Where the subject may be perishable
but the insight isn’t.

Asda and Tesco Buyers
Accused Of Arm-Twisting

Jim Prevor's Perishable Pundit, August 22, 2007

What happens when retailing gets so concentrated that vendors don’t feel they can say no? Take a look at the U.K. and you get the picture. The news is filled with headlines, such as Tesco, Asda Hit by Allegations That They Threatened Suppliers:

Tesco lashed out at the Competition Commission after details of a new line of inquiry in the watchdog’s investigation of the industry were leaked to the media at the weekend.

The commission is understood to have issued documents demanding access to millions of emails sent by Tesco and its rival Asda to suppliers in the run-up to the summer price war between it and other supermarket groups. The watchdog is looking for evidence that they threatened suppliers into granting them deep discounts that they could then use to undercut rivals.

Tesco said: “It is extraordinary to see the Competition Commission putting these prejudicial allegations into the media in this way. The allegation that threatening and aggressive emails have been sent has not been mentioned to us, despite numerous conversations with the Competition Commission on this matter.” The commission made the so-called Section 109 demands, essentially subpoenas, for the emails after being tipped off by a supplier.

Asda said it has “absolutely nothing to hide”. An Asda spokeswoman said the company, owned by Wal-Mart, the world’s largest retailer, was “fully cooperating” with the commission. She added: “We take our responsibilities as a major partner of a number of our suppliers very seriously. They are as important to us as we are to them. We absolutely observe the code of conduct.”

Specifically, the watchdog is understood to be seeking clarification as to whether Tesco and Asda used threatening language to convince suppliers to grant better terms on goods or face elimination of their relationships with the giant retailers.

The Competition Commission opened its inquiry into whether the supermarket sector’s top four companies—Tesco, Asda, J Sainsbury and Morrison’s—abused their dominant positions in the market in May. It is understood that the shift in focus to the summer price war, which contributed to a sharp decrease in inflation, represents a new direction in the investigation.

Previous inquires have failed to find wrongdoing by the supermarket giants. But the use of threats against suppliers could give ammunition to the commission, which expects to publish preliminary findings next month.

In fact, other sources have been more specific:

Competition watchdogs are considering sending staff into Tesco and Asda offices to hunt for evidence that the supermarkets have been abusing their suppliers…

…the commission uncovered evidence of buyers using threatening language to demand cash payments from suppliers to finance the supermarket price wars. The new investigation could delay the initial findings of the watchdog’s inquiry into the way the big grocers operate, which are due late next month…

Allegations of supermarkets abusing their suppliers to extract ever lower prices have been rife for years and a code of conduct setting out how supermarkets should treat suppliers was set up in 2000. Suppliers have insisted it is ineffective, but the competition authorities have repeatedly failed to find real evidence of bullying or unfair behaviour. Suppliers’ lobby groups insist suppliers are too frightened to come forward with hard facts for fear of being blacklisted. In the current inquiry the commission has offered confidentiality to suppliers to encourage them to make complaints….

…representatives of Tesco and Asda are said to have demanded “retrospective rebates” and warned suppliers they would have their goods taken off the shelves if they failed to comply. The emails, understood to relate to fresh food suppliers, were sent as the retailers plotted to cut prices by more than £500m.

The problem with the nature of this inquiry is that buyers don’t actually have to use “threatening language” to intimidate suppliers. There would have to be a search through tens of millions of e-mails to identify which buyers are indiscreet.

If, by chance, the commission does discover some threatening buyer, the chain that employed him will immediately disavow his threats, point out that management never told anyone to say any such thing and fire the buyer for incompetence.

Which would be reasonable as a more competent buyer accomplishes the same thing by simply asking for help.

The threat is implicit.

What can be done about this is unclear. For vendors, the real solution is to appeal directly to the consumer. If a consumer demands a particular brand, then the retailer needs the vendor, thus making the vendor not as vulnerable.

It is also true that consolidation on the vendor side makes it much harder for a large chain to “do without” a particular supplier. So consolidation on the supply end, whether through merger, acquisition, co-op or the use of few marketing agents, is another possible strategy.

The real reason the commission hasn’t gotten much from its inquiries is that in the U.K., many vendors — especially fresh foods vendors — are almost outsourced supply partners. Most only sell to one chain. So, implicitly, the retailer has to let them make a living or the vendors will close up.

The demands for rebates and whatnot are not dissimilar to the relationship between a U.S. chain and a regular supplier. When the buyer asks the vendor to lose money this week because he needs help on an ad or other problem—the implicit promise—the buyer is assuming the vendor can make it up in the future when the chain is not in the current situation.

The U.K. vendors are actually in a stronger position because it is much less likely they will be “fired” than a U.S. vendor.

Though vendors can battle buyers who want them to work for nothing by branding and consolidation, it is very difficult for an individual farmer to stand up to unreasonable demands. Some would say that this is the way of the world and those independent growers have to change to survive.

Others would argue that we have a societal interest in defending the domain of the yeoman farmer, and we should change the legal rules to prevent family farmers from being put in such difficult circumstances.

Protecting the family or independent farmer certainly has won our hearts, but the low prices big retailers manage to wring out of producers appeal to our pocketbooks.

They are so big on Fairtrade in the U.K., one wonders if they shouldn’t start domestically.

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