundred pounds unless other services are used. It is a loss leader. In banking as most businesses had to pay transaction charges many farming businesses negotiated and enjoyed free banking because of the profit made elsewhere in services by their Bank, usually large borrowings but also large deposits in some cases. They also enjoyed overdraft borrowing at rates far below that of other commercial businesses.But this changed most notably around 2008 as "cost of funds" reduced the turn that could be made on money, that is, in simple terms, the cost at which a Bank borrows money compared to the cost of lending it, or from a simplified consumer point of view the difference between deposits and borrowing. 

At the same time was a growth in farm diversification and farmers increased their transactional activity with holiday lets, farm shops and many other ingenious activity. The expectation was that they could enjoy free business accounts and preferential rates. Now it used to be the case that Banking, like farming, took a long term approach over many many years,but that era had passed as more competition arrived in the market.  So I found myself telling multi-generational customers in some cases that if they were being offered cheaper elsewhere, often at a loss or marginal profit to that institution I could not compete and that other Bank was welcome to make a loss out of them. Now changing Bank is a hassle and a cost for any business, but many can withstand this cost every three to five years if they wish. But does such a market place and approach benefit in the long term?

But now I return to the 5p vegetables and perhaps we should look at all the above three examples and consider them today:

Whilst the reasons may be several Mitsubishi stopped selling commercial vehicles in the UK in 2021. 

Dealerships for all the most popular Agricultural Machinery brands in 2025 are both larger in size and smaller in number reducing choice throughout much of the UK. Anecdotally the number of engineers servicing the industry is being reduced by successful entry to the industry being lower than the numbers leaving. 

Banking has lost branches and people. It is very hard to get to speak to a person and you often have to travel for more complex face to face transactions. Few businesses now enjoy the benefit  of a named contact or bank manager that understands there business.

Here we see that a race to the bottom on price has not served us well. As for supermarket vegetables it could be argued that this does not affect farmers as supermarkets take the hit of loss leaders.  However, if you really believe that you should look at  dairy farming.

For decades milk has been used as a low price essential to get customers through the shop door. Now all farms, dairy, livestock or arable, require long term decisions and investments. This is not unique, for example a new Commercial Vehicles together with it's engine and technology typically has a 10 to 15 year lead in period. But it does illustrate the need for a degree of market stability. A race to the bottom on pricing does not do this and can create supply chain issues let alone discourage investment. 

Milk - the traditional loss leader has seen a reduction in farm numbers, increased farming size and lack of viability for many farms as supermarkets sought not to absorb low price, but provide contracts that favour largeness. The farmer loses out, as does the environment managed by his dairy herd. You also end up with surplus low quality calves. Producers seek to drive down calf rearing costs and thus the process of low price escalates.  I have seen many quality calf rearers exit due to unviable contracts. The ability for lower quality practices and people to take their place driven by price reduction is great. I leave it for others to comment on this as many in the rural environment will be aware of this.

So we see milk production made less diverse with fewer larger units. Common sense can tell you that such a position threatens food security and that most overlooked element, security of future bloodstock. The bizarre thing about the use of milk as a loss leader is that we now have a situation that when you ask the consumer how much they paid for milk as they leave the supermarket most people simply do not know without looking it up!

As for veg, enjoy tucking into your 5p parsnips if you wish, but don't complain in future years if you pay more for them to be imported.