A popular phrase used in media and other commentary on the UK grocery system is that “Small firms are being ‘squeezed’ by their powerful partners“. This is shorthand for financial pressures put on SMEs by large organisations such as grocery retailers or multinational manufacturers; it is suspected that these pressures may put at risk the financial viability of many SMEs. However, there are many successful and sustainable relationships between smaller and larger organisations in the industry. In addition, investigations by the Competition Commission and the Groceries Code Adjudicator reported that, with a few exceptions, the network is broadly competitive. So, why all this noise and belief?
Recently, George Maglaras (principle investigator) and Leigh Sparks have looked at this issue using seed-corn funding from the Chartered Institute of Logistics and Transport. The project aimed at obtaining an understanding around the prevalence of and attitudes about the ‘squeezing’ phenomenon inside the UK grocery network. The findings, from 18 in-depth interviews with various stakeholders of the grocery network (i.e. retailer buyers, manufacturers, distributors, primary suppliers and trading relationships consultants), showed that practitioners generally disagree with the media comments. They believe that the ‘squeezing’ conditions within the network have developed due to market pressures. In particular, the significant growth of the discounters, increasingly high consumer expectations and the limited growth in the market are putting significant pressure on the network.
The question that is then reasonably being raised is “why are larger network members being accused of ‘squeezing’ their partners”? The answer requires an understanding of the issue of power within the network. Powerful parties are leveraging their power advantage to absorb the least amount of market pressures possible while transferring the bulk of the pressure on to their partners. This phenomenon creates a domino effect inside the network where every network member tries to protect and maintain their profit margins by passing the market pressures to their partners. Consequently, weaker network members (e.g. farmers or small manufacturers) are more vulnerable in this context. They might feel threatened or might need to leave the network. But how bad is this for the network?
The good news: such pressures are not necessarily too bad if we consider that the consumer seems to increasingly prefer consistently low prices and limited product range (i.e. what discounters are offering). Perhaps 20 different barbecue sauces per store was too much of a choice! A super-efficient grocery network able to reducing its costs and reducing product prices could be a competitive one under the current market conditions.
The bad news: we also found that the network sometimes ‘loses sight’ of the consumer. Powerful members may exercise their power for achieving short-term gains (e.g. for filling a gap in their bottom line) by asking for agreements that will allow them to maximize profit margins rather than optimising the offer to the consumer (e.g. product range inside the stores). Usually, it is the larger partners that can offer such improved terms rather than the SMEs which can’t be equally flexible in their deals. This increases the pressure on the already ‘squeezed’ network; it disadvantages the smaller members and might put at risk the quality of the products or the service levels provided by some of them.
The UK grocery network operates under these ‘squeezing’ conditions and there is considerable emphasis on cost and price reductions; this makes smaller companies vulnerable since they might not be able to absorb the market pressures or they are not powerful enough to avoid part of them. Network stakeholders need to ensure that this emphasis on efficiency and the way market pressures are being absorbed by the network collectively should not put at risk the product quality, optimum product range or service levels offered to the consumer. There is a need to identify a balance among these elements. This has become increasingly important due to the threat of Brexit added market pressures. Further increasing the gap between triangles in a Toblerone bar will be devastating for consumers given the recent reactions …
The results of the project are currently being written up for practitioner and academic audiences. If you would like further information please contact George Maglaras at the University of Stirling.