'Fair trade' is necessary if we want the retail sector to continue thriving
As suppliers battle for exposure on the shelves, retailers insist they are fighting for the consumer. Peter Flanagan investigates
Published 14/07/2011 | 05:00
'BUY one get one free'. 'Three items for €3'. These every day offers are so common at this point we don't think twice about them, especially when we go into a supermarket and have the chance to buy, say, 3kg of potatoes for the price of two.
We take it for granted that the supermarket is absorbing the hit on price in order to get us into their shop.
That's not always the case, however. In many cases the retailer isn't taking the hit at all. Rather, that price cut is being taken by the supplier of the goods. And if the supplier doesn't accept the lower price, then the retailer will take their business elsewhere.
The supplier/retailer relationship at the moment seems to be weighted in the retailers' favour, and it's getting worse. For the consumer, though, that means lower prices. And in an economy as depressed as Ireland's, lower prices are king.
Is this sustainable? Should customers be willing to pay a bit more in order to preserve jobs in Ireland? And who is right? The retailers pushing for lower prices for their customers? Or the suppliers trying to protect their business?
The supermarket sector is one of the touchiest subjects in Irish business. Just how touchy was revealed last week when Enterprise Minister Richard Bruton announced plans to introduce a code of practice to prevent "unfair" practices in the grocery sector after suppliers and retailers could not agree a voluntary code themselves.
When the Irish Independent contacted suppliers to attain their views on the big multiples, positive and negative, none wished to talk on the record about the matter. Some admitted to fearing the multiples taking retribution if they criticised them publicly, others simply said it would not serve their business to air grievances in public.
"Our relationship with the supermarkets is very good," said one. "But we have to be realistic. They hold most of the cards."
Depending on who you talk to, there are all sorts of questionable practices played out in the sector. Whether it's the alleged requirement of 'hello money' having to be paid by suppliers to retailers in order to get their products on the shelves, below-cost selling, or other practices, it's clear the sector needs some sort of regulation. The Government's code of practice in its current form, though, does not seem to have satisfied anyone.
Torlach Denihan of Retail Ireland, a trade body whose members have some 3,000 shops that purchase some €5bn worth of Irish goods every year, warns that more regulation of the sector will lead to higher prices for consumers.
"Retailers negotiate hard with suppliers to get lower prices that can be passed on to the consumer, something that is legitimate commercial behaviour as was stated in the Competition Authority's May 2009 'Report on the Retail-Related Import and Distribution Sector'," he said.
"The code as proposed will make it significantly more difficult for retailers to obtain best value from suppliers and this may well lead to higher retail prices.
"In addition the compliance costs will be a burden on retailers and suppliers," he added.
Not surprisingly, the IFA takes a different view. President John Ryan believes the code as it currently stands "has more to do with protecting the retailers and their predatory pricing rather than achieving equity and fairness in the food supply chain".
Clearly, it is a dispute that does not have a straightforward answer.
When it comes to getting their products on shelves, inevitably the big suppliers will tend to have more leverage with the retailers. Most people in the business accept that big suppliers, who have a host of major brands in their stable, will always have more leverage than the smaller, 'one product' suppliers.
"It really depends on the relationship you have with the retailers," said one supplier.
"In most cases, it is a two-way street, especially if you are established with them and the brands that you are supplying are popular with the consumer.
"There is a lot spoken about how the multiples are hammering away at suppliers and, yes, there will be the odd stand-off but by and large we have a good relationship with them."
Not everyone shares that conciliatory view though. One supplier said the 'two-way street' doesn't exist at the moment.
"Suppliers have had margins cut to the point where businesses aren't viable any more. At the moment the sector is weighted entirely in the retailers' favour who are able to impose swingeing terms on suppliers and we are really struggling now," he said.
"The code the Government is proposing is good but it may still come too late for some suppliers. We aren't talking about luxury items. We're talking about the basics of an Irish pantry," he added.
When asked about the presence of hello money, below-cost selling and other practices, his response is telling. "Almost everything you can imagine that could go on does go on. It is as bad as people say it is."
Disputes between supplier and retailer can take many guises. Only this week the UK Office of Fair Trading launched an investigation into Kerry's acquisition of Headland Foods after their main retail customers complained of higher prices.
Headland, which has been losing money, closed one of its plants after the merger due to the difficult trading environment. Bloxham Stockbrokers took the view of many in the business when they called it "ironic that a highly concentrated retail sector should be complaining about a supply chain that rationalises in response to intense customer pressure".
Earlier this summer a dispute between Glanbia and Musgrave Group, the parent of SuperValu, saw a number of Glanbia products briefly missing from SuperValu shelves.
There have been many more disputes between supplier and retailer but they tend to be kept out of the public eye. After all, if the supplier wants to have a chance to get a contract back it's not in their interest to publicise the problem.
Then again, it does suit the retailers to have this fearsome reputation for screwing suppliers, and a lot of that is myth, said one chief executive.
"In a lot of cases, the multiples' bark is worse than their bite. Yes we've had run-ins with them but by and large this is a relationship-driven business and if we're a reliable supplier, the retailers will be more likely to use us. Price obviously plays a role but it isn't the main driver as far as we can see.
"Do we provide the best quality goods consistently in a timely manner? Are our products popular? Are we always able to fulfil the orders that come in from the retailer? These are all questions that feed into the retailer's decision to use us or another supplier."
"You have to remember as well that it's good for the multiples to have this tough reputation. A lot of their promotional work is aimed at reinforcing the fact that they are working hard to keep prices low for the consumer and that, in a sense, they are 'fighting for the consumer'. Politically, it's good for them to be feared by prospective suppliers as well," he said.
The big companies that specialise in supplying branded food products to the multiples undoubtedly have a major advantage over the smaller suppliers and those that specialise in private or own-label goods.
If, for example, Kerry Group's Denny sausages and Charleville cheese are especially popular among consumers, then clearly it would be counterproductive for a supermarket to pull them from the shelves in order to get lower prices out of Kerry.
Private label suppliers can't do that. To a certain degree they are hostages to the retailer. After all, if Tesco decides to end its relationship with a private label supplier, that company does not have the brand recognition to be able to push back. Tesco Finest coffee will still be Tesco Finest coffee no matter who is providing it.
The same goes for the small and medium suppliers, particularly if they are providing a small number of less well-known brands.
"They (the retailers) dictate the terms," said one. "If we want to get on the shelves, we have to provide what they want, even if that means having to drastically change our methods and absorbing the expense of below-cost selling. Exposure on the shelf is everything for us. Without it, we don't have a business."
Mr Denihan, however, is clear that the retailers are just trying to compete in a competitive and depressed market.
"Retailers across the country have had to cut back significantly and are under huge pressure to maintain affordable prices. It is an open market here and if there were great profits to be made in the Irish market then there would be retailers from across the world queuing up to enter the country. That's not the case," he claimed.
Feelings in the sector, especially among suppliers are strong, but if there is going to be some equity in the market the Government will need to impose 'fair trade' legislation and we, the consumers, will have to be willing to spend a little more.
Without those two things, this problem will just continue and the food sector, which has been one of the few bright spots in the Irish economy, could well be forced down again.