How logistics undermines big UK retailers

Many moons ago this writer warned in the logistics press how Continental, no-frills, food retailers would give Britain's retail giants nightmares if their business models ever crossed the North Sea. The occasion was my visit to Denmark's food discounter, Netto, but what has changed since then to upset the British retail model that seemingly served the market so well for so long? In summary, three events now favour the Continental model where small is beautiful but also nimble at giving the shoppers what they now favour most of all -- permanently low prices. These are a changing economic climate, the rise of online shopping and the public's attitude to the cynical pricing ploys used by all the big food retailers. But by far the greatest of these is economic pressure brought on by the credit crunch that sees many shoppers putting value for money at the top of their shopping list, without compromising on quality.

One might well ask how is it that the British retail giants like Tesco (world's number 4), Asda, Sainsbury and Morrison with their huge buying power and long experience could not easily see off the much smaller, but nimbler Continental arrivistes like Lidl, Aldi and a re-appearing Netto. The answer can be given in one word --logistics. This is not to say that Britain's retailers are logistics slouches, far from it. Many years ago, for example, Tesco created its own stock forecasting program geared to changes in the daily weather forecasts. This gave them a crucial advantage because a pending heatwave, for example, could send demand for drinks soaring four-fold in a few days, as well as spiking demand for certain kinds of clothing and food. Before such stock forecasting programs, taverns ran out of beer in heat waves, surely a most pitiable site.

What is it, however, that sees the Continental newcomers seizing market share from the big boys that sends shudders up their spines? The obvious reason, of course, is the permanently, much lower prices, typically by up to one third, but how is this achieved? There are common features to all the foreign-owned discounters which cannot be easily and quickly replicated by the big British retailers because of the latter's legacy investments. What this means is that a big British retailer like Tesco would stock up to 40,000 SKUs (stock keeping units) as against up to 1,600 for Lidl or Aldi. Such a huge difference gives the smaller discounters a great logistics advantage. Another common feature for the discounters is their no-frills food displays, with much food simply stacked on pallets and very little individual shelf pricing. Store start up costs, therefore, are much lower, especially as they have much smaller car parks. Not lost on the shoppers is also the knowledge that all prices will be permanently low, which is a potent marketing tool. But where does logistics fit into the equation that so favours the Teutonic invaders?

To return to my Netto Danish experience over 20 years ago, this writer was impressed by their slick storage and handling. Netto then had about 125 shops throughout Denmark but only one NDC (national distribution centre) to supply all their needs. All shops were EPOS*-connected to the NDC so that at the end of each trading day all details of items sold would be electronically sent to the NDC to initiate replenishment picking. A fast sortation conveyor played a key role in despatching all replenished items to all 125 shops before opening the next day. Netto's business model then was to have no more than 600 SKUs, over 90% of which were fast movers. Any fast mover that became slow was quickly dropped and replaced by another, expected fast mover. The effect of all this was that 90% of all stock at the NDC passed through it every 24 hours, thus drastically cutting the high cost of holding inventory, which can dwarf all other warehouse costs combined. Such a high throughput rate also has implications for construction costs of big NDCs since there are no large areas given over to slow movers. Obsolete stock losses would also be smaller.

The business models the big British retailers are now stuck with have been made obsolete because of the shoppers' change in habits. The retailers tried to become all things to all men by selling far more than food and regular household consumables all under one roof so as to enhance customer convenience. That model held good for many years when incomes were steadily rising but when the recession hit six years ago a sea-change in consumer sentiment saw price become king as the convenience factor flew out the window with the remorseless rise of online shopping. Arguably, that business model of relatively high prices, wide product range and convenience is now broken.

Lumbered with the legacy costs of huge stores, the British retailers have obliquely admitted that the Continental upstarts have a better business model for a changed shopping climate. They will not, of course, take matters lying down. Sainsbury, for example, have got into bed with Denmark's Netto to open small shops with permanently low prices. Tesco are pushing ahead with openings of convenience stores but so far their prices remain uncompetitive with Lidl and Aldi. It is also possible that the big retailers will enter an unholy cabal to lower all of their food prices for long enough to drive the invaders back across the North Sea. It would mean taking a hit on their profits but it could be a price worth paying to restore the status quo of comfortably high margins that they have enjoyed for so long at shoppers' expense. Such an event would be a bleak day for consumers who have been held in the grip of just four retailers controlling around 80% of the UK food market for far too long.

*Electronic point of sale
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Food supply chain professionals admit 'slavery' complicity

In what is, perhaps, the most damning indictment of food supply chain 'slavery' complicity, the respected British Chartered Institute of Purchasing and Supply's latest survey found that nearly three-quarters of supply chain professionals admitted they had "zero visibility" on the earlier stages of their supply chains. Eleven per cent said this meant it was "likely" slave labour was used at some point in the supply chain. Turning the screw, the Institute's chief executive, David Noble, claimed "Consumers and business leaders have entered into a 'don't ask, don't tell' pact and that they "are content to remain ignorant of the malpractice that could be operating throughout their supply chains." Company leaders were also twice as likely as purchasing managers to say their supply chains are transparent.

David Noble did not include in "consumers" the end consumer, i.e. the public who buy their food mainly from big retailers, for they are totally ignorant of each bought product's supply chain pedigree and while they may know the food manufacturer's name from the packaging they would be unaware as to whether or not the manufacturer has subsidiaries operating in countries where food production slavery is rife and the company is part of it. Yet the public has shown its concerns over such issues and even mobilised public opinion to boycott certain companies profiting from 'sweatshops', as they were euphemistically known, operating in emerging countries where regulations of all kinds are lax or routinely ignored. It is a pity that culpable corporations do not share the public's concerns on a meaningful scale.

The stench of the Atlantic slave ships before abolition may have long gone along with the shackles, and all countries have outlawed the institution but slavery's stench remains in more subtle, less public forms but where the shackles of fear are just as binding. The most common form of slavery today is called collateral debt bondage, which involves people who have borrowed money pledging themselves and their family as bonded labourers to the loan sharks or slave holders, which can carry on for generations until the debt is paid.

According to the 2012 International Labour Organisation report on slavery, the world's forced labour total is 20.9 million, with Asia having the most at 11.7 million. Another measurement of global slavery, however, the The Global Slavery Index, puts the total at 29.8 million, half of which are in India. The Index, which ranks 162 countries, puts China, Pakistan and Nigeria along with India as the four countries with the largest number of slaves. But even the most developed of western countries, like America, have tainted hands, where the slave population estimate is 60,000, among them temporary visa holders and domestic servants. In Britain, where a modern slavery bill is before parliament, the figure is put at a more modest 4,426. There may well be an element of double counting and other flaws in the various surveys' methodologies but any amended figures would still be grotesquely alarming.

While Britain is to be commended for proposing a modern slavery law, the only country in Europe to do so, Britain's Home Secretary, Teresa May, warned that its proposed slavery bill could not solve the slavery issue by legislation alone, and its remit would not extend effectively beyond the country's shores. John Manners-Bell, of the consultancy, Transport Intelligence, said that "many manufacturers and retailers believe that when they outsource the production of their goods to remote suppliers, often based in emerging markets where there are fewer regulations, they outsource the moral responsibility for the conditions in which their goods are manufactured."

Such cynical buck passing is unforgivable and food retailers, in particular, have consistently shown that their own feeble attempts to clean up their supply chains have failed miserably. Like the UK police forces, they cannot be trusted to self regulate. For proof of that one need look no further than the horse meat scandal 18 months ago where horse meat was found in many products labelled as beef. Half of the supply chain professionals say that the scandal has not led to the risks being taken more seriously.

David Noble believes that if the slavery bill passing through Britain's parliament is "to have a chance of eliminating slavery from the British supply chain and we are to avoid repetition of the horse meat scandal then we must empower supply chain procurement professionals. " Such action would be better than nothing, one supposes, but to whom would the procurement professionals be answerable? If it is to the boards of companies with dubious links to slavery then the suggestion is touchingly naive. Perhaps more effective would be partly government/business financed, independent watchdogs with the resources to research areas of suspected supply chain slavery and then effectively publishing the results nationwide so that the public would have the ammunition to invoke the ultimate weapon all company boards fear and cannot withstand --- sustained, concerted boycotts. There are many precedents where such consumer action has been efficacious in many industries. Retailer Primark reportedly paid $9 million in compensation to try to salvage its reputation, Samsung Electronics recently said it halted business with a supplier in China over suspected use of child workers and Starbucks, pilloried over its insouciant tax avoidance schemes, caved in temporarily to public condemnation.

Slavery has never gone away because greed has never gone away. It may have changed its tactics and cloaks but so long as greed remains so, too, its handmaiden of corruption will flourish, and it is in emerging countries where corruption is worst. If concerned countries unite to make life much more difficult through naming and shaming, as well as boycotts of miscreant or unconcerned corporations, then the prayers of the oppressed women, children and men may at last be heard and their tears wiped away.
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Thailand's trawlers of terror shame food supply chains
Slavery shames British food supply chains