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  1. Analysis
April 18, 2005

Supermarkets: Buying power or bully power?

Buying power is often used by supermarkets to negotiate with their suppliers to get lower prices. These savings can then be passed onto the consumer in terms of price cuts and promotions. But do consumers really win in this situation? And how does it affect suppliers? Bernice Hurst investigates.

Buying power is often used by supermarkets to negotiate with their suppliers to get lower prices. These savings can then be passed onto the consumer in terms of price cuts and promotions. But do consumers really win in this situation? And how does it affect suppliers? Bernice Hurst investigates.

It is no secret that buying power is a lever for negotiating with suppliers to get lower/lowest prices in order to maintain profit margins and reassure customers and investors that prices can be reduced without reducing quality. Nor is it a secret that it can, sometimes, equate to bullying.

Even the Competition Commission and Office of Fair Trading in the UK are expected to concede shortly that a voluntary code of practice has not only been unsuccessful but has possibly done more harm than good.

When retailers boast that they have reduced 6000 prices, but insist that they haven’t reduced quality, questions immediately float to the surface about how those savings have been achieved. Is it really through cost cuts? And, if so, which costs? Employees’ salaries and/or benefits? Executive bonuses? Investors’ dividends? Efficiency? Slimmer margins? A combination of all those components? Or is there an element of squeeze that has been placed on suppliers?

Crushing suppliers?

No sooner had Sainsbury’s announced, in January 2005, that it was reducing 6000 prices than it told suppliers they would have to wait longer to be paid.

And retail analysts have attributed Tesco’s growth to its buying power, possibly a euphemism for crushing suppliers. Retailers would undoubtedly like consumers to believe that buying power underpins diversity, encouraging competition amongst suppliers. But it also pressures suppliers into reducing their margins. Following this vicious cycle all the way around leads to the question of whether lower prices really are better for consumers in the long run. Or whether they, too, are being bullied into believing that they are simply being supplied with what they demand, albeit with what they do rather than what they say.

Critics counter that some suppliers participate largely because they are desperate for a market and therefore willing to accept, i.e. unable to not accept, bad contracts, insecurity, unending demands for more targets and hard to meet standards, unacceptable levels of rejects and, most of all, ever-decreasing prices with resulting ever-decreasing profit margins for them whilst increasing those of retailers. No supplier can continually reduce prices without eventually altering methodology and quality. There is a point where neither retailer nor producer can rely purely on efficiency savings.

Another fairly open secret is the scandal of the gangmasters. Although supermarkets, their suppliers and agents all vehemently deny collusion and awareness, there is little doubt that badly treated and poorly paid migrant workers are used by many large farmers and manufacturers. This undoubtedly creates cost savings but may also have a serious impact on quality.

Limited ranges

One way supermarkets camouflage pressure on suppliers is by promoting low prices as “value”. Once upon a time, value meant that customers felt what they received for their money was worth the price they paid. Today, it simply means cheap. And supermarkets insist that this is what their customers demand regardless of studies and surveys showing otherwise.

There are different ways to maintain margin and supply demand, however, depending on perceptions and differentiation. German discounter Aldi focuses on limited ranges, mostly own-label, with minimal display and merchandising. Aldi’s style varies according to store location and target audience. The German retailer may have initially made its name by simplifying display areas and not bothering to unpack packing cases but having grown to international level, with some 5000 stores in Europe, the US and Australia, its 21st century strategy is more responsive to demographics. Although products are “developed in conjunction with leading suppliers”, customers don’t necessarily know who they are, buying and trusting Aldi’s own brands. “Customers are not confused,” they claim, “by row after row of products differentiated by brand name only.” They know that they can count on reliability and quality. Reducing the number of brands enables the chain to use its buying power more fairly.

Danish chain Netto has also based its growth plans on a no-frills theme. Keeping merchandising costs to a minimum helps maximise savings made in buying.

Not that it always works. Discounters are less popular in the UK, for example, where shoppers need to be “educated”, say the retailers. They need to be persuaded that cheap doesn’t necessarily equate to bad or poor quality. In Japan, too, the message needs to be circulated. Seiyu, which is owned partly by Wal-Mart, has suffered because customers do not see everyday low prices as a sufficiently compelling argument.

French-based Carrefour harnesses its buying power to bring small producers into its mix. The world’s second-largest retailer has devoted shelf space in its European and Japanese stores to small producers from other countries who are said to “supply alternative products to the global power brands”. The aim is differentiation, creating a unique profile that “helps small and midrange companies to develop their export business.”

Location still important to shoppers

Supermarkets may use their buying power to supply the low prices they insist customers demand but that isn’t always as important as they proclaim. Mintel’s report, Customer Loyalty and Discounting in Retailing, published in January 2005, concluded that location, and not price or range, is the number one factor for most British shoppers when it comes to choosing which store to frequent. Shoppers, the research revealed, are twice as likely to opt for a store that is “the easiest to get to” than be swayed by prices. Senior analyst Neil Mason suggests that buying power can be leveraged to attract more customers if the retailer has a variety of shop formats. They may go to the supermarket once a week but a convenience store once or twice a week on top of that. If the same retailer owns both types of outlet, and has used collective buying power to offer a range and price selection that are appealing, there is more opportunity for increasing sales.

Convenience store popularity and ubiquity is growing apace albeit with fewer owners. Consumers may grab bargains with both hands when they appear or when asked if they want them but they are not always the priority that supermarkets persist in promoting. Achieving balance between buying power and selling power is essential to achieving ongoing sales and profits.  Studies have repeatedly shown that what consumers say they want or expect to spend doesn’t necessarily reflect their actual purchases once they are in the store. More important is flexibility and getting what they want, when they want it, at a reasonable price. In this sense, retailers’ buying power can offer an irresistible proposition.

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