Pricing Pressures

The world’s largest retailer last week singled out the world’s largest supplier for some special treatment. Asda – owned by supermarket giant Wal-Mart – refused to stock any more of Procter & Gamble’s (P&G) toilet roll brand Charmin.

Asda declined to accept P&G’s demand that it push up the price of Charmin by ten per cent, and pass on the increase to the consumer.

Instead, Asda is filling the vacant shelf space with its own toilet roll brand, called Shades, and milking the situation for maximum publicity (MW August 17).

At the same time, P&G rival Reckitt Benckiser unexpectedly singled out the same retailer for some glowing tributes.

Reckitt chief executive Bart Becht said at the company’s results presentation last week that Wal-Mart was “highly performance oriented”.

He continued that Wal-Mart is one of Reckitt’s most reliable partners in terms of profits, providing 15 per cent of its US business and is in the top four businesses in the UK through Asda. He added – to some mirth – “… And by the way, Tesco is another good partner for us.”

With Asda “taking-on” a big brand manufacturer such as P&G, analysts predict a future where retailers, such as aggressively price-conscious Wal-Mart, not only dictate market trends and preferences but also threaten to de-list the brands of some global manufacturers, while favouring others.

Asda head of supplier relations Chris Hodgson says: “We are currently in the process of learning from Wal-Mart about how to deal with suppliers.”

And this learning, the analysts fear, could lead to cutting consumer choice and gradually pushing up prices on unknown brands – a scenario familiar in Wal-Mart’s US operations.

Hodgson adds: “We want to sell Charmin, but we must balance this with our concerns of representing good value to our customers. Asda still has a joint business plan with P&G and we will try to resolve this as our relationship moves on. To achieve category growth, suppliers and retailers must work together but there will always be conflicts.”

Paul Walton, head of brand consultants Value Engineers, says: “It is not surprising that Reckitt made a remark stating its preference for Wal-Mart, since the retail outlet is undeniably a huge player. In fact, other premier league suppliers share the same view of Wal-Mart. And it is true that companies do fundamentally pick and choose their relationships with retailers, even if they don’t talk about it.”

An industry source who strongly advocates a code of conduct to “police” both the retailer and the supplier says: “Wal-Mart is simply a bully. At a time when most manufacturers happen to be multinationals and relatively powerful, along comes Wal-Mart which is unequal in having even bigger clout. Not only can it push out loved and known brands, but in time may also replace them with unheard of brands from countries such as Argentina. That would be one of the worst scenarios to be faced with.”

The Wal-Mart/Asda venture in the UK is believed to have tipped the tables on the big brands, which now have to yield to the retailer’s pressures on pricing and quality.

Asda strategy could come unstuck

Henderson Crosthwaite analyst David Stoddart adds: “It is surprising that Asda is targeting P&G, since the idea of “every day low pricing” (EDLP) was invented by P&G and so they share the same approach. Other retailers also pitch on price, but then no one has been as skillful as Asda at using public relations to emphasise it.”

Analysts are also quick to point out that with the backing of Wal-Mart, Asda has the power to “call the shots”. But in the long term a business that dictates to its customers could come unstuck.

“The example is Sainsbury’s, which had a problem when it over-emphasised own labels and appeared to be restricting consumer choice,” says Stoddart.

Customers will pay for rising costs

Observers are worried that it will be the consumers who eventually have to pay – either through higher prices, or through the gradual disappearance of known brand names from the shelves.

Analysts say that while retailers look towards stocking only the lines and brands most in demand, the suppliers look for a wide distribution of their goods. So, with such different approaches, can there ever be a solution that suits everyone?

Simon Knox, professor of brand marketing at Cranfield School of Management, says “The nature of the relationship between the retailer and the supplier, though strained, is changing towards mutual dependency. Retailers no longer want to deal simply at a product level but at a business level with the brand manufacturers. The issue of Asda and P&G seems to be a tactical one about pricing issues, something that all retailers resort to.

He adds: “But there now exists, particularly with retailers such as Tesco, a genuine desire to achieve joint-pricing decisions, more transparency and shared values and visions with manufacturers.”

Industry insiders , however, believe that since the manufacturers supply to various different retail outlets, all addressing differing needs of their customers, there will be times when their operations will clash.

Also the constant need for brand manufacturers to come up with tailor-made initiatives for retailers – ranging from EDLP to special prices, can result in closer relationships between a particular supplier and its favoured retailer.

“If Reckitt is saying that it is in favour of Asda, it is because the retailer’s EDLP is currently working for Reckitt “, says Safeway director of corporate communications Kevin Hawkins.

He adds: “On the other hand, because Asda is pursuing EDLP, its ability to respond to P&G’s price hike is restricted. Asda can either put up its prices and pass it on to customers or absorb the cost and trade at a loss. At the end of the day, manufacturers’ relations with suppliers will always be hard-nosed, because both need to do well out of the deal.”

Even so, the market at large seems to be under unusual pressure both from competition, led to some extent by Asda, and from the strength of the pound, which has made imports cheaper.

But despite friction between suppliers and retailers, there is also a genuine desire to collaborate. Recently, for example, Sainsbury’s unveiled its own code of commercial practice, called “Working with suppliers”. The code, covering everything from selecting suppliers to spotting and solving problems, is a statement “prepared in order to set out in clear and unambiguous terms, Sainsbury’s approach to its trading partnerships”.

The code was developed from a recommendation by agriculture minister Nick Brown. It followed criticism of the retailer’s treatment of small suppliers such as farmers – though now it appears some of the world’s biggest multinationals will be reading such codes with interest.

Size matters

While industry observers are all for easing the differences between retailers and brand manufacturers, they agree that the relationship can never be evenly balanced. Analysts divide the suppliers into three categories – big manufacturers with big brands, big suppliers of own-label products and small suppliers, such as traditional breweries, that aim to offer something different. The retailers meanwhile are divided into the two categories – the giant Wal-Mart/Asda and the rest.

An industry source says: “In the end only size matters – whether you’re a retailer or manufacturer. The scales will turn in favour of whichever is bigger.”