Opinion

Tesco must go ‘cold-turkey’ to overcome crack-cocaine-like addiction to supplier cash

01 April 2015

Jim Prevor - PBUK

When Tesco made its move into the US as Fresh & Easy, the stores failed to realise the sales that had been anticipated. Being that the product sold is the cheapest thing a retailer has – with labour, rent, energy, marketing, etc., being the majority of costs – Tesco did what seemed to be the intelligent thing… it deeply discounted its products, offering coupons of various denominations.

So it might have mailed out a coupon giving consumers US$5 off a purchase of US$20. The idea, of course, was to gain consumer trial on the new Fresh & Easy concept and hope the consumers would return as satisfied customers ready to pay full price. It didn’t work out.

In the end, we wrote a piece, Fresh & Easy Must Go 'Cold Turkey’ To Overcome Crack-cocaine-like Addiction To Discount Coupons. The problem was that consumers brought in by the couponing did not return as full-price customers. In fact, the very nature of the promotion attracted consumers mainly interested in discounts, and when the discounts stopped, they didn’t return and business collapsed.

Long-term the answer was obvious: invest in a better offer, invest in marketing that sold quality and values, and woo in the clients who cared about the things Fresh & Easy tried to do – say being fresh and being easy – as opposed to being promotional. But that was a long-term proposition, and the panic of seeing sales drop every time the retailer turned off the juice kept Fresh & Easy discounting to the end – rather than building a sustainable competitive advantage.

Now, in the UK, Tesco has announced a restructuring of supplier relations, with plans over the next two years to reduce supplier incentive payments, such as slotting fees, promotional fees, etc., from 24 types to just three. That may simplify the process, but it won’t solve the problem, which is that Tesco and many retailers are hooked on supplier cash and need to bite the bullet of a few horrible quarters as they switch to a more sustainable business model.

The issue is not how many types of payments retailers demand from their suppliers. It is not even really how much money they get from these fees. It is not even really the potential for abuse with the timing and recognition of these payments. The issue is how retailers have shifted their focus away from delighting consumers to one that is obsessed with supplier cash. Once again, Tesco has to overcome a crack cocaine-like addiction, this time to supplier payments.

In a sense, there is no problem with a supermarket demanding fees from a supplier to gain slots in the warehouse or shelf space in the store. Although some suppliers get upset, calling them 'bribes' and using similar pejoratives, in fact, they are fees paid to the business, not the individual, and are simply a function of how that particular retailer has decided to make money.

In fact, most of these fees were not even an invention of retailers. In the US, the idea for slotting fees came from the suppliers themselves. Partly they were a response to President Nixon’s initiative to freeze wages and prices. As rumours of wage and price controls led vendors to want to raise prices dramatically so they would be at a high level when such price controls were imposed, vendors offered large fees to compensate.

In addition, large consumer packaged goods companies, notably Procter & Gamble, saw such fees as a competitive edge. It is very hard to always have the hot laundry detergent, but if such companies could raise the ante to play the large retail game, requiring the ability to pay substantial fees up front, then smaller players would have difficulty gaining entry.

Tesco has announced that after the restructuring, there will be three areas acceptable for supplier payments: premium positioning, extra volume, and compensation for recalls.

The recall issue is complicated, mostly because many recalls are not always government-required and the compensation levels are often excessive. But this is a separate issue.

So we are left with special payments for premium positioning and volume. The problem here, of course, is that the decision regarding product placed on a premium end should not be determined by the ability or willingness of a supplier to make a payment; it should be determined by what will best serve the consumer, with the notion that service to the consumer is the root to maximising sales and profits.

Even the idea that a retailer should receive a supplier payment for increasing the volume of its product sold is very dangerous for a retailer. Why? Because retailers can increase volumes of purchases in many ways. They can expand distribution by putting the product in more stores; they can expand the merchandising of the product, incorporate it in ads and even force distribution down to stores that don’t want that much product. They can pre-buy and store product.

Many of these strategies can sometimes be wise – say, compelling stores to sell a new product with long term potential. But, whether executing on any of these strategies is wise or not is a question independent of whether the chain can earn a vendor bonus on doing this.

Tesco would be much better off announcing that it will accept no supplier payments but will insist on the lowest possible prices.

Then, everything Tesco does can work around delighting consumers. Nothing could more quickly reinvigorate Tesco than sending the word down the ranks that from now on Tesco is dedicated to making money on the sell, not the buy… that great merchandising and extraordinary marketing are the traits henceforth to be rewarded... that Tesco is going to earn its money from now on as a fantastic merchant.

All over the world, the fastest growing retail concepts are built around a laser-tight focus on the consumer. Whole Foods Market, Costco, Aldi, on down to fast growing ethnic independents, succeed by looking at their consumer base and adapting to have the right assortment.

An independent Latino retailer in Los Angeles goes to the wholesale market and finds soft tomatoes, too soft to make it through the receiving standards of a large chain, but this retailer knows that he has a customer base that wants to make salsa, and these soft tomatoes are perfect for that. So he buys the product at a bargain price, re-merchandises the store to give the salsa tomatoes a big display at the store entrance and winds up offering his clientele a perfect product at a value price. And all he ever thought about was delighting his consumer.

A massive chain such as Aldi adjusts its specifications to buy a different sized apple, landing itself in the ‘sweet spot’ where price and quality intersect, thus keeping the chain’s focus right on the value proposition it offers consumers.

This is the world all retailers now live in, and all have a choice. To the degree they focus on supplier cash, they will be vulnerable to retailers who use their time and expertise to focus on winning over consumers.

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