News Feature

No-one is more riveted by the action than those companies that supply the supermarket chains. Retail consolidation is an all too real concern for suppliers, with increased size translating to increased buying power and ever diminishing margins. The supermarkets already have most of these businesses by the gonads, and if they get any stronger their already vice-like grip might just become fatal.

Normally firms keep such concerns confined to the boardroom, but last month The Marketeer was handed a high-level briefing document providing a rare insight into the anguish that lies at the heart of the supplier. The report, prepared by a marketing director at a leading northwest firm, highlighted the concerns surrounding national and global supermarket consolidation, including mentioning the players that they feared were gaining in strength (unfortunately for them, Wal-Mart), whilst also considering alternative routes to market.

Supplier’s situation

The over-riding impression gleaned is that apart from attempting to cement its position within the convenience store sector, the firm was largely a helpless spectator watching the game for hegemony play out. It could predict where the action was going to take place, get the best seats and attempt to move early to take advantage of the vacillating power play. But basically it had to wait for the result to see which players would end up making the demands, and just how unreasonable they would be. A worrying scenario that’s being emulated in boardrooms across the country.

“It’s horrible,” said one industry source who declined to be named. “We obviously have connections with a great many firms that supply the biggest names in the sector and their very existence is dependent on the good will of those retailers. They’re being squeezed and squeezed and squeezed. They aren’t in control of their own destinies any more and if the big four were to become the big three, then things are just going to go from bad to worse.”

Traditionally, the nation’s farmers appear to have paid the highest price for the burgeoning influence of the supermarkets, as all 160,000 of them fight to win the affection of a handful of ruthlessly efficient buyers. Nowadays, however, the suffering is not only restricted to our sons of the soil, as Sandra Bell from Friends of the Earth passionately pointed out when talking about the Safeway scramble: “This cannot be good news for consumers and would fly in the face of Government commitments to support British farmers and small businesses,” she said. “There must be a thorough investigation of this merger with input from suppliers, consumer groups and representatives of independent retailers. If this goes ahead they will all lose out.”

Of course, representatives of FoE are unlikely to be cheerleaders shaking their pom-poms for the big business boys; nonetheless Bell’s points appear pertinent and are mirrored by many within the marketing industry.

Alexandra Johnson, head of advertising at Poulter Partners, refrained from taking such a strident stance, but did acknowledge certain problems that consolidation could create.

“For the consumer it is better to have four strong national chains competing rather than three. For the industry itself fewer buying outlets mean even greater concentration of power, which most people would agree is not a good thing.”

On the supplier question Johnson postulated, “Less power would be left in the hands of the manufacturers/producers.” She added, with a cautionary note, “Anyone supplying both Safeway and the winning bidder (which may be more than one of the many suitors) has a potential problem on their hands. What if you make good money on your Safeway contract but take a loss for the sake of selling some volume on your other contract? The gritty detail will emerge on take-over and no-one will want to keep paying the higher price.”

Best Case Scenario

So, for the supplier, it appears as though the best-case scenario would be intervention on behalf of the competition authorities to stymie any merger/acquisition and retain the status quo. With the size of some of the competing protagonists this can’t be ruled out – but would this simply be a stay of execution? A small barrier put in place for big business to eventually hurdle over?

Mark Reed, planning director at The Union, seems to think so: “The supermarket sector is a numbers game where the major players are constantly fighting to secure size and leverage in the marketplace. The restrictions on planning permission make deals like this absolutely crucial to take advantage of, and big business often finds a way.” He went on, “There have been lines drawn in the sand before by the competition regulators but, as we’ve seen with issues such as media ownership, these have been prone to move. The rules come under immense pressure from lobbyists, and strong commercial interests do tend to get their voices heard.”

If the regulations react to the force of the economic momentum like a blade of grass in a gale, it appears as though Morrisons would emerge as the supplier’s champion, taking the coveted title of “best of a bad bunch”.

At the time of going to press the Bradford-based chain had earmarked cost savings of £250m a year on the deal, with £75m coming from the resultant increased buying muscle (some of the rest, we fear, coming from the demise of Safeway’s 100-strong marketing department). Although this is a substantial amount, it’s more acceptable than the £125m Sainsbury’s would look to slash from sourcing, and probably far less than the supreme overlords of the Wal-Mart Empire (which has staggering annual sales of $250 billion) could beat out of the supplying masses.

One marketeer confirmed this impression, suggesting Morrisons would “level the playing field”, adding, “At least four major competitors are better than three larger ones exerting even greater influence.”

However, regardless of the eventual outcome of the tussle for Safeway, the evolution of the supermarket scene is unlikely to stop there. As the leaked report emphasises, global consolidation has been a common phenomenon across the majority of markets and, with the size of the world’s leading retailers, and their relative weakness in the UK, it is potentially only a matter of time before other superpowers start to emulate Wal-Mart’s strategy. According to the document, when the rapacious retail imperialists do decide to start hunting, Tesco looks odds-on to emerge as the ideal prey, with Ahold (Netherlands) and Carrefour (France) already believed to be looking for an opportunity to pounce.

So, if this is the case, does that spell further misery for suppliers? Well, it’s difficult to see how it won’t, and, what’s more, it may also adversely affect the consumer. Mark Reed explained, “Generally speaking you’d think the ability to negotiate lower prices would be the good for the consumer, but in reality that’s only going to happen if sufficient competition exists. If the number of players is continually whittled down to perhaps two in control of around 50 per cent of the market, there’d obviously be less competition and less of a need for them to lower their prices. The sector must have competition to keep it healthy into the future.”

With the odds stacked heavily in favour of the global retail behemoths, a happy ending for the suppliers looks like the stuff of Hollywood dreams rather than cold commercial reality. One (wafer-thin) silver lining could be that the gradual homogenising of global supermarket brands and products may open up opportunities for smaller localised players to carve lucrative niches. However, if this does happen, it will be scant consolation for the inevitable casualties that consolidation looks set to produce.

Bearing that in mind, if any big screen “Store Wars” adaptation does appear in the coming years, be sure to take your hankies. Chances are, it could well be a bit of a weepy.

Got a view on the future of supermarket retailing? Then write a letter for use on our letters page being launched in March. Please send your views to alan@themarketeer.co.uk.