Asda and Tesco Push Suppliers for Lower Prices
Some of the ways in which retailers keep prices down for customers are relatively harmless, as Asda's finance director, Judith McKenna, explained in the Financial Times. "Retailers," she said, "have an arsenal of weapons they can draw upon to try to cut prices, including painless measures such as avoiding empty lorry trips and cutting packaging."
Other methods are less painless and squeeze the supply chain as tightly as possible to "help" customers by offering them "value." Those customers, anxious to spend as little as possible, don't always have the inclination to wonder how the store can afford to be so generous. But someone, somewhere, may indeed be hurting.
Among the methods used are extending payment terms, cutting the amount of inventory held to improve working capital and driving down the amount paid.
One of the friendlier, and more successful, negotiations Asda used was with a pizza supplier who simplified a recipe to achieve a rock bottom price. High volumes resulted in massive sales with both retailer and manufacturer enjoying profits while customers enjoyed bargains. In that instance, everyone was happy. But one manufacturer, who asked the newspaper not to name him, said, "There is pressure to push the costs back down...and the pain is felt right down the supply chain when the retailer tries to cut its costs."
Tesco proudly announced savings of £540 million in its last fiscal year, partly because of pressure on suppliers, especially renegotiating prices and payment terms. Needless to say, this is not particularly popular with manufacturers and farmers who are pressured into accepting retrospective changes.
Asda's approach has been to re-introduce e-auctions, where suppliers bid blind. Low bids may then be used as a starting point for negotiations. The Financial Times reports Asda's claim to only use the method on certain commodity products, but also said, "some suppliers are disgruntled" because "technology and psychology are used to concentrate all the information [about what suppliers can offer] on one side...and get lower prices." In commodity markets with an abundance of similar product, suppliers don't always have room to maneuver. As one food analyst explained, the U.K.'s market is one of the most consolidated in the world, giving the four big supermarkets "a lot of power."
Discussion questions: In what ways are retailers in the U.S. exerting pressure on suppliers to moderate prices? Do you, for example, expect to see greater use of reverse auctions to help retailers get goods at the lowest possible costs?
[Author's commentary] Website Planet Retail also reported (May 5) that Tesco has been trying to reduce agreed construction fees by 40 percent, on the basis that "lower land and material costs mean contractors can build for less." In response, the Association for Consultancy and Engineering (ACE) has apparently "been inundated by complaints from its members in the construction industry."