Supermarket shelf shock

In a report on its own preliminary probe, the council finds that the “extremely concentrated” retail food sector is dominated by supermarket chains Pick n Pay, Spar, Shoprite/Checkers and Woolworths. These four together control almost 95% of SA's retail food market.

The council, a policy adviser to agriculture minister Tina Joemat-Pettersson, has recommended that its “preliminary evidence” be taken to the commission to kickstart an investigation into the supermarket sector.

It is set to be the next big episode in a series of hearings that have resulted in bread makers and milk processors being found guilty of price fixing, as well as the recent R250m fine slapped on Sasol for collusion in fertiliser prices.

The report says aspects of supermarkets' behaviour that are “truly anticompetitive in nature and sometimes unethical ... are currently not captured by SA competition laws”. It proposes that laws be drafted to cover the gaps.

The main theme of the report is that the huge buying power of the big retailers enables them to dominate their relationships with suppliers, and that this “could eventually destroy competitive positions on the supply side”, to the long term detriment of consumers.

Supermarkets' buying power also facilitates unfair trade discrimination, the foisting of tough contractual obligations on small suppliers and dubious procurement practices that are driving increasing numbers of smaller suppliers out of business, it says.

Suppliers cited in the report say the threat of “delisting” — meaning their produce will not be considered for shelf space in shops — is ever present in their relationships with supermarket chains.

One supplier says a senior manager of a supermarket chain threatened to delist him if he sold excess produce to another group for less than what that company paid him.

The risk of delisting, the report says, is very threatening to small suppliers, especially if they supply just one chain.

“The chain can switch to an alternative supplier in a short time, which gives the supplier a weak negotiating position and enables the supermarket group to set a very low price.

“Many smaller role players in the processing industry — even the smaller of the big players — may therefore accept too low a price, endangering the long term viability of the enterprise.”

Other restraints include “most favoured buyer” clauses in contracts that guarantee exclusive supply, unjustified high contributions to retailers' promotional expenses and agreements that suppliers will be paid only for goods sold in the shop. Unsold goods are returned, with suppliers often having to decide between paying for transport costs to their premises or simply having their produce destroyed.

The report cites a book, Leading From the Front by John Barry. He is a former marketing manager for Muller & Phillips, SA's second-largest distributor of consumer products, including brands such as Cremora and Duracell.

In a chapter titled Dancing with Pick n Pay Barry claims the chain group's rise allowed it to squeeze manufacturers and use “bully-boy” tactics to gain market share over other retailers.

“These tactics included demanding smaller, more frequent deliveries to individual shops at better prices than those of bulk deliveries. They forced suppliers to unpack their own stock on the shelves. The inherent threat of noncompliance was, and still is, that Pick n Pay would stop doing business with you.”

When Barry refused to co-operate with a “back-dated rebate” — which the report says is a common practice among the big retailers — for Pick n Pay to match a promotion he had run with Checkers, the chain showed its muscle by instructing store managers to no longer purchase Muller & Phillips products — despite many of the brands being product leaders in their fields.

The report considers whether the squeezing of suppliers leads to better prices for consumers.

It says: “The buying power of retailers may have adverse effects on the viability and efficiency of suppliers which ultimately could be to the detriment of the agricultural and food industry at large.

“The power of retailers is therefore a concern, because low returns lead to pressure on cash flow and limits the expansion of production capacity. In the long run this could have adverse effects on consumer welfare.”

Among the report's other key findings are:

The gap between farm-gate prices paid by supermarkets and retail prices charged to consumers is widening steadily (see graph);

Price falls at farm level are often not passed on to consumers, though price increases are;

Changes in the retail price resulting from competition among supermarkets cause changes to be made in wholesale and farm prices, not the other way around. The report says this indicates that “while there may be competition among retailers, producers have little negotiating power”.

Suppliers that produce “own brand” goods for supermarket chains are put under the most pressure to cut prices.

In-store discounts are invariably financed by suppliers, not retailers.

Source: Financial Mail

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