Do supermarkets offer British farmers a fair deal?
Supermarkets have been growing at an astonishing rate since the first ones appeared in the early 1950s. At that time supermarkets had only 20 percent of the grocery market, while small shops and traditional Co-ops had 80 percent between them. By the 1990s, this situation had been more or less reversed, with supermarkets eating up almost 80 percent of the grocery market.
In 1998, when the Department of the Environment, Transport and the Regions (DETR) undertook what is considered to be the most comprehensive governmental assessment of the implications of food store developments, it confirmed a phenomenon that most consumers has already observed first hand. Supermarkets are extremely popular with consumers, claiming to offer us a wide variety of cheap, convenient food.
The top five supermarkets in the UK now currently control over 70 percent of the grocery market in the UK. The share of trade expenditure is Tesco (25.8%), Sainsbury’s (17.4%), Asda-Walmart (15.9%), Safeway (10%), and Morrisons (5.9%). Morrisons recently took over Safeway, further consolidating the power within the supermarket sector to just four dominant and major players. These supermarkets now wield a formidable power over both their suppliers and their customer’s; a power that appears to be frequently abused to dictate the terms and prices to their suppliers and eliminate competition. The bid by Wal-Mart, the world’s biggest retailer, for Asda in 1999 and the feeding frenzy that followed Morrison’s bid for Safeway have radically changed the dynamics of food retailing in Britain and have prompted two lengthy Competition Commission reports. Scrambling for yet more locations, the supermarkets, constrained on the edges of town by planning permission, have expanded by opening smaller shops in town and city centres and in new locations such as petrol stations. They have also been buying up convenience chains.
Supermarket groups are at war not only with each other. Complaints have also broken out with other retailers such as WHSmith, Boots, Dixons, and Marks & Spencer, which increasingly see look-alikes of their products appearing on supermarket shelves. And many suppliers feel they are fighting an endless battle of attrition with their biggest customers.
The increasing concentration of custom towards the bigger suppliers makes for a ‘winner takes all’ culture that has forced some smaller suppliers, particularly small farmers, out of business. This means that in various ways the major supermarket groups nurture and invest in their favoured suppliers even though it is a harsh regime and feelings run high. For example, an ‘own brand’ supplier to Sainsbury will be actively discouraged from supplying Tesco and vice versa, although possibly ‘allowed’ to supply Waitrose or one of the smaller groups.
The level and consequences of impact will vary depending on the particular local circumstances of both communities and towns. Smaller centres which are dependent to a large extent on convenience retailing to underpin their function are most vulnerable to the effects of larger food store development in the edge-of-centre and out-of-centre locations, stated by DETR.
For example, when Tesco opened a store on the edge of Cirencester in Wiltshire, the market share of the town-centre food shops declined by 38 percent. For convenience shops the study found that the damage was even more acute. In Fakenham, in Norfolk, for example, it found that the opening of an out-of-town supermarket had caused a 64% decline in market share for the convenience shops in the town centre. In Hampshire, the decline was even more noticed, 75%.
In 2000, when the DETR Select committee considered the impact of supermarkets, it noted that the number of independent grocers in the UK had fallen from 116,000 in 1961 to only 20,900 in 1997. These grocers are independent farmers and small-scale retailers. Statistics compiled by the Meat and Livestock Commission using figures from the institute of Grocery Distribution, Taylor Nelson Sofres and the Office of National Statistics show that there were only 23,960 independent grocers in the UK in 2001 compared to 62,000 in 1977. The same pattern is mirrored in figures for specialist shops. Independent butcher’s shops, for example, declined from 25,300 to 8,344 in the same period. Roughly two out of every three butchers have gone out of business in the last twenty-five years. Between 1990 and 2000, supermarkets’ share of the fresh fish market increased from 21.4% to over 66%, while fishmongers’ market share fell to 20.3%.
Figures logged at the Office of National Statistics show that the number of businesses selling food, tobacco, and beverages fell by 37% between 1994 and 2001; if decline persists at the same rate, another 10,000 businesses will have vanished by the end of 2005. Researchers at Manchester School of Management have predicted that if current trends persist there might not be a single independent food store left in the whole of the UK by 2050.
This projected disappearance of independent food shops is a disturbing reality, not only because it erodes choice, but also because these shops produce more economic benefits for their immediate community than supermarket chains. For example, statistics show that for every £10 spent in a local food initiative (farmer’s market, shop, farm shop, etc), is worth £25 to the local economy because small local food businesses, by using local farmers, the nearest locksmith or printer and so on, support other local businesses. That same £10 spent in a supermarket produces just £14 worth of benefits for the local community, (Friends of the Earth, 2003, p.4).
Coming back to the subject matter, the UK food industry is dominated by four major supermarkets, who together account for over two thirds of UK retail food sales, (IGD, 2003, p.3). The fact that the major retailers control access to consumers means that they are increasingly in a position to exercise buyer power. This is because distribution through these outlets is critical to manufacturers and suppliers as these suppliers have no other viable means of setting up distribution that offers the same scale and economic benefits (Dobson, Waterson, and Chu, 1998). Evidence of excessive retailer power was highlighted in November 1999 when the supermarket chain Safeway attempted to pass the costs of an in-store promotion onto farmers. Suppliers and growers with direct supply contracts were asked for a £20,000 donation per product line towards the promotion, which Safeway, said would guarantee the availability of its key products (NFU, 1999). Therefore, some suppliers faced bills in excess of several hundred thousand pounds.
In recent years, retail concentration has been accompanied by product rationalisation, driven by the implementation of category management post-ECR (Fearne et al, 2001) and supplier rationalisation in those categories dominated by private label (fresh produce, meat, and diary products) as UK supermarkets have recognised that a) transaction costs can be reduced by dealing with fewer suppliers (Fearne & Duffy, 2003); b) dealing with fewer, larger, more sophisticated suppliers reduces the risk of problems associated with quality and food safety (Hornibrook & Fearne, 2001, 2002); c) the supply base is a source of competitive advantage that requires strategic investment, which is infeasible and carries significant risk if attempted with large numbers of small suppliers (Fearne & Hughes, 1999). Continued supplier rationalisation means that the major supermarkets now deal with just a handful of suppliers in each product area (Fearne & Dedman, 2000). These suppliers are typically large packers or processors that have invested heavily to meet the needs of the multiples. In some cases retailers have nominated one supplier to be the category leader or ‘category captain’ (O’Keefe & Fearne, 2002). This supplier might be the sole supplier in a category to a retailer or the main link between the retailer and other suppliers (Fearne & Duffy, 2003).
THE BUSINESS ENVIRONMENT
Supermarkets have embarked on a constant process of weeding out and streamlining their supply base for many years now, leaving behind any suppliers prepared to speak out about how they have been treated. But farmers and producers who still do business with supermarkets, or hope to do so in the future, dare not be so candid. A permanent threat of delisting (the supermarket ceasing to stock their product) hangs over them. ‘Step out of line (with the supermarkets) and you get de-listed’, a supplier stated. The supplier is regarded as a troublemaker if he / she do not worship the ground they walk on. If a supplier falls out with one and you get blacklisted by the lot of them because they all talk to one another.
In the past decade, supermarkets have established a near feudal relationship with their suppliers, tightening their control over them, effectively dictating what they produce and screwing down prices, yet offering no security in return. As a farmer stated, one winter, it was so frosty we could not get the leeks out the ground. But we knew if we didn’t get them to the retailer, it would be a black mark against us and probably affect the growing programme they gave us next season. So instead the farmer went out and chiselled the leeks out of the soil rather than tell them that we had a problem. Another supplier stated that ‘as soon as you put your head above the parapet (complain), that’s a nail in your coffin’, is how one supplier summed up the predicament. If you blow the gaffe on supermarkets, they can turn nasty and there can be repercussions. All of a sudden they might find a ‘quality problem’ and use that as an excuse to de-list you’, confirmed another seasoned supermarket insider, (Blythman, 2005, p. 139).
Reprisals for disloyalty from the farmers can be swift and painful. As another farmer stated that he had been supplying meat direct to processor under a supermarket scheme. He went to a supermarket producers’ meeting where representatives of the supermarket in question and its abattoir were present. He mentioned and talked about his negative experiences with the supermarket and its processors that he was sorry, but he could no longer come to look at his cattle. Because if his comments, the supermarket chain in question then decided they couldn’t take his meat any more.
In the same way that many consumers dislike having to shop in supermarkets, many farmers and growers deeply resent having to supply them. The supermarkets approach is so different from the dignified, gentleman’s handshake agreements between equals that used to characterize dealings between farmers and growers and their clients. Many suppliers would dearly like to be able to tell their supermarket masters their real dissatisfactions, but because the supermarkets have an effective stranglehold on the nation’s food spend, they feel they have to do business with them if they want an outlet for their produce. Supermarkets are irascibly defiant, they won’t countenance anything that’s bad for their margins’, as said by a supplier. Another supplier said they are ‘petrified of them (supermarkets)’, (Blythman, 2005, p. 140). Suppliers are scared stiff of supermarkets. They operate a rule of fear’, explained another supplier.
In 2000, the Competition Commission completed its enquiry into the relationships between suppliers and the supermarket chains. They received many allegations from suppliers about the behaviour of the main parties (supermarket chains) in the course of their trading relationships. Most suppliers were unwilling to be named, or to name the main party that was the subject of the allegation. They stated that there appeared to be a climate of apprehension among many suppliers in their relationships with the main parties. Apprehension can be said to be a way of putting it diplomatically, infact such was the fear of supermarkets that when the Competition Commission asked suppliers to tell it about their dealings with supermarkets, it found it extremely difficult to reassure them that they could do so safely without fear of repercussions, noting:
‘Even very large suppliers were concerned about what action their supermarket customers might take if they found adverse evidence had been given against them. Most suppliers were extremely concerned that their submissions and comments should be kept confidential. Many refused to give evidence or complete questionnaires unless the Competition Commission were prepared to guarantee confidentiality and many more refused to identify the relevant main parties (the Supermarkets). Even large multinational suppliers expressed concern. Some suppliers expressed what appeared to be very real fears that any hint of involvement in their enquiry would threaten the existence of their commercial operations. Even after reassuring the suppliers of the confidentiality they will have with regard to stating what was actually happening in the sector, many suppliers still refused to submit evidence or complete the questionnaire’, (Blythman, 2005, p. 141).
The Competition Commission (2000) found out that supplier’s organisations were slightly more forthcoming than companies and individuals, as their umbrella nature gave them some protection, allowing them to be forthright. As they noted that many of the farmers were extremely reluctant, or refuse point blank, to comment on specific cases. Many of the supplier organisations have 40, 50, 60 or even 70 percent of their sales with a multiple. The resultant power that the multiples have is huge, a consultant with the packing industry told the Commission that ‘the degree and variety of pressure upon the suppliers was extremely alarming, all compiled with the retailers demands because of the dread of delisting. One lone company, in supporting its case for anonymity, pulled no punches, saying it would be ‘commercial suicide for any supplier to give a true and honest account of all aspects of relationships with retailers’. The whole business environment for the farmers to the supermarkets is conceived in a manner where the farmers have to watch what they say about supermarkets who else they could face de-listing and lose money.
Tags: city centres, competition, convenience chains, customers, farmers, retailer, supermarkets, UK, Wal-Mart
