Real Good Food Company's (RGD) sugar distribution subsidiary, Napier Brown, has become embroiled in a pricing dispute with British Sugar which has knocked trading and is likely to lead to a small pre-tax loss this year. The news caused the shares to plummet 26 per cent, although they have since clawed back some lost ground, rising 9 per cent on Monday to 51p.
The disagreement saw British Sugar withhold sugar supplies from Napier until it acquiesced and agreed to pay the imposed price, as it was under pressure to maintain supply to its own customers. Napier Brown then lodged a complaint with the Office of Fair Trading (OFT), alleging that British Sugar, which owns the entire UK sugar beet crop, had abused its dominant market position by forcing Napier to pay an anti-competitive price for sugar. Napier claims this is preventing it from competing commercially, putting short-term financial pressure on the company and is ultimately threatening its existence in the market.
Pieter Totté, chief executive of Real Good Food Company, said: "Given the progress elsewhere within the group, it's disappointing that we find ourselves in the position where a major supplier is, in our view, abusing its dominant market position. If British Sugar is allowed to impose a price on Napier Brown, its largest customer and the UK's largest reseller of sugar, without any reference to market pricing, the consequent impact on UK customers and consumers would be significant."
Napier sources sugar from the UK, mainland Europe and all around the world, for customers in the UK. But because of the way the EU sugar quota system works, Napier Brown is in the odd situation of being British Sugar's largest customer, but also its biggest rival.
The complaint has been referred to the new Competition and Markets Authority and, if successful, it could result in a significant fine for British Sugar. But a resolution is unlikely to be reached any time soon.
The news comes as the EU and world sugar prices have experienced sharp declines. Associated British Foods (ABF), the parent company of British Sugar, warned on Monday that revenue and profit from sugar in the first half of the year would be substantially lower due to falling prices, putting pressure on revenue and margins.
Napier Brown says it is confident in its case and claims it has evidence that British Sugar is in breach of commitments it made to the EU Competition Authorities in 1988 after it was fined for abusing its dominant position. Napier also claims that British Sugar is in breach of an agreement reached between the two companies dating from 1990 on how selling prices are arrived at.
"We play an important role in the UK's sugar industry, bringing competition to a market where there is a monopoly supplier of beet sugar," a spokesman said. "We have operated in this market for the past 25 years on the basis of the EU Commission findings of 1988. As British Sugar's market share has if anything strengthened since, there is no reason why the 1988 commitments should not remain in force.We will fiercely resist any pricing behaviour designed to force us out of the market."
A spokesman for British Sugar said: "The matter was recently considered by the relevant regulator, the OFT which has undertaken a preliminary high level assessment, listened to the respective parties and in February took a decision not to open an investigation. We understand that the OFT will make the CMA aware of the complaint and its decision not to investigate. British Sugar is confident that were the CMA or any other regulator to look at this matter it would find that British Sugar has acted appropriately."
The short-term impact on Napier Brown and Garrett Ingredients' results will be significant this financial year. Broker Shore Capital has therefore cut group operating profit forecasts by 89 per cent to £900,000.
