The Competition Commission’s Emerging Thinking document covers much useful ground which has since been assessed elsewhere. As always, apart from the main objectives of the enquiry, such Government investigations can yield valuable peripheral insights including financial averages in key sectors that can help to complete missing parts of the competitive jigsaw for those prepared to drill down into the data and cross-relate with practical business experience.
However, comments on the relative lack of hard evidence of ‘unfair’ treatment of suppliers, despite repeated requests and assurances that the confidentiality of submissions will be preserved, indicates unrealistic expectations on the part of the Competition Commission. Given the realities of a highly competitive and polarised market, high levels of dependency on fewer customers, coupled with a growing distrust of Government over the past few years, it should not be surprising that suppliers are unwilling to come forward. It is also unlikely that threats of legal action against such suppliers will improve response levels…
In spite of this, it may be helpful to examine the issue from a different perspective. Essentially, retailers provide vital gateways to a brand’s consumers, and successful retailers can account for 15% or more of a supplier’s business. Therefore, a trade partnership is by definition one-sided, in that a refusal to buy can result in the closure of a factory.
In an open market, Tesco, or any other successful retailer, should not be criticised, or restrained, for being successful. Moreover, the introduction of legislation to protect smaller retailers could undermine open-market principles. Whilst the impact of multiples’ success on independent retail is regrettable, Government help should be confined to assisting smaller players to become more efficient using the leading-edge KPIs developed by the top level multiple retailers.
The core problem lies in the fact that over the years, the balance of risk and reward in supply and retail has gradually become inappropriate for today’s market conditions.
Essentially, the relationship between retail gross margin, credit period, and stock level needs to be examined in terms of how they reflect the realities of the current market environment. A product’s retail gross margin is meant to reward the retailer for the effort taken to make it available to the consumer, say 10% to 15% in the case of advertised brands, or even less in the case of essential commodities. The credit period allowed by the supplier is intended to bridge the gap between delivery of the product and receipt of the shopper’s money by the retailer, say ten days, allowing for delays in the banking system. Finally, retail stock-levels are meant to be at levels that ensure 100% availability on shelf, say three weeks in many categories.
However, the current averages of 25% gross profit, thirty days credit in combination with stock levels of fourteen days, are more appropriate for market conditions that existed in the ‘70s. Today, in the case of milk, delivered daily, held in stock for no more than four days, carrying a retail margin of 31%, and even with a credit period of say ten days, it can be seen that the risk/reward relationship has become unfairly biased in favour of the retailer. As some categories can have retail gross margins of up to 40%, daily delivery of given SKUs and credit periods of up to thirty days, it can be seen that the systematic assessment of these three indicators would reveal considerable insights into the workings of the supplier-retailer business model.
However, the real payoff will come when well-documented cases are examined where some retailers, dissatisfied with the above rewards, have written to suppliers asking for back-dated price reductions, increases in credit periods of up to sixty days, and up-front investments of 5%+ of sales, in the ‘partnership’….
