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Lecture14SupplyChainManagementPartnershiporPowerStruggle732019.pptx

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Supply Chain Management Partnership or Power Struggle?

NBS7030B

Retail Marketing & Management

Ratula Chakraborty

Professor of Business Management

Director MSc Programmes

[email protected]

Retail supply chains and retail logistics

The rise of retailer buyer power

Different forms of buyer power

Economic effects of buyer power

Public policy responses

Case study – UK Groceries Market

Key question:

To what extent is the modern retailer-supplier relationship a collaborative partnership or an adversarial power struggle?

Lecture Outline

1. Retail supply chains and logistics

Route to market

factory –> sortation depot –> RDC –> local warehouse –> retail store –> consumer

The role of the Regional Distribution Centre (RDC)

Breaking bulk and storing supplies, distribution, amalgamation of product assortments for stores, preparation of merchandise

Costs in the supply chain

Transportation, handling, warehousing/storage

Product-push v. customer-pull based logistics systems

Efficient consumer response and collaboration with suppliers

System Rivalry

Supply Push v. Demand Pull

Brand Retailer

Retailer

Brand Producer

Producer

Consumers

Retail Marketing & Management Lecture – Supply Chain Management 2

Chain-stores and increasing retail concentration

Most retail sectors now dominated by a handful of major retailers that suppliers need to trade with in order to survive

Retailer-led supply chains

Retailers determine product ranges and how they are supplied

Relative bargaining positions in retailer-supplier relations

Suppliers economically dependent on key retailer customers

Easier for retailers to switch suppliers, than vice versa

Retailers control shelf space and all in-store marketing levers to favour/disfavour products

2. The rise of retailer buyer power

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

De-listing threats and other retailer bargaining tactics

Intimidation, scare tactics, continuous pressure to lower prices

The use of competitive tendering and online auctions

Used for unbranded commodity products (e.g. cheese, bleach)

Own-label development to weaken brand power

Provides an alternative to reduce retailer’s dependency on brands

Exploiting different roles to leverage buyer power

Retailers serve three roles for brand producers: as their customers (i.e. gatekeepers to consumers), competitors (selling own label), and suppliers (supplying shelf & advertising space)

The rise of retailer buyer power

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Retailer Buyer Power

Exploiting Different Roles

Retailers as “Suppliers”

Pressure on Suppliers

Retailers as “Competitors”

Retailers as “Customers”

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Buyer power is manifested in two forms:

Buying effectiveness on supply prices

Lowest prices generally obtained by firms with highest market share

Small retailers can pay significantly more (10%+) for their goods than leading chains

Contractual obligations placed on suppliers

To provide direct or indirect financial benefits

To increase suppliers’ economic dependency

To hamper retail rivals (e.g. raise their costs)

http:// www.foodmanufacture.co.uk/People/Video-supermarket-ombudsman-depends-on-food-and-drink-suppliers

3. Different forms of buyer power

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Discounts to retailers

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Payments for shelf-space (slotting allowances) and “pay to play” and “pay to stay” fees

Exclusive supply obligations (“only supply us”)

Most-favoured-customer (MFC) requirements

Late payments and enforced sale-or-return (shifting business risk on to suppliers)

Retrospective discounts and enforced contributions (post-contractual opportunism)

Supermarkets hurting suppliers (BBC News, 17/10/2009, 3:00mins)

http://news.bbc.co.uk/1/hi/business/8311930.stm

Examples of contractual obligations imposed on suppliers by retailers

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

The Tesco profit overstatement that exposed the scandal of delayed payments to suppliers) (22/9/2014) - http://www.bbc.co.uk/news/business-29306893 (1:40 min)

(More details and a 9:40 min video interview with the (then) new CEO, Dave Lewis, at http ://www.bbc.co.uk/news/business-29306444 )

(commentary on background - http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11122425/Tesco-scandal-could-spark-a-long-overdue-shake-up-of-the-retailer-supplier-relationship.html )

Examples of contractual obligations imposed on suppliers by retailers

The start of the investigation (5/2/2015) - http://www.bbc.co.uk/news/business-31143709 (2:20 min)(background – “Tesco: where it went wrong” - http:// www.bbc.co.uk/news/business-30886632 )

The results of the investigation (26/1/2016) - http://www.bbc.co.uk/news/business-35407612 (2:30 min)(and written summary at http://www.bbc.co.uk/news/business-35408064)

Commentary on what this means now for suppliers see - http://www.telegraph.co.uk/finance/comment/12124265/Tacons-verdict-leaves-Tesco-suppliers-dancing-in-the-aisles.html , http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/12122662/Five-ways-Tesco-turned-the-screws-on-its-suppliers.html , http://www.foodmanufacture.co.uk/Supply-Chain/Tesco-should-be-fined-for-grocery-code-abuses

Examples of contractual obligations imposed on suppliers by retailers

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Can driving down supply prices ever be bad?

Three ways in which buyer power may adversely affect competition and harm consumers:

Demand withholding – exploiting monopsony power to restrict demand and drive down supply prices

Reducing suppliers’ incentive to invest and innovate

“Waterbed effect” with small retailers charged higher supply prices due to discounts given to large retailers

But, buyer power can also be manifested through anti-competitive requirements or restraints on suppliers

4. Economic effects of buyer power

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Distorting Retail Competition

Further tilts uneven playing field

Large retailers in “virtuous circle”, small retailers in “vicious circle”

Small retailers can suffer “waterbed effect”

Assists predatory pricing

Combining local price flexing with below-cost selling to target small/specialist retailers

Loss of retail variety with sole focus on price

Economic effects of buyer power #2

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Distorting Supplier Competition

Small suppliers driven out of the market

Most vulnerable to retail buyer power

No alternative routes to market given demise of small/specialist retailers

Long term decline in supplier investment

Marginal cost pricing for suppliers with no power, so unable to cover fixed costs

Product quality, variety and innovation suffer due to inability to recover investment costs

Economic effects of buyer power #3

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Retailer-Supplier relations and buyer power

3 minute BBC interview (21 January 2013) with Christine Tacon, the newly appointed supermarket ombudsman who is the 'Groceries Code Adjudicator

http :// www.bbc.co.uk/news/business-21141841

http:// www.bbc.co.uk/news/business-354080 64

(Jan 26, 2016) news

2 minute BBC news story (23 July 2012) on dairy farmers protesting about the prices they receive for milk from supermarkets:

http :// www.bbc.co.uk/news/uk-18963839

Economic effects of buyer power #3

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Questions for Discussion #1

Are there supply chains which are still largely producer driven rather than retailer driven? Why? Will this last? (e.g. newspapers and cars)

Why is it often easier for a retailer to switch to different suppliers, but harder for a supplier to switch to different retailers? Are there exceptions? What are the implications for the balance of bargaining power?

Why is the development of lookalike retailer own label goods a particular competitive challenge to the major brand producers? How should brand producers respond?

Direct measures to prevent exploitative or anti-competitive buyer power

“Code of Practice” governing retailer relations with suppliers (e.g. UK and Australia)

Economic dependency laws (e.g. France, Germany, Greece, Portugal, and Spain)

Ban discriminatory pricing in intermediate goods markets (e.g. Robinson-Patman Act in the US)

Prohibit anticompetitive buyer-led vertical restraints (under EU Articles 81 and 82)

Allow co-operative agreements amongst producers (e.g. permitted in various European countries)

5. Public policy responses

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Broader measures to preserve retail diversity and competition

Predatory pricing laws (but often seen as ineffective)

Blanket below cost selling bans (but viewed as inflationary in France and Ireland)

Targeted below cost selling bans (e.g. Germany)

Tight planning restrictions (notably for large stores)

Strict retail merger policy (with low market share thresholds)

Enforced store divestiture or store swaps

Public policy responses #2

Retail Marketing & Managemen – Supply Chain Management 2 Ratula Chakraborty

Competition Commission “Groceries Market” Inquiry 2008

Retail sales worth £123.5bn in 2007, representing 16% of total consumer expenditure in UK

Grocery sales: 72% in supermarkets, 20% in convenience stores, 8% in specialist outlets

“Big 4” supermarkets control 75% of grocery store sales

Food/drink manufacturing industries increasingly concentrated (70% with C3 > 50%), but over 6,000 firms

307,000 agricultural holdings – fluctuating fortunes but particular concern about dairy farmers

6. Case Study – UK Groceries Market

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Buyer power effects

CC find the gap in supply prices paid between largest and smallest retail chains averages around 11-13%

CC find that 26 different practices imposed on suppliers by retailers are anti-competitive

But, is there any evidence of harm from buyer power?

Harm to retail competition?

Harm to supplier profitability and viability?

Harm to consumers from reduced product choice or higher retail prices?

Case Study – UK Groceries Market

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Retail Sector Composition

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Case Study - Conclusion

UK grocery retailing dominated by “Big 4” retailers

Concern that increased buyer and seller power of leading retailers may harm competition

Evidence of buyer power in differential buying effectiveness and use of buyer power practices

Limited evidence of buyer power adversely affecting profitability and viability of other parts of the supply chain

Little evidence to emerge that consumers have been harmed in respect of product choice/innovation and prices

Policy response: “Groceries Supply Code of Practice” and an ombudsman scheme for handling supplier complaints

Plans for the new code of practice (BBC News, 4 February 2010)

http://news.bbc.co.uk/1/hi/business/8497451.stm

Retail Marketing & Management – Supply Chain Management 2 Ratula Chakraborty

Some exposures…

The Tesco profit overstatement that exposed the scandal of delayed payments to suppliers) (22/9/2014) - http://www.bbc.co.uk/news/business-29306893 (1:40 min)

(More details and a 9:40 min video interview with the (then) new CEO, Dave Lewis, at http://www.bbc.co.uk/news/business-29306444 )

(commentary on background - http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11122425/Tesco-scandal-could-spark-a-long-overdue-shake-up-of-the-retailer-supplier-relationship.html )

How Tesco mistreats its suppliers (22/10/2014) - http://www.bbc.co.uk/news/business-29703600 (2:40 min)

The start of the investigation (5/2/2015)

http ://www.bbc.co.uk/news/business-31143709 (2:20 min)

(background – “Tesco: where it went wrong” - http://www.bbc.co.uk/news/business-30886632)

The results of the investigation (26/1/2016) - http://www.bbc.co.uk/news/business-35407612 (2:30 min)

(and written summary at http://www.bbc.co.uk/news/business-35408064)

Questions for Discussion #2

How might retailers and their suppliers find win-win solutions where both sides can gain from trading?

If supply chains are dominated by powerful retailers how do food/drink producers like Coca Cola, Unilever Procter & Gamble, Nestle, Kraft, etc., earn £ billions in profits each year?

How can small retailers compete against the buying power of the major retailers to ensure they remain competitive and economically viable?