With some major grocers in Europe working together on purchasing, Simon Creasey looks at the impact these tie-ups can have on suppliers.
When Tesco announced a buying tie-up with Carrefour in July this year it took the grocery industry by surprise. Few food industry experts anticipated these retail behemoths, which in markets had historically been fierce competitors, would forge an alliance.
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However, in the context of recent activity from rival European grocers, the move made sense. On mainland Europe, a flurry of similar allegiances have been struck. Competition in the more mature Western grocery markets is more intense than ever and the growing threat of the discounter groups across Europe has led established market players to consider dramatic new tactics to claw back market share.
Tesco and Carrefour hope the alliance will particularly drive down the cost of own-label lines, which offer better margins than branded products and have been at the heart of the recent rapid success of discounters like Aldi and Lidl.
But what do alliances like this mean for manufacturers – both large and small – and are there any defensive measures they can take?
The growing list of buying tie-ups and similar strategic deals forged over the last couple of years is striking.
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By GlobalDataLast month, Spanish retailer Dia Group announced it had joined the new generation Horizon International Services ‘negotiation platform’, which was launched in June this year by French retailers Auchan and Casino, alongside Germany’s Metro Group.
However, the planned agreement between Tesco and Carrefour arguably made the most waves when it was unveiled in July.
On announcing a “long term strategic alliance” the retail giants claimed the tie-up would “enable both companies to improve the quality and choice of products available to their customers, at even lower prices thereby enhancing their competitiveness”.
Tesco and Carrefour also said the alliance would “allow both companies to strengthen their relationships with their suppliers and create significant opportunities for those suppliers”, adding: “Each company will continue to work with supplier partners at a local and national level.”
When pushed to expand on exactly how the agreement allows the companies to strengthen relationships with suppliers and create those “significant opportunities”, a spokesperson for Tesco failed to elaborate.
Unsurprisingly, retailers tend to be adamant their buying pacts are beneficial for all parties.
Commenting on the Horizon alliance, a spokesperson for Metro says the venture is a “multi-level trade alliance with a global footprint and a collaborative approach towards the suppliers”.
The Metro spokesperson claims the agreement offers “attractive international services to global suppliers by a one-stop shop solution covering different levels of trade from wholesale and foodservice distribution formats to hypermarkets and supermarkets to discount in more than 40 countries on three continents”.
“It’s a win-win relationship, with synergies that could be invested in best services and prices for our clients”
The spokesperson adds: “It will furthermore offer support services for SMEs for extending their business to an international level. The combination of expertise and set of experiences at various levels of trade and regions will add further value to the global services. This will increase competition with major distributors, who are part of similar alliances.”
A spokesperson for Dia, the latest retailer to join Horizon, moves to underline how the venture is a “service platform not a buying platform” that is “dedicated to offer services to the major manufacturers”, adding: “These services are related to the knowledge of clients through bid data, business intelligence, data sharing.”
Using consumer data compiled by the four international food retail partners under the Horizon umbrella, the Dia spokesperson claims retailers, consumers and manufacturers all benefit from the venture.
“Working together with the manufacturers the product offer, promotions [and] new assortments could be more accurate, the client would be more satisfied [in terms of price and product] and retailers and manufacturers would sell more,” the spokesperson insists. “It’s that simple. It’s a win-win relation[ship], with a lot of synergies that could be invested in best services and prices for our clients.”
A spokesperson for Casino further elaborates the Horizon alliance will focus on “moving away from purely transactional negotiations towards a collaborative, balanced and innovative type of negotiations”.
The agreement is “respectful of everyone’s interest: customers, farmers and manufacturers,” the Casino spokesperson adds. “Each party will continue to be independently responsible for its own commercial strategies and sales policies, which include building product ranges, defining pricing and promotional activities. Relevant competition authorities will be approached for approval prior to the implementation.”
Because the details surrounding exactly how food manufacturers will benefit from these buying alliances has been scant to date, some industry watchers are not convinced they are necessarily a good thing for all parties.
“Of course suppliers won’t benefit from these agreements,” says one European buying expert, who gives the concept of buying alliances short shrift. “They aren’t set up for the benefit of suppliers – they’re set up to benefit the retailers.”
Another retail source agrees. “When they talk about opportunities [for manufacturers] what they mean is opportunities to increase buying through them but, although they might get a bigger piece of the pie by selling through both brands [in a buying partnership] on a larger scale, they are certainly not going to benefit on a price per unit basis.”
“It might help certain suppliers who trade with one retailer and not the other – but to what cost I don’t know”
David Sables, CEO of Sentinel Management Consultants, says he is not a fan of buying alliances – but he believes some suppliers could ultimately benefit from the Tesco/Carrefour deal in particular.
“There is an opportunity here because they cover different catchment areas, so there are bound to be suppliers that sell into Carrefour who have got products that would go down quite well over here [in Tesco stores]. So if you’re supplying Carrefour and you’re not currently supplying Tesco – or vice versa – then you could potentially double your business,” Sables says.
It’s a view shared by one UK-based food manufacturer who sells products into retailers across Europe and was willing to speak on condition of anonymity. He acknowledges there is a potential opportunity to increase volumes through buying alliances but he is worried what impact that will have on his margins.
“It might help certain suppliers who currently trade with one retailer and not the other in the buying partnership, but to what cost I don’t know,” says the manufacturer.
Other industry watchers argue the purchasing alliances may not necessarily look to extract savings from across the store.
“The retailer rationale is very easy to see [but] how this translates into on the ground activity will likely be a focus on three main areas – the major branded multinationals, private label suppliers and non-grocery items,” Andrew Searle, a managing director in the consumer team at consulting firm AlixPartners, says. “Specifically, we believe that fresh produce will not be an area of focus given the difficulties involved in getting enough leverage into sourcing agreements from country to country and the fragmented nature of that supplier base.”
In the main, manufacturers are cautious about commenting publicly about the growing number of buying pacts between retailers. All of the large FMCG manufacturers approached to comment for this article either flat out declined or failed to respond to repeated interview requests. As did a number of smaller manufacturers. The common refrain from representatives of food groups was they “don’t comment on customers [retailers]”.
Europe-wide food industry confederation FoodDrinkEurope did provide a statement. It is sceptical about the prospect of financial benefits to manufacturers. Buying alliances between retailers “substantially increase retail buying power adding further to the existing imbalance in the food supply chain and putting food manufacturers and other suppliers under increasing pricing pressure”, a FoodDrinkEurope spokesperson says.
“Imbalances in bargaining power can and do lead to unfair commercial practices. These include the transfer of excessive risks or unexpected costs from grocery retailers to suppliers. The threat of delisting of products grows with implications for ability of food businesses to access consumers. Consumers also lose out if choice is lessened. That’s why the recent EU Commission proposals on unfair trading practices must cover the full food chain including retailers and retail alliances, not just farmers and SMEs.”
The fear in manufacturing circles is if they do not play along and offer these alliances the cost savings they are looking for then they run the risk of being delisted.
“The reality is there are opportunities for both parties to enhance their businesses by working together”
Although some grocery retail experts say ultimately manufacturers can do very little to fight back against any potential margin cuts imposed by retailers there are a few defensive measures they could try.
“Collaborating seems like a smart thing to do,” says Bruno Monteyne, senior analyst European food retail at Bernstein. “They can also see if they can simplify the logistics of delivering their products.”
Another option would be for manufacturers to acquire rival food businesses so they can benefit from enhanced purchasing power and greater efficiencies, which would allow them to either take a cut on margin or hold firm in negotiations.
“Some of the biggest suppliers can ride out these negotiations and even if they are delisted they will just wait and get relisted again because they know their products are good,” Sables says. “Plus they’re sitting on huge cash cows. They have brands that they created 20 years or so ago and they have been raking in the money all this time so they’re able to ride the waves. So basically all the big suppliers have to say [to these buying alliances] is ‘no, come back when you grow up’. Some of them do do that because they’re wise enough or they get advice from someone like me.”
Smaller suppliers clearly do not have the same clout, so they are less likely to be able to afford to take as strong a position in negotiations but, as Monteyne points out, “that’s not where the big savings come from anyway. I don’t think any of the retailers out there squeeze the small suppliers because they have unique products that people want”.
At AlixPartners, Searle argues it is “too simplistic to look at buying alliances as being solely for the benefit of retailers banding together under the ‘cheaper basket’ mantra”.
Searle says: “The reality is that there are opportunities for both parties to enhance their businesses by working together – pragmatic collaboration is going to be the key to success.
“For retailers the key challenges are going to focus on differentiation and positioning. Some of the questions they need to be considering will include how the arrangements fit their overall strategy in terms of every-day low pricing versus promotional activities. Specifically, with homogeneous pricing, how does a retailer negotiate, and execute, bespoke in store promotional activity?
“Crucially retailers are going to need to find ways to preserve their positioning, maintain/enhance their core customer proposition and deliver the products, brands and activity that customer base expects. This is going to require a real focus on category management/development working in close partnership with suppliers.”
And Searle suggests food manufacturers should see the purchasing alliances between retailers as an opportunity.
“For manufacturers, the start point has to be that this cannot simply be an attack on margins. It should be seen instead as opportunity to drive significant cost optimization throughout the value chain,” Searle says. “In the course of doing this, a key questions to answer will be how the manufacturer harmonises SKUs, specifications and suppliers. The positive here is there is value to be found in these areas and this is an opportunity to bring them into tight focus. For many suppliers this should be seen as an opportunity to focus on their core products and also place the right bets on NPD in order to ensure they are consistently delivering ‘must-have’ ranges.
Searle adds: “Again, there are many questions to be solved regarding promotional activity – the branded manufacturers in some ways hold the upper hand here given their marketing spends and often global consumer franchises. Imagine a scenario where one of the retailers in a group threatens a delisting but the others disagree. How both parties collaborate to continue to gain mutual benefit from promotional activity will be an area where working together will be key.”
Based on the scant details we have about these buying alliances to date, it is difficult to come to firm conclusions about where the impact will fall but food manufacturers will likely have to be prepared to foot the bill (to varying degrees) of any cost savings retailers seek to extract in the face of competition from discounters and concerns about consumer confidence amid slow wage growth and shoppers tightening their belts.
“What these alliances are going to do from the retailers’ perspective is give them greater buying power and help them commandeer lower prices, which in turn will help them commandeer greater market share,” says Hamish Renton, managing director of UK-based industry consultants HRA Global. “This remains a zero-sum game for manufacturers despite all the fluff and PR spin because if one supplier picks up a contract for 1,000 tonnes of cheese that means someone else isn’t making that 1,000 tonnes of cheese. What the retailers are essentially saying is ‘come in with the winners, limbo lower on cost, limbo lower on price and limbo lower on margin and possibly you might pick up some margin if you can go lower than the other guy’.”
