How small retailers can deal with big supermarkets

It can make even the toughest of entrepreneurs quail - but it's a must if you want to make the big time.

by Alicia Clegg
Last Updated: 09 Oct 2013

Psychological warfare, bullying and downright rudeness are just some of the indignities small businesses suffer to win shelf-space in the supermarkets. With treatment like that, you might wonder why entrepreneurs line up to arm-wrestle the retail giants. Someone I felt sure could answer this question was James Averdieck. As a co-founder of Gu, he piggybacked to stardom on the distribution networks of the multiples. On this occasion, however, the chocolate pud king had no time to talk, not even to MT. He was recovering from the shock of selling Gu, for a figure thought to be in the region of £35m.

According to data from Kantar Worldpanel's Supermarket Share, Britain's biggest chains - Tesco, Sainsbury, Asda and Morrisons - control more than 75% of grocery sales. The reality for an independent brand, therefore, is that if you want to attract investors, achieve runaway sales with consumers and ultimately 'do a Gu' by selling out for a spectacular sum, you really have to crack the supermarkets.

There are, of course, refusniks. Edward Perry built up frozen-meals manufacturer Cook to a £20m turnover by opening stores and supplying farm shops and independents. But Perry admits that Cook, which he co-founded in 1996, might have grown faster and made profits more quickly if he'd used the national networks of the multiples to reach consumers. 'It's as much a personal as a commercial choice,' he says of his decision to do things his own way.

It is not only their unrivalled reach that makes the majors a magnet for entrepreneurs impatient to hit the big time. Craig Sams, co-founder of Green & Black's organic chocolate (now part of Cadbury), sees supermarkets as the perfect perch for niche brands. 'When you advertise, you pay per eye-blink to reach a hell of a lot of people who couldn't care less about your product. At least with an on-shelf promotion, you know the offer is falling on appreciative eyes.'

So, if you are keen to strut your stuff in the supermarkets but wary of adding to the pile-up of retail road-kill left splattered in the wake of their juggernauts, what should you do?

The good news is that supermarkets rely on new products to keep shoppers interested in their stores. But to get a foot in the door requires persistence. When they first wanted to approach Sainsbury, Praveen Vijh and Preet Grewal, co-founders of snack-bar brand Eat Natural, thought they could just call the buyer. After weeks of leaving messages, they put their phones onto auto-dial until, one day, he replied. 'It may take weeks or it may take months,' says Vijh, 'but the one thing you have to do is to get through to them.'

The next hurdle is to convince the buyer that of the myriad brands they could stock, yours is the absolute must-have. This is where small businesses often fall down, says Graham Cassie, head of local and regional sourcing for Waitrose. For a new brand to be listed, he points out, someone else's has to drop off the shelf. In other words, a pitch is a gladiatorial slugfest in which either you or an opponent bites the dust.

'Ask yourself what your product is bringing to the range for the customer,' adds Cassie. 'What products does the range already carry and how does your product do a better job?'

If you still can't get a look-in, try direct action. When the supermarkets turned down Jamaica-born Wilfred Emmanuel-Jones's Black Farmer brand, he took his sausages to the people and asked punters at food festivals to petition supermarkets to stock it. 'The only thing supermarkets fear is consumers,' says Emmanuel-Jones, who is standing as a Conservative parliamentary candidate at the general election on a pledge to champion the interests of small producers. 'Consumers are your infantry.'

Once in the aisles, you'll naturally want to stay there, which means hitting sales targets. 'But don't expect your product to sell itself,' warns Sams. 'You have to drive people to the store.'

As a cash-strapped start-up, Paul Lindley's kids' food brand Ella's Kitchen faced the challenge of selling enough to survive a 12-week trial in Sainsbury. An innovative deal with cable TV channel Nickelodeon solved the problem: in return for a slice of revenues, it agreed to advertise his brand on children's TV.

Having robust systems is also important, as supermarkets gear their processes to the logistics of major manufacturers, such as Unilever, and expect small fry to fit in. An example is timed delivery slots, which suppliers are expected to hit punctually, whether they have one lorry or a fleet. Those that miss their slot might be turned back at the gate. So make sure you are in the right place, advises Adam Pritchard, founder of pomegranate juice brand Pomegreat. 'The moment you start missing deliveries, your listing is under threat.'

The biggest headache for small brands up against retail goliaths is, of course, price negotiation. But the idea that a small supplier cannot defend its profitability is wrong.

Eat Natural's Vijh and Grewal make the point with an anecdote. Some years ago, a bullish buyer handed them a pencil and a sharpener and warned that unless they 'sharpened' their offer, they would be out on the street. Having already estimated what margin the buyer made from their competitors, they dropped their price - but only by as much as was needed to hold on to the business. 'It ended with him doubling his business with us,' recalls Vijh. Had they not done their homework, they might have given away margin unnecessarily.

The new groceries supply code of practice, which came into force in February, lifts the lid on dodges that some retailers have, apparently, been getting up to. These include tricks such as demanding discounts after goods have been supplied, billing for stock stolen from store premises and browbeating suppliers into picking up the tab for promotions such as two-for-one deals.

Will the world change? The code, which the main political parties have pledged to strengthen by appointing an ombudsman, may curb the worst abuses of retail muscle. But if comments by Malcolm Walker, chief executive of Iceland Foods, are anything to go by, it will take more than regulation to turn retail hawks into doves. In an interview with the Daily Telegraph, Walker announced that Iceland Foods would do 'the bare minimum' to comply with the code, and described it as a fact of life that 'big suppliers bully small retailers and big retailers bully small suppliers'. Such opinions reflect the realpolitik of retail power.

Having safeguards to fall back on if things turn nasty may sound comforting, but to build business with a chain, you need to build a relationship. This means knowing which levers to pull in negotiation and when to hit the brakes - rather than quoting from the rulebook. 'The buyer's job is to push as hard as they can,' says Lindley at Ella's Kitchen. 'Only you know what you cannot afford.'

Lorraine Brehme, co-founder of Clipper Teas, agrees that standing up to retailers is easier if you know your price and have the guts to stick to it. Operating on this principle enabled her and her ex-husband to exit Clipper in style two years ago, having grown turnover to more than £15m. 'If you know you cannot afford to sacrifice another penny, don't give in.'

After all, if your brand is selling well, it's not in the buyer's interest to squeeze you so hard that you stop developing products or go out of business. Nor, for that matter, is a buyer likely to de-list a popular brand that other supermarkets stock - whatever they may threaten.

Another hazard to watch out for is the supermarket that launches own-label copies after the idea you sweated over has proved that there is a market. In the absence of patenting, the best defence is to get consumers on your side.

Emmanuel-Jones uses controversy as body armour. Being personally identified as the 'black farmer', he says, protects his brand against copycats, and guarantees that people talk about it. For Clipper, investing in striking packaging made its teas and coffees stand out and encouraged customers to stay loyal.

Could wining and dining your buyer cut you some slack? Think again. Buyers are ruled by sales targets, profit contribution and their bosses. 'If you want friends,' says Vijh, 'go to the pub.'

Nevertheless, the better you get on with a buyer, the more likely he or she is to put some muscle behind your brand. 'If you do find someone who is open to your product and the ethos behind it,' says Brehme, 'they will work with you.'

Don't, however, assume the love affair is for ever. Few supermarkets keep buyers in one job for more than a year or two (Waitrose is an exception). And, when the replacement takes over, be ready for fireworks, warns a cynical Emmanuel-Jones. 'The new guy is out to be better than the last, and what "better" means to them is to screw more margin from you.'

Of course, if your buyer won't give you a look-in or de-lists your brand, you may be only too happy that their shelf-life is short.

HOW TO NEGOTIATE WITH THE MULTIPLES

- Don't get locked in.

Offering a supermarket a limited period of exclusivity can get your product launched. But don't become so dependent on one store that you can't afford to walk away.

If a buyer realises how much power they have, they may use it.

- Mug up on the competition.

If you know your competitors' costs and what margin the supermarket is making from them, you can estimate what your buyer is likely to accept.

- Mobilise consumers.

Use memorable branding, packaging, PR and advertising to publicise your brand. The more shoppers ask for you, the more power you have to negotiate.

- Don't give anything away without getting something back. If you reduce your margin on one term, make it up on another - eg, shorter payment days.

- Find creative compromises.

The buyer's goal is to sell more and achieve profit targets, not to bankrupt you. If you cannot afford what the store wants for a promotion, suggest an alternative such as contributing more if you sell above an agreed threshold.

- Don't sell yourself short just to do a deal.

If you go out of business, everyone loses.

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