Margin Shrink In The Grocery Aisles

Are you supplying a supermarket chain with your produce?  Indirectly through a broker or market?  Directly to a distribution centre or a store?  Are you worried about your margins?  Well, it seems you are not the only ones.  Grocery manufacturers  also have a few things to say these days.  In one of the better articles in the Business Herald for some time, reporter Christopher Adams discusses the threat of shrinking grocery manufacturers’ margins using Kiwi icon Weetbix as an example.

Surprise, surprise, there is little difference between what gets the grocers excited and the concerns of the produce industry.  The key commonalities are these:

  • Growers and manufacturers need to earn a decent margin in order to keep their businesses sustainable, provide incentive to continue investing into the businesses, and, indeed, have the funds available to do just that.
  • Our supermarkets are frequented by a generation of shoppers who have been taught to shop the ever increasing number of specials on offer and therefore have little appreciation for the true cost producing and marketing food.
  • In the absence of other mass market channels supermarkets set the rules of the food game, like it or not.
  • The New Zealand supermarket duopoly situation limits the choice of mass channels available to food producers and manufacturers.
  • The duopoly will not disappear anytime soon.  Entry barriers into the food retail game are high.  We did not wake up one morning to find ourselves confronted by the duopoly.  It is actually the result of decades’ worth of consolidation in the industry, driven by the costs incurred by retailers and their desire to create economies of scale as a countermeasure.
  • A correlation exists between the size of a market and the number of businesses required to service this market.  The UK withs its 60 million inhabitants, compared to our 4.3 million, does not have a duopoly – but what do you call Tesco, Sainsbury, Waitrose, Aldi and Lidl?  They are an oligopoly – which has, in the main, the same characteristics as a duopoly.

So, whats the solution then?  It is actually not any one thing, but a combination of measures applied simultanoulsy.

  • Producers and manufacturers need to be able to understand and intelligently articulate their cost of production and required margins.
  • Supermarket buyers need to be exposed to economic principles, such as “you don’t kill the  goose that lays the golden eggs” and others, and taught to take a holistic rather than the  ”I need a special for tomorrow” approach when contemplating competitive measures.
  • Realistic and workable value (as opposed to supply) chain partnerships need to be developed between supermarkets and and their suppliers. 
  • The consumer needs to be educated via all available channels about the true value of food, be it grown or manufactured.

 Easy, eh?  But easier said than done!

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