Saying goodbye to hello money

With Minister for jobs and enterprise Richard Bruton finally signing the grocery goods regulation into law this week, it should rebalance the power in favour of suppliers and producers. Six years overdue, some producers and suppliers are questioning how effective these regulations and their enforcement will be.

How has the balance of power shifted?

The grocery supply chain has become retailer-driven. In most cases, the retailer has become larger than the supplier. In the past decade, grocery retailing has consolidated, with large supermarkets emerging that command significant shares of the grocery market.

Market data from Kantar Worldpanel, shows the big three supermarkets in Ireland have a combined market share of 73.4%, while in the UK the big four have a combined market share of 72.5%.

This relative scale allows supermarkets to dictate terms and conditions to producers. This offers them a greater prospect of obtaining price concessions from suppliers as well as being able to charge suppliers directly for access to their stores (eg through listing charges or shelf-space fees) and impose other restraints on suppliers (such as exclusive supply obligations).

Through aggressive bargaining strategies, including demanding payments for listing or delisting products, suppliers must guarantee a shop margin, guarantee a back-office margin, and guarantee a minimum level of promotion.

Punitive promotions

If launching a new brand, the supplier must guarantee that it will at least equal the margin on the substituted product and, if not, pay the difference.

Where sample tastings are held in store, more often than not the supplier must use the ones provided by the retailer. Allied to this, suppliers must offer rebates on goods already sold, enter into exclusive supply obligations and other non-compete contract clauses.

These practices are not restricted to Ireland. Last week, the UK’s grocery regulator, Christine Tacon’s probe into Tesco’s accounting practices highlighted exactly what has been going on.

Not only was Tesco found to have intentionally delayed payments to suppliers in order to support profits, Tacon had serious concerns around deductions that Tesco had made against suppliers to maintain margins.

Money talks

The report also makes reference to Tesco requiring “hello money” from suppliers in order to secure better positioning or increased space on shelves.

While Tacon said she found no evidence of this practice from Tesco, she did have concerns about other practices that could amount to indirect requirement for better shelf positioning. Tesco, in reply, said it had mended its ways, apologised and said it was “now a very different company”.

Set against a backdrop of increased competition, a changed shopper and grocery deflation, supermarkets have never been under as much pressure to hit targets.

Determined to drive footfall and take market share, the supermarkets’ level of aggression towards suppliers has been increasing.

They are effectively asking suppliers to rebuild their store formats while also guaranteeing their margins, as they battle to fix a broken model.

Discounters

The discounters have hit the big three hard, taking a combined 15.9% of the market. They have a much simpler model and agenda when it comes to suppliers.

Because they carry far fewer suppliers, 500-1,000, compared to Tesco with more than 3,000, they depend more on the ones they have.

These practices are rampant across the industry, and the level of discounts and rebates are much more aggressive in Ireland.

This is surprising, considering that the UK is a much more competitive market, and the Irish market is much smaller.

Fear of speaking out

Yet suppliers are afraid to speak out for fear of being delisted. After all, these supermarkets are their major or sometimes sole customers.

But at whose expense? The shoppers aren’t losing – they have never faced as much choice and are spending less money on food (down 1%) than one year ago, according to the CSO.

And despite their customer and community-friendly messages, supermarkets continue to deny the activity, yet they don’t seem to be losing.

Irish figures

It is very difficult to see how much money they are making in their Irish operations. Tesco subsumes Ireland into their UK numbers, while Dunnes Stores is a private company that doesn’t publish accounts. Musgraves (Supervalu) is a wholesaler that sells to franchised stores.

Musgraves’ last set of accounts shows they make margins of 1.4%. This does not include the franchise margin, which is thought to be between 4-5%.

Tesco, which has had industry-beating margins in the past, in excess of 6%, has seen margins fall in the last few years to around 4%.

These margins are seen as world beating, considering it is a developed market.

Meanwhile, as retailers continue to look for increased value to protect their margins, the Irish grocery supply chain downstream is being hollowed out. Simply put, suppliers are rebuilding the supermarkets.

COMMENT

Competition authority needs sufficient clout

This should be a simple industry, where retailers make money buying and selling food. No one denies the retailer a fair margin. But it is the level and how they take it that causes concern.

The fact remains that the effect of retailer buyer power, either directly applied or working its way through the supply chain, is taking income away from primary producers and suppliers.

One of the biggest challenges for the competition authority will be in its inability to uncover, prove and fine a supermarket if it is found that the regulations have been breached.

It is hoped the competition authority will be given sufficient resources to investigate claims and that legal enforcement will be effective.

It is disappointing that Tacon was only given the power to fine retailers in 2015, which meant no fines have been imposed to date.