The ‘Big Squeeze’ in the UK Market
Simon Martin Of QV Foods Group And The FPC Speaks Out:
Getting Past Selling Below The Cost Of Production
Jim Prevor’s Perishable Pundit, November 16, 2015
There is a squeeze going on in Britain.
The retailers are being squeezed, as the government requires higher pay for employees — a national “living wage” is being phased in — and real estate taxes on commercial properties are rising — while retailers perceive themselves to have no flexibility in raising prices due to the growth of discount concepts. The newspapers are filled with articles headlined like this: Minimum wage: Tesco pleads for rethink from Osborne
Not shockingly, retailers thus turn to suppliers to bail them out. Should they? Will they? Can they? We asked Tommy Leighton, the Managing Director of the Pundit’s sister operation in the UK, to find out more:
Sales and Marketing Director
QV Foods Group
and Vice President
Fresh Produce Consortium
Simon Martin will be presenting at the upcoming New York Produce Show’s Global Trade Symposium about the disruptive influences shaking up the UK marketplace. Here, we ask Simon for a sneak preview of his presentation and a perspective on where he thinks suppliers and their retail customers are heading…
Q: What is currently the most disruptive influencer of UK fresh produce trade dynamics?
A: It’s not a new situation, but the retail price war has stepped up to unprecedented levels, and it is having a major effect on everyone in the industry. It is getting to the point now where more and more lines are being supplied at, or below, the cost of production and whilst there are fresh produce companies willing to accept this, it will only get worse.
The problem in the UK now is that there are too many companies trying to sell to too few customers, and although there are more routes to market opening up, the bigger-volume customers that most people want are becoming much more difficult to serve in a sustainable manner.
The well-documented rise of the ‘discounters’, notably Aldi and Lidl, in the UK has put a lot of pressure on the traditional “Big 4”, although arguably the days of referring to those retailers as discounters are behind us as well. Tesco, Asda, Sainsbury’s and Morrisons had been used to being in control of the majority of grocery retail for decades.
Online retail is becoming more important by the year — and we now have the prospect of Amazon entering the market also. Retailers such as Poundland, Farm Foods and Iceland, who were not particularly big players in fresh, have begun to get involved on a bigger scale, and all of a sudden the Big 4 are dealing with a completely changed landscape.
They are not automatically set up to compete in the leaner, lower margin environment favoured by some of these competitors, and it is going to take them time to make the necessary adjustments.
Q: Where do the Big 4 supermarket chains begin to address the most difficult trading period they have ever experienced?
A: The biggest question they have to answer is whether or not they can afford to compete. In the current climate, it’s difficult to see how they can unless they make significant changes. The consumers have drastically changed their shopping habits in recent years, and the clear advantage that the super- and hyper-markets had over their discount competition — the fact that they were the place where you could buy everything under one roof — has been reduced as people have become accustomed again to shopping more regularly than their big weekly shop.
They have a different view of what’s convenient now, and many are as happy to go and spend £20 (about $30 US) three or four times a week as spend £100 (about $150) in one go.
Q: So, is the model of the Big 4 being rendered unsustainable by these changes?
A: I wouldn’t say it’s unsustainable, but they will need to address their culture and how they can change it. Plenty of things have been said [by supermarket chain bosses] already, but it’s still not clear what direction any of the Big 4 are planning to take. Having been able to monopolise the consumer for decades, the fact that the consumer can dabble freely in a far more open playing field now is a big challenge to them.
Q: This type of scenario you have painted for suppliers has been predicted for some time, and somehow the vast majority of companies in the produce industry have managed to stay afloat. Why do you think it’s different this time?
A: I agree. As long as 15 years ago, we were hearing similarly gloomy forecasts. But that was a different time. People were making those predictions about companies that historically had been able to make a very good living in the produce business. Some of them were not being managed all that well, and the companies that we did see disappear would often have failed due to poor management.
Now, generally speaking, the firms in the fresh produce industry in the UK are very well run, but if there is no profit in the business, however well run you are, there is inevitably a breaking point.
Supplying below the production cost is more widespread now than ever, not only in produce but across a number of product sectors, and it’s not easy to see how we can escape an enforced rationalisation process. Two fresh produce companies have gone bust in the past few weeks, and I expect to see more unfortunately — the situation has gotten that bad.
Another thing that was bandied about a lot over the years has been the need for greater collaboration. Again, I think when we talk about that now, it is from an entirely different perspective. Collaboration between retailers and suppliers has never needed to be more real — in the past, it has been very one-sided and in part, that has led us to where we are now.
There are a lot of marketing and trading companies in the UK that might well be eradicated in the very near future, but I believe we will see true grower-retailer partnerships emerge because we’ve reached the stage where we can’t afford to do it any other way.
I think the strategies will be different for the domestic grower and for imported products. Dealing with trading offices is going to get more strained as there just isn’t the margin to make it work. Every single cost is being analysed and stripped, meaning the supply chain has to be as lean as is physically and practically possible. I think we have done a very good job as an industry already, but now we have to advance again.
Q: Is it really possible that the fresh produce supply chain for the UK market can become significantly leaner?
A: Suppliers have to focus on finding ways to serve their customers in the right way for the NOW, not in the way they have been supplying them for the past 20 years or more. If you’ve got big shiny sheds all over the country, do you really need those facilities?
It’s time to be ruthless and take out costs wherever possible. Find the areas where you can add true value. If you are doing things that don’t add value, stop doing them.
At QV Foods, we are very good growers, and if we can do that as efficiently and effectively as anybody else, we will be giving our customers the best service. We may have to start talking to our competitors and colleagues in the industry more and exploring any ways that we think might bring even more value into what we do.
I’m going to be in New York looking for different options and methods that might help us. We have to look at true collaboration, and sometimes that means thinking outside the box to find ways of working together to a common end.
Q: Is the UK becoming less attractive to suppliers around the world?
A: I still think the UK is a flagship retail market in the sense that being able to supply into a UK customer is a good sign that you are capable of supplying anywhere in the world! Obviously, at this moment in time, the combination of low prices and high specifications are less attractive, but I think the key now more than ever is to pick your partners carefully, and be very clear of your aims and objectives in the market.
Analyse how many of the services that you have as a shipper add value to the product that the consumer eventually buys, and understand the market well enough to know whether you are prepared to invest in being a true partner to your customer, or whether you’d prefer to trade your product.
Q: How can the Fresh Produce Consortium help suppliers from outside the UK?
A: I’m delighted as vice president to be coming to the New York Produce Show and Conference again. We present the London Produce Show and Conference with PRODUCE BUSINESS, and it has been very successful in allowing people from outside the UK an opportunity to fully engage with our market.
That’s what the FPC is all about — we want to foster relationships that will create new opportunities for the UK fresh produce business, and both of these shows do exactly that.
The FPC will also be hosting a brand new feature at the London Show in 2016. On June 8, there will be an interactive seminar and workshop programme for companies and people who want to supply the UK market, but perhaps don’t understand all of the regulatory and standards framework, or would just like some tips on how to get started.
It’s a feature that’s been added into the show by request, and I think it will prove invaluable to anyone who takes part.
We have heard this all before. Indeed, in 2008, we wrote a series of pieces on this very theme:
Another Company Says No To Wal-Mart’s ASDA:
We launched this series with a piece entitled, Just Say No: The New Dynamic Of Producer/Buyer Relations, which quoted the Fresh Produce Journal in London announcing that Del Monte had walked away from ASDA’s banana business:
Del Monte is re-evaluating its position in the UK after “walking away” from ASDA’s banana business.
UK md Peter Miller told FPJ: “We decided that it was no longer the right proposition for us to continue supplying ASDA with bananas.
“We walked away from the ASDA tender because we didn’t like the money, but we still have 80 per cent of their pineapple business, a significant and developing share of their melon business and a massive proportion of their fresh-cut fruit business.”
ASDA has extricated itself from the global supply deal its parent company Wal-Mart had on bananas with Del Monte, and is now sourcing from Fyffes, Chiquita and International Produce.
The same piece focused on Tanimura & Antle’s decision to not sell to processors. We followed up this piece with an article titled, Tanimura & Antle Changes…A Sign Of The Times.
We also published an important letter from Ted Campbell, former Corporate Director of Produce for Supervalu, under the title, Pundit’s Mailbag — ‘Little Tolerance For Dictatorial Buyers.’ In this piece, Ted explained what he saw as a reasonable procurement philosophy:
During my years at SUPERVALU and AWG, I spent many days training young buyers that their key responsibility was securing the “best” source for products rather than the apparently cheapest source. As you well know, it is critical to have consistent supply, superior quality, product safety, innovative items, and numerous other attributes — none of which happen fortuitously (they almost always cost more).
The second leap of faith in this training exercise was to develop their understanding that these premier suppliers deserved adequate return on investment and thus should receive a “fair premium” over general market pricing.
Finally to really make their heads spin, I always told them that a reasonable pricing premium returned dividends at retail because better stuff just simply sells better: more eye appealing, better eating quality/customer satisfaction, less shrink & labor, usually better margin, better repeat sales with positive customer referrals, etc. No one makes money until the product goes through the cash register, so I wanted items to fly off the shelves (and the financial advantages of rapid inventory turns are often overlooked).
Then John S. Cross, General Manager of Newell Potato Cooperative, sent in a letter that we published under the headline, Pundit’s Mailbag — Fear of Losing Market Share. The gist of his letter:
Too many producers in the potato industry have an extreme fear of losing market share, and unless their sales people don’t have product to sell, are afraid to raise prices to a profitable level.
It is interesting that John works in the potato industry because happenings in the potato industry are bringing this discussion right back to the UK, where it started in the controversy over Del Monte dropping Wal-Mart’s ASDA as a banana customer.
Earlier this month, a major potato supplier to ASDA also decided to say “No More” as is detailed in this article in The Scotsman:
Supermarket in firing line as potato bosses pull plug on £32m contract
A FAMILY-RUN potato business has fired the first shot for Scotland’s food growers by choosing to end a multi-million-pound contract supplying one of the UK’s largest supermarket chains.
The announcement by Taypack Potatoes in Perthshire yesterday that it had cut its £32 million-a-year contract with ASDA, Britain’s third-largest supermarket group, was met with surprise by insiders. The company, which started up in 1986, supplies ASDA with 80,000 tonnes of fresh-pack potatoes per year.
Taypack, one of four main potato suppliers in Scotland, is a significant player in the UK fresh potato market, controlling a 9 per cent share of the annual production of 1.5 million tonnes.
It is believed Taypack’s misgivings over the contract began some time ago but came to a head recently when ASDA, which paid the company around £180 per tonne, demanded more potatoes were supplied, forcing the growers to buy in potatoes at £230-300 a tonne…
Of course, it is one thing for an exporter to decline to serve a market. After all, the banana boat can be sent elsewhere. But what about domestic producers that have no market for their products elsewhere?
And what about consumers who are deprived of the best product because that product finds another home?
And how, precisely, will retailers get out of their funk, if they don’t get first option on the best product?
We wonder if this focus on driving costs out of the system isn’t a bit misdirected. Perhaps a focus on proprietary varieties, innovative packaging, even brands with a unique selling proposition... don’t vendors who provide these things offer a more likely path to increased sales and profits than one that can cut costs another quarter percentage point?
David Glass, then CEO of Wal-Mart, said Wal-Mart needed its suppliers more than the suppliers needed Wal-Mart. I wonder if any retail CEOs think that way anymore.
Come to the Global Trade Symposium, and we will have a spirited conversation around these issues.
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