May 25, 2012
U.K. Suppliers May Get Protection From Retailers
Retailers are obliged to convince shoppers they are getting low prices and value for their money while convincing investors they are achieving maximum profits. Along the supply chain, everyone needs to achieve the same objectives. At the end furthest from retailers, producers and farmers have the least negotiating power. This can lead to factory farms, economies of scale, efficiency savings and doing more for less (insert your own cliché) in the name of free markets.
A new Grocery Code Adjudicator may level the British playing field, ensuring supermarkets can’t "scrap arrangements with suppliers at the drop of a hat," according to business minister Norman Lamb. Reports in The Grocer, www.just-food.co.uk and The Guardian expand on the development. Mr. Lamb said supermarkets’ power must be balanced with responsibilities, getting the best possible deals and passing them on to consumers while behaving "fairly and lawfully."
While he and the Food & Drink Federation (FDF) cited the potential for increased innovation and investment, the British Retail Consortium (BRC) said likely additional costs could stifle such outcomes. "A lot of little pieces of red tape combine to make one big burden" that "duplicates an existing supply code of practice and writes a blank cheque on behalf of the retail sector." Andrew Opie, BRC food director, insisted the U.K. supply chain is a scene of "collaboration not conflict" and denied retailers abuse their power.
The Groceries Supply Code of Practice (GSCOP) protects small suppliers from enforcing the code and "speaking out about unfair practices" according to FDF director of communications, Terry Jones. It would be the adjudicator’s responsibility to oversee GSCOP’s implementation.
Back in January, The Guardian said that farmers endorsed the need for an adjudicator, "accusing big supermarkets of driving down their prices below the cost of production and they want to see an end to what they regard as unfair practices." The adjudicator could "help ensure fairness among supermarkets, suppliers and consumers, and find ways to put a brake on food price inflation." Some politicians claimed consumers would also benefit because there would be less confusion and "bumper profits" made by supermarkets would not come at the expense of the public.
BrainTrust
Recent Discussions
Discussion Questions
Discussion Questions: Do farmers and suppliers to American retailers need an adjudicator to protect their interests? Is the balance of power in the U.S. too skewed toward retailers versus suppliers?
Poll
Fairness in the American capitalistic system is based on the overall skill one applies to operating a business. It may be true that one always plays fair when one has the winning hand; it follows that the key objective is to earn the winning hand … fairly.
In regard to balance of power in the U.S., if it is skewed toward retailers versus suppliers, why are the net profit margins lower in food retailing? Perhaps the British and American food retailing models are too different to compare equally.
Before anyone goes on a rant about, “European-style socialism and the supermarket,” let’s think for a moment. Many farmers already have part of their interests protected in the form of crop subsidies, so let’s not get lost in some, “totally free market,” fantasy. That said, we do — at least in principle and when it serves our interests — practice a form of “pure” free market capitalism in this country under which you are free to succeed, fail and squeeze margin and profit anywhere you can.
Being a farmer — especially a small farmer — is a tough, tough, tough way to make a living as anyone who has ever done farm work themselves will be happy to tell you. The work is hard, the hours are long, the rewards are slim and you are held hostage by weather, banks and market prices which is exactly why so many family farms fold while industrial or combine farms flourish.
And, last time I looked, Willie Nelson, Neil Young and John Mellencamp weren’t holding any “Supermarketaid” concerts.
But … based on its track record it’s just hard to believe the federal government could “help” farmers, retailers or consumers by inserting itself in the middle of a supply chain. A free market rarely benefits everyone, at least not equally. Many of the Founding Fathers owned slaves to keep down agricultural production costs.
Of course the deck is stacked against farmers — and again, family farmers in particular — it has been for the better part of a century.
One day we’ll wake up and figure out that commodity costs have skyrocketed and the cost of finished products has hyper-inflated and that we sacrificed crop diversity to get there. And, on that day, we can all clutch our Adam Smith to our breasts and wonder what the real, “wealth,” of a nation is.
Until then, I doubt things will change.
The US legal and regulatory structure is substantially different than in the UK. In the UK, the retailer has the power as the buyer. Additionally with only a few retailers representing the majority of market share, they have purchasing power. Chains determine the price they are willing to pay for merchandise. In the US there is the Robinson – Patman law which sets the purchase price for everyone.
The decision in both countries to buy or not to buy rests with the retailer and always will. Once the decision to buy has been made, there are only a few categories with a contracted time limit. The suppliers’ power rests with attracting loyal consumers, offering unique products and good product performance, for a reasonable price.
Another example of trying to do a good thing, that again will not work. If farmers and suppliers had the will to say no to the big boys, we wouldn’t be in this mess in the first place. Fairness is never going to happen in our system, as many of the large food suppliers have placed their eggs in one basket. Conceptually on paper, it is an effort to have us all work together, but selling a trainload of food to the power buyers is always going to end up in their favor in a big way. Happy Memorial Holiday to all the Vets, and my Independent Supermarket Operators out their trying to make a difference!!!
Let’s get real about how the supermarket business is driven. Operationally, what goes on in the aisles of the stores is brand-on-brand gladiatorial mayhem. Supplier vs. supplier is a process that is supervised by retailers, where the “mayhem” actually happens serially as the retailer meets and negotiates with first this, and then another competitive supplier.
The retailer’s goal is not increasing margins on sales, but rather increasing traffic in the store. Their REAL profit comes from managing the supply chain, because they are running high traffic mini-warehouses in neighborhoods around the world, aka supermarkets. They are highly efficient at this process, to the MASSIVE benefit of shoppers/consumers. Obviously they reap “rents” from those who wish to use their establishment, as a way of reaching shoppers. Hence all the slotting fees, trading allowances and promotional dollars levied on the suppliers.
It is the retailers goal, typically, to build traffic at nearly any cost, as long as the store at least operationally breaks even, even if that means zero operating profit. Because that “zero” will be enhanced from their reasonable and competitive levies on the suppliers.
On the other hand, suppliers’ goals are to maximize margin profits, pretty much their only source of profits. Hence, the conflict between retailers and suppliers is not simply the retailer trying to get the lowest possible price for their goods. One is trying to drive margin down and the other is trying to drive margin up.
There is a Broadway musical, “Oklahoma,” that has the line, “The farmer and the cowman should be friends.” We could paraphrase that as, “The retailer and the supplier should be friends!” It’s NOT going to happen. Way too much to discuss here, but the retailer is managing that brand-on-brand mayhem with the goal of keeping as many brands playing as possible. Remember, the shopper is NOT the retailer’s focus as far as customers are concerned. Their customers — they’re selling access to them — are the suppliers. Only an idiot kills their own customers. Hence, as predatory as retailers sometimes seem, they might stupidly, but not willfully, kill off a supplier.
Although these facts that drive the business are not widely thought of in this way, the reality is that government participation in this raw competitive world is just plain stupid — and will NOT benefit shoppers/consumers. Just more government idiocy in trying to prop up the losers. The “losers” you will have with you always. 😉
One other thing: besides the serial mayhem described above (retailer supplier negotiations), don’t forget that every retailer is competing with every other retailer as well. Which means that brands do have the power to punish a retailer, while relying on the support of other retailers to NOT get run out of business themselves.
In many ways, retailing is the ultimate expression of the freedom of society — ubiquitous and massive choices. Turning the controlling forces of government loose on the vigorous competition going on there will only impoverish the societies that pursue that game. No society suffers long without the force of government creating and maintaining that suffering, all for the ostensible benefit of natural losers.
I don’t really know that much about the difference between supplier concentration in England and here. Intuitively, I would guess the US is already dominated by large manufacturers and the market is pretty even between large supermarket chains and large farm operators.
The bigger question and the one that is being brought to the forefront of this year’s election is whether a free enterprise system is compatible with a successful society. To paraphrase Adam Smith, will everyone maximizing their individual profit lead to the most profit for everyone? I think a lot of people are reconsidering the benefits of unfettered capitalism, whether it is concern over exotic financial instruments, high frequency trading activities that bleed profits off of capital markets, lobbyists who buy off government representatives or Super PACS who distort campaigns with erroneous claims.
Even “Ultimate Fighting” has rules (no eye gouging, no kicks to groin, etc.) and I understand why the UK would want to discourage the loss of small farms, but I also believe that markets should be as free as possible. I don’t like the idea of a board administering the market. I would try to set up some taxes or service charges that may favor small farmers, but are applied evenly across the whole market. If everyone understands the rules, then they can work to maximize their returns within the constraints set by the by fee structure.
No. Smart suppliers manage expectations with their retail partners and compete in the same global field as all of the other suppliers. The ability to better manage costs (and thus prices) along with product performance and supplier communications (and expectations) results in a successful retail relationship.
More Discussions
How Timely Is the Planned Lowe’s Website Renovation Focusing on Personalization?
Is Lowe’s being timely with its website reno, and is it right to be placed as…Should Costco Be Opening Members-Only Gas Stations?
Is this the right move for the warehouse club?As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…
Fairness in the American capitalistic system is based on the overall skill one applies to operating a business. It may be true that one always plays fair when one has the winning hand; it follows that the key objective is to earn the winning hand … fairly.
In regard to balance of power in the U.S., if it is skewed toward retailers versus suppliers, why are the net profit margins lower in food retailing? Perhaps the British and American food retailing models are too different to compare equally.
Before anyone goes on a rant about, “European-style socialism and the supermarket,” let’s think for a moment. Many farmers already have part of their interests protected in the form of crop subsidies, so let’s not get lost in some, “totally free market,” fantasy. That said, we do — at least in principle and when it serves our interests — practice a form of “pure” free market capitalism in this country under which you are free to succeed, fail and squeeze margin and profit anywhere you can.
Being a farmer — especially a small farmer — is a tough, tough, tough way to make a living as anyone who has ever done farm work themselves will be happy to tell you. The work is hard, the hours are long, the rewards are slim and you are held hostage by weather, banks and market prices which is exactly why so many family farms fold while industrial or combine farms flourish.
And, last time I looked, Willie Nelson, Neil Young and John Mellencamp weren’t holding any “Supermarketaid” concerts.
But … based on its track record it’s just hard to believe the federal government could “help” farmers, retailers or consumers by inserting itself in the middle of a supply chain. A free market rarely benefits everyone, at least not equally. Many of the Founding Fathers owned slaves to keep down agricultural production costs.
Of course the deck is stacked against farmers — and again, family farmers in particular — it has been for the better part of a century.
One day we’ll wake up and figure out that commodity costs have skyrocketed and the cost of finished products has hyper-inflated and that we sacrificed crop diversity to get there. And, on that day, we can all clutch our Adam Smith to our breasts and wonder what the real, “wealth,” of a nation is.
Until then, I doubt things will change.
The US legal and regulatory structure is substantially different than in the UK. In the UK, the retailer has the power as the buyer. Additionally with only a few retailers representing the majority of market share, they have purchasing power. Chains determine the price they are willing to pay for merchandise. In the US there is the Robinson – Patman law which sets the purchase price for everyone.
The decision in both countries to buy or not to buy rests with the retailer and always will. Once the decision to buy has been made, there are only a few categories with a contracted time limit. The suppliers’ power rests with attracting loyal consumers, offering unique products and good product performance, for a reasonable price.
Another example of trying to do a good thing, that again will not work. If farmers and suppliers had the will to say no to the big boys, we wouldn’t be in this mess in the first place. Fairness is never going to happen in our system, as many of the large food suppliers have placed their eggs in one basket. Conceptually on paper, it is an effort to have us all work together, but selling a trainload of food to the power buyers is always going to end up in their favor in a big way. Happy Memorial Holiday to all the Vets, and my Independent Supermarket Operators out their trying to make a difference!!!
Let’s get real about how the supermarket business is driven. Operationally, what goes on in the aisles of the stores is brand-on-brand gladiatorial mayhem. Supplier vs. supplier is a process that is supervised by retailers, where the “mayhem” actually happens serially as the retailer meets and negotiates with first this, and then another competitive supplier.
The retailer’s goal is not increasing margins on sales, but rather increasing traffic in the store. Their REAL profit comes from managing the supply chain, because they are running high traffic mini-warehouses in neighborhoods around the world, aka supermarkets. They are highly efficient at this process, to the MASSIVE benefit of shoppers/consumers. Obviously they reap “rents” from those who wish to use their establishment, as a way of reaching shoppers. Hence all the slotting fees, trading allowances and promotional dollars levied on the suppliers.
It is the retailers goal, typically, to build traffic at nearly any cost, as long as the store at least operationally breaks even, even if that means zero operating profit. Because that “zero” will be enhanced from their reasonable and competitive levies on the suppliers.
On the other hand, suppliers’ goals are to maximize margin profits, pretty much their only source of profits. Hence, the conflict between retailers and suppliers is not simply the retailer trying to get the lowest possible price for their goods. One is trying to drive margin down and the other is trying to drive margin up.
There is a Broadway musical, “Oklahoma,” that has the line, “The farmer and the cowman should be friends.” We could paraphrase that as, “The retailer and the supplier should be friends!” It’s NOT going to happen. Way too much to discuss here, but the retailer is managing that brand-on-brand mayhem with the goal of keeping as many brands playing as possible. Remember, the shopper is NOT the retailer’s focus as far as customers are concerned. Their customers — they’re selling access to them — are the suppliers. Only an idiot kills their own customers. Hence, as predatory as retailers sometimes seem, they might stupidly, but not willfully, kill off a supplier.
Although these facts that drive the business are not widely thought of in this way, the reality is that government participation in this raw competitive world is just plain stupid — and will NOT benefit shoppers/consumers. Just more government idiocy in trying to prop up the losers. The “losers” you will have with you always. 😉
One other thing: besides the serial mayhem described above (retailer supplier negotiations), don’t forget that every retailer is competing with every other retailer as well. Which means that brands do have the power to punish a retailer, while relying on the support of other retailers to NOT get run out of business themselves.
In many ways, retailing is the ultimate expression of the freedom of society — ubiquitous and massive choices. Turning the controlling forces of government loose on the vigorous competition going on there will only impoverish the societies that pursue that game. No society suffers long without the force of government creating and maintaining that suffering, all for the ostensible benefit of natural losers.
I don’t really know that much about the difference between supplier concentration in England and here. Intuitively, I would guess the US is already dominated by large manufacturers and the market is pretty even between large supermarket chains and large farm operators.
The bigger question and the one that is being brought to the forefront of this year’s election is whether a free enterprise system is compatible with a successful society. To paraphrase Adam Smith, will everyone maximizing their individual profit lead to the most profit for everyone? I think a lot of people are reconsidering the benefits of unfettered capitalism, whether it is concern over exotic financial instruments, high frequency trading activities that bleed profits off of capital markets, lobbyists who buy off government representatives or Super PACS who distort campaigns with erroneous claims.
Even “Ultimate Fighting” has rules (no eye gouging, no kicks to groin, etc.) and I understand why the UK would want to discourage the loss of small farms, but I also believe that markets should be as free as possible. I don’t like the idea of a board administering the market. I would try to set up some taxes or service charges that may favor small farmers, but are applied evenly across the whole market. If everyone understands the rules, then they can work to maximize their returns within the constraints set by the by fee structure.
No. Smart suppliers manage expectations with their retail partners and compete in the same global field as all of the other suppliers. The ability to better manage costs (and thus prices) along with product performance and supplier communications (and expectations) results in a successful retail relationship.