UK retailer bullying of suppliers ramps up

For may years the consequences of intensifying competition among the UK's grocery retailers have been visited on their hapless, bullied suppliers through up to 60 odious ploys designed to squeeze the last drop from suppliers. Matters had seemingly improved in 2013 when the code of conduct was enforced by the Groceries Code Adjudicator but now that is all out the window following Tesco's resurgent, macho stance as it prepares a price war with the leading discounters, Aldi and Lidl.

Past apologies by Tesco's chief executive, Dave Lewis, for his company's "naked pursuit of growth" that led to an investigation into its bullying of suppliers account for nothing as Tesco delivers an ultimatum for draconian price cuts of up to 50% within a few weeks' deadline. But what is behind this move, which can only be expected to be followed by other big grocery retailers, could it have been foreseen and who are likely to be the winners?

David Sables, chief executive of Sentinel Management Consultants which trains suppliers to negotiate with supermarkets, put his finger on the pulse when he claimed that suppliers were being asked to fund deficiencies in Tesco's business model relative to the discounters, but without going into reported specifics. So what are those specifics and can and should Tesco win and if so what would be the consequences for the consumers?

Part of Tesco's problem is its refusal to cut its relatively high profit margins of 4%+ compared with the 2% the discounters are happy with so how can these upstart Continental challengers continue their remorseless rise in market share at the expense of the big four supermarkets?

Stock control is paramount

The recent paradigm shift in retailing sees value for money as the new mantra pursued by consumers which the discounters have delivered in spades, typically undercutting the big four's prices by 30% on a typical shopping basket. They have partly achieved this through a no-frills approach to shop openings which are much cheaper and quicker to commission than the big superstores but far more important has been its approach to inventory control. Warehouses put money to sleep so much so that inventory holding costs can dwarf all other logistics costs combined. A typical Tesco superstore could house about 40,000 SKUs compared with around 1,600 for the discounters, most all of which would be fast movers. Any that became slow movers would be promptly dropped and replaced with anticipated fast movers. This puts the big grocers at a serious disadvantage because most of their stock would be slow and medium movers.

The big retailers must now see their superstores as albatrosses but their online side of the business could bring relief if and when they decide to trim down their costly, giant property portfolio. But internet shopping could also be a threat if many of the big food, etc suppliers band together to build huge shared order picking warehouses for direct deliveries to consumers, thus disintermediating the traditional retailer. Amazon has shown success in this by acting as a wholesaler, but it still represents a cost layer that could be eradicated if suppliers banded together. Meanwhile, sole traders with a slick website working from home can already place orders with manufacturers for direct home deliveries to their customers. 

There is a risk that yet more attempts may be made by the grocery giants to beat the discounters through mergers, like the recent Sainsbury overture to Asda, a move that undoubtedly would have harmed consumers' best interests had it been allowed to go through. There are risks, too, that many of the smaller suppliers will fail over what has been described by one of Tesco's suppliers as a straightforward money grab. If Tesco succeeds and reverses the discounters' fortunes then the ultimate losers could also be the consumers because they would once more be in the grip of the big four who will have more leeway to raise their prices while keeping the suppliers squeezed.

Could all this have been foreseen? Nearly 40 years ago I warned of trouble ahead for the big UK grocers following my visit to Netto in Denmark, a food discount retailer with 120 shops supplied by just one national distribution centre (RDC). Their slick business model, supported by EPOS and EDI, saw all sales replaced at each store every 24 hours. This meant that the NDC, equipped with fast sortation conveyors, saw 90% of all its stock pass through it every day, partly because Netto stocked only 600 SKUs, nearly all fast movers. In my report to Materials Handling News I warned that if this business model crossed the North Sea to Britain it would give Britain's big supermarkets "nightmares." The rest, as they say, is history.
 
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