Tesco: the giant canary in the mine

Commercial income‘ like ‘collateral damage‘ is one of those attractively anodyne expressions that hides a decidedly unpleasant reality. In the UK, even some of the most sophisticated members of the business community have only just been introduced to this term that neatly covers all the cash that retailers extract from their suppliers rather than from the more expected source: their customers. 


In the US, where accounts have to reveal the origin of how businesses make their money, the credit rating agency Fitch suggests that almost all of retailers’ profits – 8% of the cost of goods – now come directly from suppliers. The UK situation may be even more dramatic. If chartered accountant Duncan Smith of Moore Stephens Food Advisory Group’s comments in this BBC piece are to be believed, the big four British supermarkets make £5bn in this way every year – more than their total combined pre-tax profits.

Although the reasons for doing so just now are glaringly obvious, it is far too easy to focus all of our attention on Tesco. Yes, from what we have read, there seems to be little question that Britain’s biggest chain played fast and loose with the facts of if and when supplier contributions would be made, but if we set the timings aside, Tesco was far from the only attendee at this orgy. Waitrose, every middle class Brit’s favourite shop (when they aren’t slumming it at Lidl), also has a price list from which suppliers can choose how to make their contributions and so, apart from the pesky German discounters, does almost everybody else. 


The commercial income Tesco will have got from its Beer, Wine & Spirits department will have been significant, but readers of this article will probably somewhat overestimate the contribution derived from wine companies to the gaping hole in the retailer’s projections. To provide some context, the total value of UK retail wine sales is only around twice the £2.8bn spent on cheese in 2014. However, when it comes to providing commercial income, wine will have significantly overperformed when compared to those dairy counters. Cheese is essentially unbranded; half of what we eat is cheddar of some kind, much of it sold under the retailer’s own brand and bought from a small number of suppliers. So there aren’t as many arms to twist. 

Wine companies in the UK have peculiarly twistable arms, given the relative impossibility of building substantial sales for a brand without passing through the shelves of the big retail chains that control around three quarters of the market. Volumes can be moved through the German discounters, but at low margins and usually under those discounters’ own labels. By contrast, the more fragmented nature of the US market – and its size – allow producers who so desire, to sidestep the biggest chains altogether. 

And this is where the most important difference between the markets comes into play. In the US, wine companies have the potential to run their own marketing campaigns and to build and sustain the value of their brands. Under the UK system, they are hit with a double whammy: almost every penny of spare cash is sucked up by retailers who then regularly reduce perceived brand value by cyclical deep discounting. (Heavy price cuts are a feature of the US market too but they are less regular and predictable; when you see a product at a low price, you are more likely to grab it now for fear of never catching that bargain again). A very few, very strong, global brands such as Hardy’s and Concha y Toro can buck this trend and run effective campaigns of their own, but they are the glaring exceptions to the rule.

The days when Masters of Wine travelled the world cleverly snapping up bargains wherever they found them are long gone. Today, every sale involves negotiators and quite possibly notorious Joint Business Plans which have much in common with the old days when teachers administering beatings straightfacedly told their unfortunate victims that “This will hurt me more than it hurts you”. 

This may not have made the UK a particularly pleasant environment to work in – at least for suppliers who complain about having to deal with serial unexpected requests for additional cash – but, until recently, it seemed to work pretty well for anyone holding shares in the biggest chains. (And, let’s face it, there are plenty of shareholders in other sectors who lose little sleep over the contributions supplier-abuse make to their dividends).

But the climate in Britain may really be changing. There are farmer-friendly parliamentarians who had a nibble at this issue a couple of years ago and seem ready to take a much deeper bite this time, and German role models who daily demonstrate that there is another way to play the retail game. A fresh parliamentary enquiry would have no reason to limit its interest to Tesco.

Quite how easy it would be for an entire national retail system to alter its diet, however, is another question…


3 comments

  1. A superbly written article as always Robert. But I would like to make a couple of small points in defence of how the multiples have been behaving with their suppliers.
    1) Producers/Suppliers, whether of brands or of own label, give incentives to their trade customers which are sometimes based on volume, sometimes based on building profile, sometimes based on eliminating the competition, sometimes because they need cashflow – the reasons are myriad. I do not see why the major retailers should not benefit from this in a normal way. Clearly, if they're in a position of power and are using this power in an abusive fashion, then this must be stopped. But this happens rarely if ever in my view in wine, and perhaps elsewhere too. It is up to the producer to ensure that any one retailer does not become too powerful in their business – and with the size of the world market for wine, it's difficult to see how they could let that happen – and if they do, surely it's their lookout? As wine is based on an agricultural crop, there is a natural fluctuation in terms and pricing based on supply and demand economics. Your article seems to suggest that the only fair way to work would be on a 'net price' basis, so inevitably the question arises: what is a 'net price'. Consumers aren't stupid, and can mostly differentiate between real and artificial promotions – this is why there are a tiny proportion of sales of full price of the infamous 'BOGOF' mechanic. In addition, the companies you mention may be powerful but this has not stopped either of them getting heavily involved in large-scale promotions with all retailers.
    2) Dealing with the discounters is no fairer than dealing with anyone else. What needs to be stopped is the unexpected cash call. But all JBPs are designed to benefit both parties, so if you're not happy with yours as a supplier, it's just a question of not signing one. Or negotiating better.

    This kind of comment is always difficult to make as it is a sensitive subject, but a lot of the commentary I have seen on this issue just simply misunderstands the principles of trading with any business customer – whether a major retailer or not.
    The real issue, as you point out, is: how do you monitor and restrict abusive practices – a tricky subject that Parliament, for obvious reasons, finds awkward to address.
    Excellently argued views as always though.
    Matt

  2. Thank you for your kind comment and considered response.

    My basic point is not that supplier contributions are bad per se. If they contribute to building the brand and sales. I actually like the Tesco Wine Fair model, for example. What I am questioning is the use of the contributions as a simple income stream.

    Also, I disagree regarding the fairness of dealing with the discounters. The relationship is tough, admittedly, but it's like a rugby game. Everybody knows the rules. Many suppliers to the bigger UK retailers complain that the referee keeps moving the goalposts – and rarely to their advantage.

  3. Hi Robert – It's good to see more people opening up and talking about all of this. What I am seeing day by day is also a lot of surprise by a number of smaller wine suppliers in the UK. Some of the UK grocery buyers expect the large companies (the big boys) that have the huge global cash flow (or who don't only sell wine) to fit the listing fees because they know that those products will sell on the shelf and will move… so it's a bit of you pat my back I pat yours… the smaller companies don't get access to the huge gondola end promotions (as much as they wish they could as they could potentially build brands that way) because as one buyer said to me, I can't risk the promotion not going to brand X because I'm personally measured on like by like sales (yr) – so they are risk averse to some extent (this is also one reason you don't see enough innovation unless under retailer own label). A lot of the smaller importers/distributors aren't asked for the listing fees because they simply can't do it and the profit nowadays made on a container is small vs. somewhere like the US… As one large importer said to me, “we don't get paid for 60-90 days” but our label design companies want to get paid within 14-30 days and so imagine doing x labels for a retailer, making 5-15c margin on a bottle times the 18540 bottles in a container…not very much money… in fact it just covers ONE label design…). As Matt says, this is a spiderweb of a conversation as there are so many things to be told and discussed – it's not that easy. And then you get into the story of over-riders or stock that ends up selling at the promotional price instead of at full price that wasn't agreed with the retailer. Transparency and integrity needs to be increased by both sides of the game here… We all know where BOGOFs started and they didn't start with the Tesco buyer – it was a mutually beneficial agreement. The only real way to take this forward in grocery really, is to have agreed structures in place whereby all suppliers follow the same trading plans and structures and rules – but it's not as easy as it sounds and it's tough for the little guys…and often the buyers can help the little guys get shelf space – this is where relationships come in… the big guys know the deal and have the big trading plans and the little guys often get in and have agreements that are more flexible.

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