Although you are absolutely right, [breaking the addiction to supplier cash] can't happen. Industry economics cannot be changed as most food retailers generate incredible incomes from the buy rather than the sell.
Many, many years ago, I wrote a piece for an industry trade publication about the retail food industry being addicted to funny money. My comments were not well received and I was chastised for comparing trade funds to drugs.
Like you, I don't have the ability to speak “politically correct” and nobody likes a prophet with a negative message. John the Baptist preached for years about repentance only to get his head cut off.
In today's business environment, an aggressive food retailer can squeeze anywhere from 6-10% of sales from the manufacturing community, who gladly pay to play – with discount allowances, pay to stay, slotting fees, end cap displays, new items, returns, free goods, backhauls/freight, investment buys/ROI, diverting, category captains, road trips, holiday outings, local donations, gifts, advertising funds, etc., etc.
Multiple industry studies indicate that trade funds represent 17% of the cost of goods (grocery/consumables), for which the consumer pays, while the Willard Bishop global retail analysis reveals that the center of the store drives the income engine that covers the cost of all of the temperature-controlled, fresh departments.
Changing these functions/activities is impossible because the disruptions to the organization's cash flow would be catastrophic.
Frankly, I don't see industry leaders who have the will, guts, or interest to change, so the dysfunction continues. It is simply too easy to squeeze the manufacturer rather than operate state-of-the art, profitable stores.
Richard is a highly respected consultant having worked at A&P and Fleming, and served as Supervalu’s Director of Transportation. He also was Director of the St. Joseph’s University Center for Food Marketing and was the CEO at Brooks Provisions, among many other food industry activities, so we are always flattered when he elects to weigh in on industry issues. We have been fortunate to feature his letters in Produce Business UK’s sister publication, Jim Prevor’s Perishable Pundit, where Richard has made contributions such as these:
Pundit’s Mailbag — ONE Global Produce Industry Needs ONE Voice
Pundit’s Mailbag — Wal-Mart’s RPC Decision Is Part Of Its Bargain-Hunting Produce Procurement Strategy
We asked Jim to respond:
Today, Richard weighs in not to disagree but to point out the hopelessness of urging retailers to take a hard road when an easy one is available. We don’t disagree.
Indeed, the only reason we think it might be possible is that, as they say, necessity is the mother of invention. And the traditional model that Tesco and others have been following is no longer working.
This is evident in the market share statistics where Nielsen numbers indicate the hard discounters – Aldi and Lidl – have now surpassed 10% share in the UK market. It is also indicated in the severity of Tesco’s actions, as when Tesco announced in January 2015 that it was going to close 43 stores and abandon 49 development projects.
It is also, of course, indicated in the hard profit-and-loss numbers where Wednesday, April 22, the only question is how many billions of losses Tesco will announce. (Editor’s Note: Tesco has now reported the worst results in its history with a record statutory pre-tax loss of £6.4bn for the year to the end of February, which included substantial write-downs on UK property and its Chinese venture.) The City of London and Wall Street in New York whisper that Tesco will sell crown jewels such as Dunnhumby and may even draft capital from shareholders in the form of a rights offering.
If the centre of the store is the engine supporting the whole store’s economics, including the fresh department, as Richard points out crediting Willard Bishop, this is just another indication that the current business model is unsustainable. After all, those center grocery departments are besieged by supercenters, warehouse clubs and internet services as well as hard discounters, so it seems unlikely they will be able to serve as the support source for supermarkets in the future.
Manufacturers are not stupid, and all these fees have to be paid one way or another. If the manufacturer pays them, the manufacturer has to wind up charging higher prices to the retailer than if it did not. This distortion of costs is going to make it very hard for retailers to accurately price to compete with Aldi, Lidl and other discounters.
Of course, as we emphasised in our original piece, the real cost for a retailer in soliciting – or even just accepting – fees is that it distorts merchandising. It means doing things the retailer would not have done if its only goal was to delight consumers – and use this delightfulness to maximise sales and profits.
With companies such as Aldi and Lidl focused on their consumer, there simply may no longer be an option for conventional retailers to continue in the future as they have in the past. If they continue, they will face other upstarts that don’t have these legacy issues. The option may be simple: Adapt or die. It is unclear what choice will be made.
In the US, when Tesco tried to launch its Fresh & Easy division and we wrote a great deal about that here, we saw the disaster coming and pleaded with Tesco to change its approach. There were two concepts having great success in America in that size box – Aldi, a discounter, and its corporate cousin, Trader Joe’s, an epicurean concept. We thought that the Fresh & Easy stores could be split demographically and converted to clones of these chains. It could have worked but, at least under CEOs past, Tesco was intent – “my way or the highway” – in building its concept. There is no more Tesco in America.
It is hard to imagine a great retailer decline. Yet, the Great Atlantic & Pacific Tea Company once spread across America and now is a mere shadow of its former self. Sears, Roebuck & Co. was imagined unassailable, and yet it is on the verge of extinction.
The path for conventional supermarkets does not look overly bright, but as Dickens had Scrooge ask the Spirit of Christmas Yet To Come: “Are these the shadows of the things that Will be, or are they shadows of things that May be, only?"
In this case, it is fair to say that the future is not yet written, so the path to success lies within the operators, such as Tesco.
The final question is within Richard Kochersperger’s statement:
“Frankly, I don't see industry leaders who have the will, guts, or interest to change, so the dysfunction continues. It is simply too easy to squeeze the manufacturer rather than operate state-of-the-art, profitable stores.”
Will executives at Tesco or other conventional retailers transcend their limitations and rise to meet the challenge? On that question, much depends.
Many thanks to Richard Kochersperger for weighing in on this important issue.