Focus on Manufacturing | Irwin Mitchell | Spotlight on Food

The supermarket supply chain is showing signs of refreshing change, which is great news for both manufacturers and importers. We explore whether the changes will redress the imbalance of power between the supermarkets and their suppliers.

For the last 20 years and more, manufacturers and suppliers of food and other consumer goods have presented a dark view of the retail market. No matter how good their product, more often than not growing their business meant selling to the supermarkets. There, due to the supermarkets’ traditional market dominance, suppliers faced losing complete control of product pricing, cash flow problems, and the uphill task of negotiating with pugnacious supermarket buyers.

In the last two years, however, the supplier/supermarket sector has changed from both a regulatory and structural perspective. As has been the case with successful legislation in the past, these market changes are complimentary and are causing supermarkets to deal with their suppliers very differently.

Regulatory change

The regulatory change has come in the form of GSCOP (Grocery Suppliers Code of Practice - which came into force approximately two years ago) and the role of the newly-imposed GCA (Grocery Code Adjudicator - currently Christine Tacon), who has the task of enforcing GSCOP.

GSCOP sets out a series of rules which the UK’s top 10 supermarkets must follow when dealing with their suppliers, and is intended to redress the imbalance of power between the supermarkets and their suppliers. Above all, under GSCOP, the supermarkets are bound to treat suppliers fairly. For example, under GSCOP, supermarkets can’t threaten delisting if suppliers do not agree to profit calls. Nor can they make unilateral deductions on supplier invoices, or force suppliers to contribute to the cost of product sales or promotions in breach of previously agreed supply agreements.

Initially, GSCOP received little support by suppliers, who from past experience thought that it was just another Government scheme doomed to fail. However, the GCA’s recent report on Tesco has raised hopes. Many suppliers can associate with the problems the GCA highlighted about Tesco’s buying behaviour, and see her report as evidence that GSCOP really could be the foil needed to rebalance competition within the retail sector.

The GCA’s report focusses largely on Tesco’s delays in paying its suppliers in breach of GSCOP and that element has captured a lot of press attention. However, Tesco’s errors are only part of the story.What is more important is that the breaches of GSCOP identified in the GCA’s report are widely accepted as not being exclusive to Tesco. Consequently and the remaining nine supermarkets who are also subject to GSCOP will be poring over the GCA’s report to establish how and why Tesco fell down, and what they need to do to avoid the same mistakes. Others are also taking note as there is the possibility that in the future GSCOP’s remit may be widened to cover other dominant high street retailers.

If supermarkets (and, potentially, other dominant retailers) don’t go through the GCA’s report carefully, they risk being subject to the next GCA investigation and to a fine. On this occasion, Tesco escaped a fine (as the GCA’s powers to impose a fine came after the period she investigated), but the GCA said that she would have considered a fine for Tesco so if she could have done so. This means that a supermarket who now repeats Tesco’s mistakes could find themselves being fined of up 1% of its UK turnover.

Structural change

Structural change in the supplier/supermarket market can be attributed largely to two factors; the rise of discounters (such as Aldi and Lidl) and changing consumer trends.

The discounters have taken - and continue to take - a large market share from their more traditional competitors, but their product strategy is very different from the traditional model. In a nutshell, the discounters focus on providing fewer products and fewer varieties of product whilst maintaining good quality. As a consequence, discounters buy more products from fewer suppliers, who therefore take on a more important role in this model. The discounters therefore secure strong relationships with their suppliers so as to safeguard their supply channels. It is therefore no surprise that Aldi has the highest GSCOP compliance amongst the top ten supermarkets.

From a consumer perspective, while in times past consumers were arguably less interested in supply chain relationships, in today’s age of the Millennials they are. Consumers now not only want a good product but they want to feel good about what they are buying – crucially, they do not want to feel guilty about it. Demonstrating fair treatment of suppliers is therefore a key marketing component on which supermarkets and other retailers are focussing.

The future

Retailers are now in the process of adapting as fast as they can to these changes. From a regulatory perspective, following the GCA’s report, suppliers are already noting a marked improvement in their relationship with Tesco. Looking at this change from a structural perspective, Tesco is not hesitating to advertise its new stance on supplier relationships as means of standing out from any competitors who are currently lagging behind in this sense, but who will want to catch up fast.

Suppliers therefore have good cause for optimism. No longer should dealing with a supermarket be a depressing business. By contrast, if a supplier has a good and competitive product and can meet a supermarket’s demands in terms of quantity and quality, there has never been a better time to build a strong supplier/supermarket relationship with the prospect of a sunny future.