Archive for 'Supermarkets- the other stuff'

Brick & Mortar Supermarket Support Programmes Gather Pace!

facebookcheeseblogI took this picture a couple of years ago in The Hague in the Netherlands. The supermarket chain displaying this wheel of cheese complete with facebook sign prides itself in not accepting cash for payment! The Netherlands are a nation of cheese makers, cheese seller and cheese consumers. Seeing entire cheese wheels on display is therefore not altogether surprising. The facebook sign is, of course, a dead give away that the photo was taken within the last ten years and not in the nineties or earlier. Social media is a very powerful tool in the modern food marketer’s arsenal and whoever decorated this Dutch supermarket window achieved a breathtakingly simple execution of an incredibly complex strategic issue that is vexing the minds of supermarket owners the world over. How can the investment in brick & mortar stores not only be protected in the face of the relentless onslaught of the online shopping phenomenon, which said brick & mortar store operators have to join themselves in order to protect their overall market share?  Retailers around the globe are experimenting furiously, as their investment in the traditional brick & mortar model. Consumers are naturally enjoying their new found freedom of existing supply channels being changed, reconstructed or realigned and entirely new channels emerging at a rate of knots.

Woolworth Australia seems to have cooked up an experiment in this category which is worthwhile keeping an eye on. The supermarket corporate has teamed up with eBay.  eBay shoppers can now pick up their purchases in selected Woolworths stores…and will hopefully shop the store at the same time. More details here.

An innovative attempt to use existing distribution capacity, regardless of ownership. Competitors exploring selected channel fusion options based on exceeding consumer expectations.  It doesn’t get any better than that.

Why Profits Matter

tesco2Is a supermarket company entitled to make a profit? Of course it is. Does a supermarket company’s adoring public care about the profit the business makes? You bet. How do customers get to hear about a supermarket company’s profits? Well, if the supermarket company in question is listed on a Stock Exchange and is therefore obliged to follow forecasting and reporting rules stipulated by that exchange, then the answers to all sorts of questions, including the ones about profit, can be found in the paper and on the web.

The Tesco finance team appears to have temporarily misplaced its abacus.  Tesco has overstated  its half-year profits by £250million was. Analysts suggest this to be  ’principally due to the accelerated recognition of commercial income and delayed accrual of costs’.

Aha! Here are my 5 pence worth.

‘Commercial income’ is retail-speak for money generated through supplier deals, be that case allowances, shelf allocation fees, weekly promotional activity or catalogues. The term ‘accelerated recognition’ suggests that monies handed over by suppliers amounted to less than was contained in the forecast at the beginning of the financial year. And the only way that can occur is if the supplier agreements are incentive based; i.e., determined by the volume of stock the retailer manages to move through his promotional activities.

Why would a retailer not be able to move the amount of stock they had forecasted? How about – because he is loosing market share…

A retailer’s accounts are finely balanced between the money he pays for goods, the price he charges their customers, the fees he can demand from his suppliers for granting improved access to shelf space in numerous variations, the competitive position taken in the marketplace and market share percentage achieved. Wheels do not come off overnight. But when the first wheel is as loose as it appears to be at Tesco and if the operator is as significant as Tesco, then a fundamental shake-up of the market place is not an unrealistic expectation.

The high cost of low prices

A few weeks ago we had the PMA Australia New Zealand Fresh Connections Conference here is Auckland. An all-round success in terms of attendance.  One of the industry stalwarts I bumped into there was Lex Wilcox, retired potato and onion grower/packer/shipper from Pukekohe and one of the brains behind the success of AS Wilcox Ltd in his day.  Lex has earned his retirement through decades of hard work for his company, the Pukekohe Vegetable Growers Association and the Vegetable & Potato Growers Federation, one of the predecessors of Horticulture New Zealand.

Catching up with Lex reminded me that he had sent me a 2006 article from the Sunday Start Times recently, entitled, “The high cost of low prices”, together with a philosophical statement by John Ruskin on the common law of business balance. Ruskin’s authorship of this ‘law’ can not be verified.  The one sentence version is “There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person’s lawful prey”.

Lex sent the article in response to my blog entry on “Supermarkets, Growers and Food Prices” which introduced an earlier Guardian article on the topic.  Long before the supermarket bread war kicked off last weekend.  Lex’s article makes interesting reading – as does the longer version of the Ruskin quote.

It is an interesting social dilemma that is being played out.  Supermarkets compete for market share on the basis of product/price specials. Nothing wrong with that.  Consumers have come to expect ‘hot deals’ every week.  And they’d better be good or they vote with their feet.  Should suppliers contribute to supermarkets lowering their retail prices to attract more shoppers through their door? I don’t see why not, as long as the consultation process is alive and well, suppliers are not expected to produce loss leaders on a scale that threatens the viability of their overall business and when accompanied with a ‘give and take’ attitude.

These bread wars are not the last product/price action we have seen.  The game is changing. Online shopping is gaining favour with consumers globally.  Brick and mortar investments into new stores are getting harder to justify and being caught in the middle is not a pleasant experience any longer.  Tesco is the perfect example right now.

Supermarkets, Growers & Food Prices.

munichmerch1One of the more intelligent articles I have come across in recent years on the topic of supplier relationships in the perishable food area can be found in the Guardian.  Here is a poignant part of  the article’s last paragraph which should have some resonance in our part of the world too.

“…farmers need to be paid enough to invest in our agricultural base. We actually need to pay a little more for our food now to avoid paying much more later. A price war might be good for consumers in the short term. It might offer some sort of relief. In the long term, however, we would all be much the poorer.”

I wholeheartedly agree with this sentiment but would even be more specific. Growers and farmers need to receive sufficient enough a price for the food they produce to provide them with a reasonable income as well as a return on their investment.

The background to the article is the market share loss being experienced by the UK’s main stream supermarkets at present, with the writer analysing the predictable price cutting strategies being implemented from the perspective of their potential impact on Britain’s self-sufficiency in food production.   A very worthwhile read.

A Few Comments On The Latest Round Of Progressive Bashing

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It must be election year. And – the Aussie/Kiwi relationship has had some bad press in recent weeks in relation to New Zealanders living in Australia not being able to access certain state services. Then we allegedly had Coles and Woolworths discriminating against non-Australian FMCG products as part of their “Buy Australia” campaigns.

A good time then for Labour’s Shane Jones to kick off a debate on supermarket business practices – particularly that supermarket chain that happens to be owned by one of those Australian behemoths.  And which incidentally, used to be owned by the other one of those two in the late eighties and early nineties. In the interval between Coles selling Progressive and Woolworths buying it, a third Australian group, FAL,  owned Progressive. As a nation, we are therefore used to having about 50% of our grocery retail capacity owned by the cuzzy bros from across the ditch. That lengthy period of general acquaintance and the fact that I spent some ten years working for Progressive leads me to adding my tuppence worth to the discussion in progress.

So here are a few facts from my perspective:

  1. Supermarkets are a social phenomenon. Once mankind decided to congregate in towns and cities, we stopped hunting and gathering in the forests and on the prairies, shifting our attention to merchants, markets, stores, supermarkets and now, the worldwide web.
  2. Like it or not, supermarkets have for decades been the gatekeeper to the consumer for anyone who is commercially marketing food products beyond a minimum volume level.
  3. Supermarket operators are not stupid. Of course they are interested in increasing market share, income and profits. In that they do not differ from any other business.
  4. Supermarket net margins are slim in percentage terms. It costs a lot of money to acquire land, build stores and maintain them.
  5. Demand outstrips supply in terms of shelf space availability in-store and new products  promoted by manufacturers are competing vigorously  for that shelf space.
  6. It therefore makes perfect business sense for supermarkets to sit their prospective and current suppliers down to ask them three questions;
    • How are you going to support your products through consumer marketing campaigns, so that we gain some comfort in justifying the shelf space we are about to make available to you?
    • What is your specific marketing strategy in relation to selling your product through our stores network?
    • What trading terms do you offer us?
  7. Yes, we no longer seem to have this neat separation between manufacturer and retailer with each focusing on their core competency and letting the other one getting on with his business without interference…but hey, we also have machines in our offices that combine in one device functions previously carried out by four separate devices, i.e.; photocopier, scanner, fax and email programme. In other words, business evolves. It is not static. Things change. The traditional supermarket business model is being challenged from all directions. In the US,  Amazon is becoming a fresh food fulfillment centre… Here in New Zealand, Nappies Direct turned itself into Supermarket Online
  8. Supermarkets and their operators typically know they are under  the constant spotlight in terms of compliance with the regulators whilst consumers are scarce with their praise and brutal with their criticism. And politicians are prone to comment prematurely on anything without having all the facts…
  9. Let’s not muddle up all the issues involved here as that only skews matters further. Each of the following has its own dynamics:
    • supplier negotiations between buyers and sellers. Market forces will prevail and in a market economy there is no room for political interference.
    • marketing strategies built around “Buy Australia/New Zealand/Upper Volta” campaigns. Every country has these. They are economically flawed, don’t fit into today’s WTO based thinking, are ultimately not sustainable but have good resonance with consumers.
    • supermarket private label or own brand philosophies which are a reflection of the fact that the skill sets bundled within the global supermarket operators are such these days that these companies have an obligation to their shareholders to optimise their revenue opportunities beyond the traditional grocery model.
  10. We could, of course, nationalize the entire food supply chain and subsidize food prices for the entire population.  If that approach had been a workable proposition, the Soviet Union would still be alive and well today.

My closing comment is this:

Dave Chambers, the Managing Director of Progressive/Countdown, is an ethical operator. He learned the grocery trade from the bottom up, having gone through the old Foodtown Management Trainee programme. I first came across him when he was store manager of Foodtown Kelston in West Auckland in the early nineties. He was a smart cookie then, a very personable guy and a rational thinker –  and he retained and built upon all these qualities.  With all due respect, the same qualities did not apply to many of his then store manager colleagues – which explains how Dave managed to rise to the top of the pile. Dave stayed his entire career in the store operations area – in other words he was never a buyer or category manager negotiating with suppliers but always focused on serving the customer.  Yes, he reports to Australia, but Dave Chambers comes with a high level of personal integrity and a reputation he has built over decades. So when Dave  says that the recently made allegations about retrospective supplier payments are incorrect, I am inclined to accept this.