Sunday, 12 March 2017

Retailers' odious supplier treatments risk disintermediation

When just four UK food retailers control over 70% of an industry you have a problem in the supply chain --- unfair  bullying of suppliers. Other risks, of course, stem from monopoly practices, like price fixing cartels working against the public interest. The latter risk, however, has been diminished by the meteoric rise of the deep discounters like Lidl and Aldi who now control 12% of the UK grocery market. It is this intensifying competition which lies behind many of the recent supplier complaints about big retailers' bullying practices, sometimes tantamount to blackmail and fraud. There is a way for suppliers to fight back but it would take an enormous degree of cooperation among suppliers, but before coming to that let's examine some of the latest wheezes that big retailers are using and which could discommode them if they persist.

Supplier complaints against the dominant retailers are nothing new, they go back 20 years, but some of the wheezes used against them are. One is for supermarkets to demand suppliers pay up to £25,000 for charity dinner tickets, according to a Government watchdog. Another of the estimated 60 odious ploys is the claim that delivered goods never arrived and retailers refuse to pay for them. The sums involved are substantial.  A preliminary investigations of only 20 suppliers found that they lost £15 million a year to "drop and drive" deliveries, implying the total amount lost to the 8,000-9,000 supplier firms must be huge. "The supermarkets are genuinely not paying for goods that they are selling," says Christine Tacon, the groceries' code adjudicator. By any other name that is fraud.

Blackmail is not beneath the retailers either. To return to the charity dinner tickets caper, one supplier complained of being asked to pay £25,000 for a table at a charity ball who came under pressure, like being told: 'Well if you don't buy a table your name will be on a list of people to the chief executive that are not supporting our charity.' Yet another innovation involves supermarkets charging suppliers up to £55 if customers complain about anything, including not liking a ready meal, and the more bizarre, like finding a teabag inside an egg. All these and many other tactics, like the old favourites of extending payment periods from one month to three and charging for favourable shelf positions, are designed to boost profits unfairly. The worsening extent of this will be unveiled by a new survey of supply firms being launched this month to uncover abuses.

Meanwhile, what can suppliers do to fight back and what risks are there for the big retailers if they do not change their bullying ways?  Already, some retailers are suffering from disintermediation by people setting up impressive websites which channel orders directly to manufacturers for delivery directly to buyers' homes, thus cutting out the bricks and mortar retailers. Moreover, one can source products from home, comparing prices in different countries for the same product to get the best deal.

The potentially greatest threat to retailers, however, lies with the capability of major and medium-sized food suppliers banding together to finance giant order picking fulfilment centres that would act like a shared user facility which some third party logistics (3PLs) suppliers already offer for their clients and who, like the food suppliers, are suffering from tough contract deals with big retailers. The foundation for that scenario is already being laid by Amazon, who are going into the food selling business to supply customers directly from their distribution centres. If enough of the major food suppliers can be signed up for such ventures it would be difficult to see how the grocery retailers could fight back, since delisting all the suppliers' items would leave them with nothing on their shelves to sell.

Now is the time for retailing's bully boys to wake up and smell the coffee before it could be too late and the 3.6 million people employed in the UK food supply chains see their ranks much diminished.