Wednesday, 23 September 2015

More woe for British food retail suppliers?

The tribulations of the food and drinks suppliers seem only to be getting worse at the hands of their large retail taskmasters. Not content with extending payments to quarterly intervals, or worse, the world's biggest food retailer, Walmart (sales $486 billion p.a.) now proposes to charge its suppliers for storing goods in its own warehouses and shelf space in new shops. For some years, of course, other food retailers have levied multiple charges like rental for favourable shop shelf positions but Walmart has been reluctant to be so proactive. However, for added chutzpah, to help suppliers adjust to prolonged payment schedules, Walmart is encouraging them to seek low-interest loans through one of its financing programmes.Understandably, many of its 10,000 suppliers are discommoded, with some reaching for their lawyers, and one wonders how long it may be before Walmart's British subsidiary, ASDA, one of the four dominant UK grocers, will follow suit.

Some see Walmart's move as an attempt to fatten its margins and offset raises it recently gave store workers but Walmart says its new fees are part of a strategy to revive its US business through moves like keeping its often chilly stores warmer.

This strategy of business revival may have disturbing implications for all of Britain's grocery retail suppliers because the big four grocers are struggling to stem market share losses to the smaller, largely foreign-owned, retailers who offer so much better value, based on their business model that gives them logistics advantages the big retailers cannot enjoy with their current business models.

These no-frills, low-cost, recent UK start-up retailers like Aldi, Netto and Lidl have one enormous logistics advantage over the giants. Their small, fast-moving SKU range of typically 1,600 products, means that no vast sums of money are tied up in huge stocks for long periods, a cost that can dwarf all other warehouse costs combined. Some 25 years ago I visited the Danish food discounter, Netto, where just one centralised distribution centre (DC) replenished all of its 120 EPOS-connected shops overnight so that 90% of the DC's stocks passed through it every 24 hours. SKUs that became slow movers were quickly replaced for new, hoped-for fast movers.

However much Walmart may argue that driving everyday low cost gets to everyday low price increases sales for them and suppliers, the inescapable fact remains that without a fundamental change in their business model to meet the new paradigm shift in shoppers' habits, where good value is paramount, it is unlikely to succeed against the arrivistes tilting at the giants.