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Sunday, 18 January 2015

UK retailers are crippling suppliers

UK food and drink retailers now face a perfect storm from the price wars raging among the big four grocers and with the surging discounter arrivistes like Lidl, Aldi and Poundland but it is their supply chain partners, and to a lesser extent their 3PLs (third party logistics providers) who face a hellish consequence from the squeeze imposed on them by the big four that account for over 75% of Britain's grocery market. It seems that over 100 food and drink producers are at risk of collapse over this price war and new research shows that the number of UK food manufacturers in "significant" risk soared by 92% to 1,410 businesses in the final quarter of last year. According to recent research, more than 100 of these companies will collapse into administration unless supermarkets treat their suppliers more fairly and trading improves. Neither is likely any time soon.

There have been retail "price wars" before but not of the kind now facing the industry, and certainly not on the same scale, brought on by years of declining consumer real incomes, a paradigm shift in shoppers' habits and the IT revolution that now allows shoppers to buy online the same product in different countries at the best price, so threatening the traditional bricks and mortar model of retailing. Price is now king, and the new heroes are the online facilitators and the discounters giving permanently low prices across all their SKUs, thanks to their business model that the big four cannot yet emulate without going through unprecedented, painful downsizing.

Even before the latest price wars broke out the big four had been squeezing their suppliers for years by using up to 60 different ploys, most notably extending payment periods from 30 days to three months and the ever-present threat of delisting if suppliers refused to come to heel. This attitude has cascaded all the way down the supply chain to the smallest suppliers. Given the most intense pressures yet on the supermarkets they are hardly likely to soften their attitudes to suppliers and that includes the 3PLs who themselves are struggling in difficult markets, even if the majority have five-year contracts with the big retailers. Woe betide them when their contracts come up for renewal.

It is difficult to see through the battle smoke how all the players will react to what seems like a permanent sea-change in shopper's habits. What seems in little doubt, however, is that the big supermarkets will have to cease being all things to all buyers by selling the widest range of goods possible, typically 40,000 SKUs in a large superstore. This is their Achilles' heel when dealing with the nimbler discounters whose stock lines would be less than 1,600 and nearly all popular, fast movers, a key requisite for minimising the most costly of warehouse functions -- huge inventory holding costs.

What must now seem reasonably clear, however, is that the big supermarkets will slash their stock lines to ease their cash flow problems and that means many suppliers facing widespread product delisting and charges for those who are lucky enough to see their products remain displayed on shelves. If the number of food retailers in significant distress, up 58% year-on-year, according to one report, to 4,552 in the final quarter of 2014 is bad enough the picture is even worse for the troubled food and beverage makers who saw a 92% rise. In desperation, the larger manufacturers are easing their plight by shifting the burden onto their smaller suppliers, as Heinz, the baked bean maker, has reportedly done by extending the term suppliers must wait for repayment from 45 days to 97 days. The climate in the milk industry is even direr, which over the last 10 years has seen the number of dairy farmers halve to under 10,000, though this industry's problems have more to do with supply and demand issues rather than retail wars. Yet more trouble is brewing in the poultry business, Britain's biggest selling meat, where price cutting threatens a profit collapse.

The extent of the problem, both political and economic, is potentially huge, given the 3.6 million people employed in UK food supply chains alone but there is much more potential pain on the horizon for traditional retailers and even online sellers like Amazon, Ebay and Alibaba, and it will come from further cyberspace innovations. The traditional retailers who want to survive the coming tsunami from the ether will have to offer an online service and be flexible with their pricing strategy and delivery times.

A good example of a potential game-changer is a new American online start-up called Jet.com, founded my Marc Lore, a veteran of website shopping and former employee of Amazon. He wants to re-invent the wholesale shopping club for customers who will find just about everything they need in return for an annual fee of US$49.99 after a 90-day free trial period. Lore claims that Jet's prices will be 10-15% lower than anywhere else online partly because, unlike other online competitors, there is no money being made on the transaction. All income derives from the annual fee. Shoppers will also be able to extract more savings if they are prepared to let Jet discover how to deliver goods as economically as possible. Prices, for example, can drop if a shopper combines multiple orders with a single shipment or is willing to wait for a seller offering a more economical shipping option.

Birth and progress are rarely painless and never entirely beautiful. The problem for politicians will be to manage the inevitable upheavals that will affect so many in retailing as sensibly as possible but it could well prove beyond their capabilities.
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