UK: Food wars - competition in the supermarket sector. (5 of 5)

UK: Food wars - competition in the supermarket sector. (5 of 5) - "If you want their business, you have to do business on their terms." So says a frozen food maker, summing up the frustration of the thousands of suppliers who count on the big supermarket

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Last Updated: 31 Aug 2010

"If you want their business, you have to do business on their terms." So says a frozen food maker, summing up the frustration of the thousands of suppliers who count on the big supermarkets for their own survival. Suppliers will tell you that generally the supermarkets are reasonable. If a food retailer likes your product it will "screw you down on price", but not to the extent of putting you out of business.

Nonetheless, many have serious concerns about the state of the industry. The lack of protection here for smaller businesses, compared with in the US, France and Germany, which all have strict laws on abuse of purchasing power, is bemoaned. It is suggested that the price discounts and promotional spending demanded by big retailers here are not always justified by the supplier's cost savings on large volumes. This means that the wholesale price is raised for all. "The amount we spend on discounts and promotions just doesn't recoup itself," says one packaged food maker. "It comes out of the profits for the group." The high cost of getting new products on the shelf is also claimed to be making smaller food manufacturers less viable.

The focus of attention is the "package" that suppliers say supermarkets seek before a product is accepted. This could include a once off "listing allowance" paid direct to the store, ranging from £100 to £5,000. It might also include a short-term discount on the retail price of 5 to 10% paid wholly or partly by the supplier. A "shelf barker" ticket to catch the customer's attention might be another £250 to £500. And then a one-page ad in the store's in-house magazine for shoppers could run from £2,000 to £15,000 plus. Note that these practices vary widely across retailers and are not true for all.

Suppliers do not object to the promotions. They simply feel that they have no power to negotiate the terms. An outsider might also question just what retailers are selling - food or shelf space?

Sainsbury joint managing director Tom Vyner dismisses this interpretation as nonsense. "This debate on ad allowances and shelving space is of no relevance to the average retailer," he says. "They simply want the best price." He suggests that it is the supplier that chooses to draw on its different budgets, such as advertising, to try to sell a product.

"Overriders" are another bone of contention. Traditionally many suppliers pay back to the large retailers a certain cut of their own takings at year end. In some cases this is paid only if the retailer surpasses sales targets. In others it is automatic, in return for loyalty to a product. Suppliers dislike the procedure intensely, particularly as they suspect that the retailers try to set volume targets lower than expected sales. Says one commodity supplier: "If you operate on a 2% or 3% margin and 75% of your business is with the big retailers, the overrider makes a big difference. One cock-up and you've had it."

Retailers' "own label" products too have proved a tricky matter. Unavoidably, there is an insinuated threat when a supplier already on the shelf is asked to make a retailer's own label. "If they are selling your brand then they have you hooked, because they say 'You give us own label or we'll go to Joe Bloggs down the street'," says one health food maker. Smaller suppliers which take the own label contract may then find that their own company brand name loses shelf space and authority. "And then if the retailer drops you, you have nothing left." In practice most own label suppliers are retained long term, and, despite the lower margins, the extra volume does help suppliers. But the concerns remain.

Another problem is that it can cost over £3 million to promote a new product - and yet it is now accepted wisdom that within nine months or a year the product will be overtaken by stores' own-label "imitations". Many companies cannot survive alone in the face of such statistics and end up falling in the arms of the supermarkets or large food companies.

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