Asda and Tesco Push Suppliers for Lower Prices
By Bernice Hurst, Contributing
Editor, RetailWire
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."
The newspapers are filled with ways to cuts costs on everything from meals (including the growing popularity of private label products) to vacations. Interestingly they also have lots of articles about how brands have increased or maintained their profits by raising prices.
We have seen an increase in reverse auctions, but these only work well if the retailer is not buying branded products. Where the customers have demonstrated a strong loyalty to a particular brand or a brand has a very large share of market they have no impact. For example, a supermarket might be able to run a reverse auction for a secondary line of potato chips, but it is not likely to drop Frito-Lay.
Reverse auctions have worked well where the items are used in making or delivering the final item the customer buys such as in ingredients and/or packing supplies. Here the consumer does not know (and probably doesn’t care) where the clam shell, t-shirt bag, etc. came from. Likewise, consumers probably don’t care which brand of pepperoni on the store brand pizza.
Where we do see a lot of price moderation is in decreased package size. A pound can of coffee is now 13 oz, etc. The consumer gets to buy a package that is of a familiar size and may or may not notice the decrease.
The power in the pricing game always goes to the party who’s best at differentiating. If you are a supplier, you need to have brand recognition and/or product innovation–along with the associated customer loyalty–if you want to be able to justify non-rock-bottom margins. If you are a retailer, you need to attract shoppers to your *store*, not just the branded products sold at your store (Trader Joe’s, Whole Foods, Wegmans, Costco, and Tesco all come to mind).
If the product you are selling is lower-case (for example, “yogurt”), not upper-case (“Fage”), then expect retailers to find every way possible to squeeze out pricing concessions, including reverse auctions and tough negotiations.
Is there any wonder why Walmart is dominating, especially in the food arena? An 800lb. gorilla can sit wherever he wants, just as Walmart can pay any price it wants for its stores. The downside of this is that the rest of us, i.e. the hard-working independents and co-ops, will pay an extra charge for the same goods to subsidize Walmart’s rock-bottom wholesale, and eventually put more of us out of business.
I’ve expressed my concerns about this at the NGA for years, and for the most part, all of our lobbying about a level playing field has fallen on deaf ears in Congress. I don’t have an answer for this huge problem, other than to run a good perishable mix, but this problem is getting much worse. The consumer temporarily wins, but as we’re weeded out, look out for much higher prices. Any thoughts, or am I just paranoid?
We’ve been coaching our clients on ways to mitigate one troublesome trend: Price deconstruction. Vendors and service providers that itemize features, elements and add-ons with associated costs are begging for trouble and loss of negotiating power.
We’ve seen scenarios in which retailers have deconstructed then recreated products from the ground up using a supplier’s pricing; adding and subtracting features then self-pricing the result…and the result can be a product or service that is less salable, effective, durable, etc. The final blow comes when sales are less than stellar and the vendor loses the business altogether.
For some reason, it has become more fashionable to complain that pushing for price reductions throughout the supply chain is bad. Tier 2 and lower suppliers especially complain that they are hard pressed for price reductions and really have little room left to earn a living. Yet, when you tour these suppliers you often find that they are years (decades?) behind in their practices. They have not adopted lean or waste reduction methods, operate on batch principles, and hope to make up the margin through volume. Of course there are exceptions. But, the effort to reduce waste in the supply chain has not worked its way through all tiers (and certainly hasn’t been exhausted in the top tiers).
Waste reduction, efficient manufacturing, and supply chain efficiency take hard work and years of effort. Even in China they recognize the time has come to adopt lean methods rather than simply throwing more labor at the issue. We have a long way to go before the supply chain will have been squeezed tight enough to remove all (or even a lot of) the waste.
The grocery biz has always seen the strength being driven by the retailers, large and small, in the form of slotting allowances, marketing, etc. CPGers have been anxious to give whatever the retailer wants (to a degree) and the retailers have been happy to hold the manufacturers at bay. When a major European retailer chose to ban a global CPGer from their shelves in order to protest higher costs, guess who held the key leverage.
There are all sorts of methods of driving down costs, reverse auctions being just one, but until a more consistent level of collaboration occurs, everything else is just talk. And that’s the only thing that’s still cheap.
Often the retailer is just a middleman, the shoppers’ representative. Most shoppers don’t ask for higher prices. In good times and bad, since the dawn of retailing, stores big and small have always tried to get lower prices from their suppliers.
Retailers who group their purchasing, via a co-op like Retex, magnify their leverage. Retailers who won’t work together are easier to exploit. Even if you won’t buy as a group member, simply learning what others pay may alert you to hidden deals.
The Robinson-Patman Act is a very weak law (prohibits certain types of price discrimination), and it’s rarely enforced.
Number 1 objection to group purchasing: “But I get better deals than my competition, so why should I help them?” Often stated by someone who doesn’t know the deals the competition gets.