Peace is breaking out in the grocery trade. Retailers and brand manufacturers ,which have traditionally had a strained, if symbiotic relationship, are rushing to bury their hatchets. The most public examples are Sainsbury’s agreements with Procter & Gamble and Mars (MW July 5 and 26), but the other major players are also doing deals.
The rapprochement between retailers and suppliers is a cash-driven peace settlement and one that has a fragile look about it. It has also sparked concerns that the relationships could lead to anti-competitive practices which might reduce the number of both suppliers and retailers.
The past three years have seen disputes over copycat products, the growth of own-label and an implied downgrading of branded goods on supermarket shelves. Now a temporary truce in hostilities has evolved to give both sides time to assess new ways of reducing the spiralling costs of getting products onto shelves.
Sainsbury’s initiative in forming special joint teams with both P&G and Mars is the first public sign of this evolution. With the suppliers’ input, Sainsbury’s will select the best range of products to display on its shelves – a move destined to irk other brand owners and lead to a cut in its own-label products.
Sainsbury’s primary motivation is to find ways to make its shelves more attractive to shoppers put off by the increasing levels of own-label products and a perceived lack of choice. Sainsbury’s marketing director Kevin McCarten, a P&G trained marketing man, understands consumers need choice and will shop around until they get it.
He says the aim of the tie-up with P&G is to “re-merchandise” a number of key product areas such as detergents and personal care items – to work out the best mix of products on the shelves.
The partnership with P&G enables the two to work out a balance of merchandise involving a reduction in own-label lines and greater prominence of brands. The chain is to cut back on clothing and use the extra space to promote branded goods.
It represents a major U-turn for the retailer and is an admission that in some areas, including household detergents, Sainsbury’s drive into own-label went too far. It previously filled its shelves with own-label products, reaping ever higher margins and severely angering branded suppliers who saw their lines and margins diminishing. Producing copycat versions of branded products further soured relations.
The Institute of Grocery Distribution (IGD) brokered a disputes procedure deal over copycat products because of fears that the arguments were beginning to damage business. But it has yet to be really put to the test.
However, there is another more pressing financial motive for the two sides to move closer.
“In the past two years all the major players in the grocery retail business, including Sainsbury’s, Safeway, Tesco and Asda have struggled to rein in rising costs,” says one supermarket source. “Increased employment, all the different mechanisms (such as loyalty schemes) to operate, and the fact that as they broaden into other product areas the distribution costs rise, because they are dealing with lower volumes. All of these factors are making the business more expensive. And the supermarkets have to crack the problem.”
Sainsbury’s chief executive Tom Vyner says annual savings of 1bn can be achieved by manufacturers and retailers co-operating in the development of their supply chains. The retailer’s enthusiasm is matched only by the brand owners’ need to reduce its advertising and marketing costs. P&G has a global policy of cutting spend from 25 per cent to 20 per cent of sales revenue. One way of doing this could be to “share” the marketing burden with retailers through promotions and improved in-store visibility.
To this end, they are developing new ways of keeping costs down in the product’s journey from factory floor to supermarket shelf and are ensuring that products hit shelves exactly when they are needed so there are no costly overlaps when shoppers are faced with empty shelves or suppliers have warehouses full of products fast nearing their sell-by dates.
At the moment, the relationships are designed to erase practical problems. But there are concerns in the industry that it is a short step from co-operation benefiting retailer and supplier to bigger players squeezing smaller retailers and suppliers out of the market.
“The relationship between suppliers and retailers has been improving,” says one analyst. “But it could be bad news for small manufacturers who end up delisted. If a retailer has a good relationship with three out of the four product manufacturers, those three will be stocked.”
The analyst believes the closer relationships between particular retailers and suppliers could at a later stage attract the attention of the Office of Fair Trading for anti-competitive behaviour. Such relationships, he argues, could prove to be barriers to entry for new retailers who can’t negotiate closer ties with suppliers. Similar barriers would exist for smaller suppliers entering the market.
“I understand the concerns,” says Tesco supply chain director Graham Booth. “But we’re in business to satisfy customer needs – whatever they need, we’ll do it – and we would not jeopardise that with a single-supplier relationship. If we do good work with one supplier we can do it with others.”
The drive to achieve efficient replenishment and assortment is part of the philosophy known as efficient consumer response (ECR) which allows both parties to strip out costs from the supply chain through closer technological links.
The shopper buys a tin of beans which is scanned into the retailer’s till and a message is sent electronically to the manufacturer ordering another tin of beans. This keeps shelves full without the need for lengthy inventories and constant renegotiation of supplier deals. Tesco claims it can save 100m “over the next few years” through ECR.
This requires an unprecedented exchange of information between partners. For the scheme to work, retailers will need to warn their manufacturer partner well in advance of promotions to prevent a disastrous stock shortage. If manufacturers are informed of buying trends and promotions, they can tailor production to meet demand.
With consumers able to pick and choose products, it becomes crucial to know who is buying what and why in order to maintain efficient stock replenishment. Retailers’ loyalty card schemes, with their tiny discounts on the weekly shopping bill, are obviously not sufficient to persuade consumers to change supermarkets, but do offer an invaluable means of collecting data on consumers.
By working together and sharing information, there is also an expectation that new products will have a lower failure rate. Manufacturers could be expected to be more innovative when they have the security of a retailer backing their efforts.
This is not “rocket science” as one source points out, but some observers believe these partnerships can only go so far before different vested interests and a desire to increase margins get in the way. Analyst Michael Bourke of Panmure Gordon says: “The customer/supplier relationship can never be a true partnership – they have different interests. Partnerships have a place in sorting out which products sell best, but there is a limit. There are things retailers and manufacturers just won’t discuss.”
Tesco is one retailer which is further ahead than many of its competitors in implementing ECR, according to Joanne Lamey, author of the FT Management Report “Supply Chain Management” 1996.
Her report says: “A key feature of Tesco’s supply chain management is the level of open communication it has with its suppliers. Electronic data interchange (EDI) has played a major part in facilitating this communication. Over 1,300 suppliers are linked to Tesco through the Tradanet EDI network for a variety of activities.”
These include information exchange for details on packs, prices, products, promotions and availability, with demand and stock forecasts shared with selected suppliers. But some observers say such relationships can never work because buying and selling are fundamentally confrontational.
Suppliers are looking for a wide distribution of their goods and high volume sales, whereas retailers are looking to stock only the lines which are most in demand and which make the highest margins.
The objectives of ECR are nothing new. John Ballington, sales director of Lever Brothers UK and a member of the IGD’s ECR strategy group, says: “It’s not rocket science. It is good practical common sense based on key principles. It is all about taking a fresh look at how you are doing things.
“One half of the circle is about efficiency, the other is about building business opportunities to make your category more interesting. It is like getting the jigsaw picture rather than the pieces.”
But he denies that these evolving relationships are giving manufacturers back the status, control and upper hand they lost to the retailers in the Eighties. He accepts, however, that ECR favours the big supermarket players and manufacturers. “It is not a question of a balance of power. Consumers will always want strong brands. They (manufacturers) will always have lots of advertising, they will always innovate, they will always keep up with the times.”
Another hurdle to a successful partnership between retailers and suppliers is the long-established culture of secrecy and years of mistrust.
The big manufacturers will be worried that their secrets could be leaked by supermarket buyers to rival suppliers. Conversely, retailers might be suspicious that plans for a big push in one sector might be leaked to a competing retailer. There is also the mistrust that innovative ideas for branded goods could be spoiled, for example, by own-label copycats.
There is also the suspicion that if savings can be made from implementing an ECR strategy, it will not be fairly distributed and the retailer will benefit more than the manufacturer. But manufacturers too would appear to have a lot to gain from the new spirit of co-operation.
IGD chief executive John Beaumont says: “There were times in the Eighties when retailers would say, if we don’t get better prices we will stock own-label instead of your brands. There comes a point when you have to say that back-biting and pushing one another to the cliff edge is not in the interests of the consumer.
“We are looking at trading off the antagonism between retailers and suppliers against cost reductions, without losing the true competitive spirit. Retailers are always going to put pressure on manufacturers, on price and on quality.”
Alliances such as that between Sainsbury’s and P&G will antagonise their competitors. It is logical to assume that rivals will try to spoil the link-up, or will align themselves with a rival retailer. The result of that could be a small number of strong trading blocks where both supply and outlet are guaranteed on an exclusive, or at least a more tightly controlled, basis.
The industry is reluctant to talk about these trading alliances. As one manufacturer says of its partnership with a retailer: “Crowing about our relationship with one is to the detriment of our relationship with the others. While it goes on we don’t necessarily make a big song and dance about it.”
The prospects for a long-term ceasefire in the confrontation between retailers and manufacturers are slim. They may work together on getting the most efficient supply chain management. They may even announce a truce on look-a-like products, although the clash between Kellogg and Tesco over copycat cereals – the most blatant example since the IGD brokered agreement – would make that less likely.
But while one of them has the upper hand – in this case the retailers – they will be reluctant to give up that position. As Paul Walton, head of the brand consultant Value Engineers says: “Retailers like their relationships monogamous. They find it difficult to live with a supplier if they are live-in lovers with someone else.”