I was talking to my friend Alpa about the fact that I shop for my food on line. We were discussing the pro and cons of it and then diverged to where we shop and why. I was saying that Tesco have reasonable prices and I haven’t had many problems with their delivery service. She then said she wont shop there becuase they are ruthless and don’t treat their suppliers well.
I then remembered a documentary that I saw a bit of, in which they filmed the traumas that a supplier went through when Tesco demanded the good he had provided them for a few years, but for less money! He had a whole heap of land full of lettuce but he could not afford to sell it at the price they requested yet he had no other seller lined up.
I have researched whether this unreasonable play on power has been documented anywhere else. Here’s what I found.
Management issues say: –
Despite its record £2 billion profit, Tesco needs to take a long hard look at its relationships with its suppliers and how it is viewed by its customers if it is not to come unstuck in the future, a consultant has warned.
The retail giant this week [12 April] became the first UK retailer to break the £2 billion profit barrier, but at the same time fuelled criticisms that it is becoming too all-powerful.
Tesco now accounts for an estimated one in every eight pounds spent in Britain’s shops, and its global empire is expanding rapidly.
But critics argue its buying power is cutting suppliers and farmers to the bone and its expansion into clothing, convenience store and town centre retailing is spelling the death knell for many high street and independent shops.
Paul Toyne, director of corporate social responsibility consultancy Article 13, said Tesco needed to look very carefully at whether these criticisms were starting to hit home.
“There is a general perception that it is squeezing the value out of its supply chain,” he said.
For the moment this might not matter to its customers and shareholders who, it seems, are happy enough with its “pile it high, price it low” approach.
But the supermarket chain needed to look at positioning itself so that, if perceptions did start to change significantly, it did not get its fingers burnt, he argued.
Waitrose, for example, while admittedly aiming to attract a very different sort of customer, had proved highly successful in positioning itself as a “caring” supermarket when it came to sourcing of its products.
“Tesco needs to insure its UK market share, while still trying to grow. If customers and investors do start to worry about its practices then it will need to take that into consideration,” Toyne said.
“There is a good rationale in being ahead of the curve, and Tesco has been fantastic at that in the past,” he added.
The Guardian reports: –
How suppliers get the sharp end of supermarkets’ hard sell
Retail Watchdog may be on trail of bullyboys whose threats drive down prices
At last, it is said, competition watchdogs have found the “smoking gun” they have spent years hunting for: hard evidence that the big supermarkets use their muscle to bully suppliers and extract unreasonable price cuts.
The Competition Commission, which is nearing the end of its third full-scale inquiry into the grocery business in seven years, last week ordered Asda and Tesco to hand over millions of emails sent and received over a five-week period in June and July. They leapt into action after unearthing email evidence that the big two supermarkets had been threatening suppliers and demanding cash payments to finance this summer’s round of supermarket price wars. The emails, it is understood, employed “threatening language”.
The grocers, naturally, are denying any such wrongdoing. Tesco responded in typically robust fashion, denying the claims and accusing the competition authorities of making “prejudicial” allegations. Asda insists there has been some horrible mistake and is certain that it will be exonerated.
The big grocers have always denied all such charges, insisting they are in partnership with their suppliers.
Suppliers’ lobby groups claim the big chains can squeeze suppliers until their financial viability is in doubt. But they have provided no hard evidence to show how this is done. The supermarkets say this proves there is no problem, but the suppliers’ lobby groups say simply that they are so frightened of being delisted – having their goods taken from the grocer’s shelves and contracts not renewed – that they dare not complain.
The Competition Commission and the Office of Fair Trading have tried time and again to find hard facts, but they have failed. However, they were concerned enough at the time of the last inquiry into the grocery sector seven years ago to set up a code of practice that is supposed to protect suppliers.
In the last competition inquiry one supplier told the watchdog that, “it would be commercial suicide for any supplier to give a true and honest account” of their dealings with the big retailers.
With another inquiry under way, the Competition Commission acknowledges there is a “climate of fear” and has once again been asking suppliers to step forward, promising it will treat suppliers submitting evidence in complete confidence. Last week, the investigation moved up a gear with the request for emails.
The relationship between suppliers and Britain’s biggest supermarkets is complex: there are major suppliers of the biggest brand name goods where undoubtedly it is the supplier that is in the driving seat in any negotiations. There are some brands that even Tesco cannot be without and while the grocer accounts for more than 30% of the UK market, it does not have huge muscle when it is dealing with global manufacturers such as Procter & Gamble or Nestlé.
At the other end of the scale are small suppliers who relyon one or two supermarkets to get their goods in front of shoppers and small manufacturers producing supermarket own-label goods. Each of the big supermarkets deals with about 2,000 suppliers, ranging from global conglomerates to small independents and farmers whose goods are stocked in only a handful of stores. Many of these suppliers depend on a single retailer for a large proportion of their sales. One of the biggest problems that suppliers – and competition watchdogs – face is that many supply contracts are not written down. Most are agreed verbally and they are open-ended agreements. The supermarkets employ a range of tactics to drive down prices. They include:
Unilateral changes to agreed terms
Written contracts setting out the terms of what has been ordered and what they intend to pay for goods supplied are not usual. The grocers may then unilaterally change pre-agreed terms in their favour at the time of delivery. This makes it difficult for suppliers to plan and invest in innovation and allows grocers to change their orders to a take-it-or-leave it offer.
The retailers would argue that leaving the possibility of changing an order at the last minute ensures quality is maintained and that if they regularly changed agreed orders, their reputations would be damaged to such an extent that suppliers would not trade with them.
This year the Competition Commission said it was impossible to say how widespread such unilateral last-minute changes to orders are because of lack of evidence. It said it had been told suppliers were too frightened to come forward with hard facts “for fear of being delisted or other retaliation by their main customers”. A Friends of the Earth survey of 99 farmers showed that “several farmers” had suffered losses as a result of such changes.
Slotting allowances and pay-to-stay- fees (also known as “listing fees”)
The grocers may demand a “slotting allowance” – a cash fee – up front to provide shelf space for a new line. They are paid per item, per store. Alternatively they may demand listing fees, to cover the cost of the administration behind introducing new lines.
Supermarkets may also demand a pay-to-stay fee – a cash “rent” on shelf space allotted. They may ask suppliers to submit bids for space on shelves, at the end of aisles or in freezer units.
The grocers argue that a slotting fee is a signal of a supplier’s confidence in a new product and a payment to cover the risk of a product failing when that space could go to an already successful product. However, it can also mean small and new suppliers have no chance of getting their products on shelves because they cannot pay the fees. Also large, rival suppliers can bid up the price of shelf space to keep competitors out.
The Competition Commission has pointed out that slotting fees can drive prices up as suppliers include the fee in their price.
Market research group Gfk said more than a quarter of suppliers pay slotting allowances regularly or occasionally. About 15% regularly or occasionally pay pay-to-stay fees.
Grocers may appoint “category captains” – usually a large, branded goods supplier – to advise on which products are offered to shoppers, how shelves are laid out, goods are priced and which are promoted. The Competition Commission has pointed out that category captains can manage the ranges stocked to their own benefit and can learn about their rivals’ plans, prices and new products from their rivals.
Exclusive dealing arrangements
EDAs restrict the number of retailers a supplier can deal with. It can mean a supplier agrees to sell only to one supermarket and promises not to sell to a rival. They are most often used with own-label products.
Exclusive purchasing agreements (EPAs) also exist where a retailer agrees only to buy from one supplier. Alternative suppliers cannot therefore compete. The supermarkets argue that EPAs give suppliers a sense of security and allow them to invest with a greater sense of security. The Gfk survey shows that more than a third of suppliers were asked to enter exclusive arrangements and one in five agreed.
Supermarkets often demand payments towards advertising certain products and/or to cover the cost of price promotions. The Gfk report revealed that 70% of supermarket suppliers make either regular or occasional payments towards marketing costs or price promotions. About 43% said they paid some “other rebates”.
Supermarkets ask for discounts to suppliers’ prices as a matter of course, and suppliers expect them to. They are usually related to the volumes that are expected to be sold, called over-riders, or promotional activity planned. Suppliers, however, resent demands for retrospective discounts, which retailers can demand after a deal is agreed and after goods have been sold.
Suppliers may be asked for payments to cover problems ranging from poor stacking of pallets to putting bar code stickers in the wrong place. The penalties demanded may include lost profits, the cost of rectifying the problem and an administrative charge.
Supermarkets can ask suppliers for payments towards refitting stores or for stock to fill the shelves of new stores. Suppliers are often asked for support on “margin erosion” – where profit margins are reduced as a result of cutting prices. These are commonplace and suppliers expect such demands.
Explainer: Code of conduct
More than half of the suppliers surveyed by consultants Grant Thornton were unaware of the terms of the code of conduct that covers supermarkets and their suppliers, introduced in 2002. Of those who are, more than three-quarters do not believe it offers protection from the financial might of the major supermarkets. Many also fear the code does not go far enough as it does not cover milk, meat or bread. It is also voluntary. The code was introduced to try to protect suppliers from the “bullying” tactics used by supermarkets. However many suppliers are fearful of invoking the code as they do not want to lose their contracts with the supermarkets.
More than half feel the code is not enforceable as it does not encourage the supplier to make a formal complaint to the Office of Fair Trading. The code bans stores from charging suppliers for the display of their goods in favourable positions and for promotions such as “buy one get one free”. The code covers stores with more than 8% of the market. Grant Thornton surveyed 50 senior directors of suppliers to UK supermarkets with turnovers ranging from £10m to over £100m per year.