BrainTrust Query: Will global forces cause the balance of power to shift back to suppliers in food retailing?
By Bill Bishop, Chairman, Willard Bishop
It looks like the power dynamics are shifting back upstream in some business channels, and the question is, will it happen in food retailing?
The Tuesday Wall Street Journal front-page headline called out, ‘New
Detroit Woe: Makers of Parts Won’t Cut Costs.’ The article goes on to say that
Navistar International, a company that has been supplying diesel engines to
Ford for 30 years, stopped shipments to Ford temporarily in February of this
year, and at the time Ford was their single largest customer.
The shifting balance of power reflects the new global strength of certain
auto suppliers and shows that long-standing buyer dominance over suppliers
can come to an end.
In another industry, i.e., home entertainment consumer electronics, we’ve
seen that some large, brand manufacturers are beginning to embrace retail start-ups
that strive to complement their retail marketing strategies but don’t request
the discounts sought by some of the large, big-box competitors.
While we haven’t seen any signs of a similar power shift in the food retail
channel, it doesn’t look like “all is quiet on the Western Front.” The shift in crop production, e.g., the rush to corn for ethanol, is reducing production and raising costs in many food categories, and the rapid increase in demand for organic and natural products is having a similar effect.
What, if any, signs are others seeing that would indicate that a similar shift
might be beginning in the food sector? This is worth watching.
Discussion questions: Will global forces cause the balance of power to shift
back to suppliers in food retailing? In what food categories could you perceive
this happening?
As long as we embrace category management in its current form, where the supplier has become a tool of the retailer (as opposed to a partner), the balance of power won’t shift. Once we recognize that a partnership where a supplier knows the category and the retailer knows the marketplace, power games should ideally dissipate and both should strive to sell more stuff. I don’t think global forces are at play here–it will be a recognition that category management has turned into a different practice than we expected, and not a positive one for suppliers.
The balance of power in any relationship is a matter of innovation. The supermarket industry has relied on others for innovation for years and it could ultimately result in innovative suppliers being able to exert a great deal of control over how a retailer handles their products. While there are laws that govern the relationship between customer and manufacturer, there are thousands of means of circumventing (legally) these regulations. For instance, a retailer could be denied distribution due to late payment. I believe this would cover about 95% of supermarket chains. This very legitimate means of withholding inventory or promotional offers or possibly even favorable pricing is possible. It is also possible to set up exclusive distribution arrangements by using a restricted or private label. In short any supplier who has the ability to develop a truly unique product can control the distribution of that product. If consumer demand is strong enough those in charge of distribution risk consumer migration if they are not able to meet demand. The impact of such situations is legend in the toy industry where consumers regularly camp out to buy new products. I can’t imagine a supermarket being in a position to become a part of the distribution chain for a product this powerful. HOWEVER, we may very well see a time in the future when genetically modified free range organic beets will cure cancer. I bet the beet guys will not only raise prices but will control distribution with a vengeance. So Kroger, Safeway, Publix–you guys be nice to your beet guy!
The balance of power is not going to shift back to the supplier, the balance of power is shifting to the consumer, no matter how small they may be. The article in the WSJ points out issues in the automotive supply chain from the perspective of the Detroit players. The issue really is the power has shifted to the consumer, whoever and wherever they happen to be. Today’s consumer has so many more choices in automobiles and really in the macro picture they have more choices in transportation. It’s this shift in power that has put pressure on the Detroit supply chain. The belief it has shifted back to the suppliers is only a micro action in a macro world.
We need to also remember the difference between a consumer and a customer. A customer is anyone who buys something, a consumer is someone who consumes something. This is the difference between the Detroit supply chain and consumers. GM, Ford, etc. are all customers, they’re merely buying goods to eventually resell them. It’s you and I going out to make a transportation decision that is the consumer and thus we are the ones with the power. The sole reason for this is the power of the Internet and the global ability to buy and source any product from anywhere in the world. It’s the power of information combined with the power of access that has resulted in this shift in power from the retailer to the consumer.
Actually, not all (or even most) auto manufacturers are at war with their suppliers. The problem is primarily with the so-called Detroit Big 2.5–GM, Ford, (Daimler)/Chrysler. These firms have had long-standing problems for a variety of reasons not the least of which has been arrogance–toward both customers and suppliers. Quite simply, the world has changed and the 2.5’s business models haven’t.
This is where there is a parallel to the world of food retailers. Their world, too, has changed. Those that have a clear business model that best meets the (ever-changing) needs of customers continue to thrive. Those that are stuck in the old ‘make money on the buy, not the sell’ mode will continue to struggle on the way to eventual extinction.
Long live Peter Drucker. And let us remember his sound advice about today’s new world of competition: the threat of new entrants (like Wholefoods); the power of customers (like those put off by Wal-Mart’s upscale efforts); the threat of substitutes (like organic foods rise to fortune over the last 10 years); and the power of suppliers!
Retailers might have the power and the relationship with their customers, but those customers love and enjoy national brands. Just look at Sainsbury’s foolish assumption that their customers loved them so much that they could make 80% of their store offer own label–it crashed. As long as retailers maintain integrity with their suppliers and variety to their customers, the balance of power should remain in the retailers favor, but don’t get too bold.
To predict the future we must understand the past. The balance of power shift from supplier to retailer was driven by industry consolidation (retail and wholesale). Big buyers have great power. The second factor was information. Prior to the balance of power shift, the suppliers provided market intelligence and trend information. All retailers today have scanning POS. Just by looking at this information they know what is happening in their market place long before the suppliers. Knowledge/information is power.
The auto industry is different than retailing. Their suppliers have consolidated due to pressure from the auto manufacturers. Most have been through or are going through chapter 11. These suppliers have only two options. First, maintain prices and achieve profitability or second, go out of business. Monopoly or oligopoly power is always short term. There is nothing approaching the consolidated power in retail as there is in autos. Therefore, my conclusion remains–the buyer/customer/consumer is and will continue to be king.
Neither suppliers nor retailers hold the power. It is, has been, and always will be the customer. Suppliers as “partner’s” control the category somewhat. The consumer doesn’t find the variety she wants, AND being in control of the process, votes with her purse and her feet.
The retailer, believing they have control, uses bonehead moves like BOGO and 10 for 10 promotions to draw traffic. To offset the losses of gross, they raise everyday retails. Consumers, being in control once again, load their pantry with loss leaders, and drive down the street to purchase staples at a retailer who either has everyday “reasonable” prices, or another bonehead retailer doing a BOGO on what she needs. We used to call this Cherry Picking, and we have developed a highly skilled generation of them. Both retailers and suppliers have long ceded leadership to each other and the customer picks up the spoils.
An upstream power-shift in food retailing is inevitable. Not only because pretty much everything is cyclical, but because retailers are demanding that suppliers take more and more responsibility for retailer success. From packaging to RFID – the more responsibility, the more power.
A prime example of this dependency on supplier support is the food retailer obsession with new formats. Are they (Publix, Bashas’, et al) experts in this area? No. Merchandising (not decor) drives new formats, and suppliers provide invaluable support and guidance in their development nearly every step of the way. Without the active support of suppliers, new supermarket formats would not exist. That’s power.
All the Pollyanna comments about the customer being king – with the definition of “customer” being either the final consumer or the retailer – is just wordsmithing. Innovation drives demand more than demand drives innovation. Nobody knew they needed/wanted a PC before PCs were invented. Auto manufacturers didn’t “need” airbags before airbag technology was invented. Nobody knew they wanted packaged salads before packaged salads were introduced. Suppliers drive retail, not customers.
Corn ethanol has already raised commodity prices, since animals eat corn, and corn prices are high. Commodity price increases help groceries make money, since margins are generally added as percentages to the cost price. If the canned goods default margin is 15% added to the cost, then margin dollars rise as costs rise. The real problem for retailers: as CPG manufacturers merge, it’s harder to play them off against each other. Then supermarket margins certainly will decline. Before the internet, record companies merged, causing record store margins and profits to decline. Those mergers started the decline of the retail recorded music business, well before file sharing and downloads totally demolished it.
The auto industry parallel to the food industry is interesting, but there is one major difference between the two that must be considered–retail is controlled by the car makers, not an autonomous segment as it is in the grocery business. However, most of the car companies seem to be in a bit of financial trouble these days, so they could play the role of harbinger for the food and drug supply chain in two areas–pricing and inventory practices. What stuck me about the WSJ article was the fact that most of the parts suppliers listed are in chapter 11, including Delphi, the largest.
Recognizing that the parts suppliers also have suppliers and that raw materials prices have been far from stable for a few years now, it seems easy to understand their predicament. As their customers required increased investments in initiatives such as JIT and decreasing or stable pricing, the parts houses hit the wall.
Seems to be a classic economic squeeze. The same thing is happening in CPG. Retailers have been strongly resistant to pricing increases and have successfully squeezed margin points through tactics such as reverse auctions for several years now. As production costs continue to rise, it seems reasonable to forecast that CPG manufacturers will hit a wall too.
I don’t understand the “back” assertion of this proposition. I certainly acknowledge that retailers have been gaining power, but the CPGs remain immensely more capable companies than their retail counterparts. The trend will continue unless the CPGs find new ways to engage consumers. The tools that got them where they are today are deteriorating rapidly. The best hope for new marketing tools are the internet, in-store marketing and word-of-mouth. I don’t think any of these will truly replace the old mass media in impact.