On the supreme power of the retailer

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I have worked in FMCG for a long time and rarely has life been so tough as a brand owner.

The increasing concentration of retailer power has long been a factor. Add to this the ever more sophisticated retailer private label offerings, the toughest economic climate we have seen in recent times, the relentless culture of price comparison and profit-diluting promotions, and you have a perfect storm where standing still becomes a respectable result for many.

While it may not always feel like it, the above factors are largely within our control. The really tough times start when we become exposed to uncontrollable external factors such as currency fluctuations or spikes in the cost of raw materials. Spare a thought this week for all of our peers who rely upon wheat or cocoa as key ingredients for their brands.

Russia last week banned grain exports for the rest of the year after a severe drought and wildfires destroyed 20% of its wheat crop. The price of wheat, which has already jumped 70% on world markets this summer, has risen further.

Meanwhile, London hedge fund Armajarohas been accused of gambling with the lives of cocoa growers as it purchased 7% of the annual global production. Cocoa prices have risen 150% in the past18 months.

“As brand managers we are stuck in the middle, accused of frittering away what little profit remains.”

As brand managers,we are stuck right in the middle, squeezed from every angle and accused of frittering away what little profit remains.

Our shareholders continue to demand top line growth and improved profitability, as do our retail customers who are also busy beating each other up on price. And the consumer at the end of the chain does not react positively to a sharp hike in retail pricing.

The academics out there would tell us not to panic as the value chain will simply realign behind much higher retail prices and it will soon be business as usual.

I admire the economic theory, but how many academics have been to Tesco head office recently to secure a price increase? The reality is that UK grocery retailers yield more power than the vast majority of their suppliers. Any impact on their bottom line is simply recharged to the brand owner in one form or another over time. The net impact for most is that the marketing budget becomes the balancing figure in a distressed profit and loss statement.

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