Balancing the shelves

Of the food suppliers interviewed by the FM, just one was willing to be named. The others were not prepared to compromise hard-won relationships by speaking out publicly about their experiences. “Don't mention my name. I'll be delisted,” says one. “It's a battlefield out there,” says another.

Certainly the fast-moving consumer goods industry has always been tough and aggressive. Retailers are under pressure to provide the right goods to customers at the right price, place and time. Additional pressure on supermarkets comes from spiralling food prices, higher manufacturing costs and a consumer spending squeeze. So the big chains put pressure on their suppliers.

This is the name of the game, and if small suppliers can't run with the big dogs, shouldn't they stay on the porch?

Getting on the shelf

Except that the small suppliers feel that they are unnecessarily prejudiced. “It's the initial cost of getting onto the shelves that kills you. That's why food prices are so high,” says a supplier of perishable foodstuffs.

“I had to sell my body to pay my listing fees,” says a supplier of chilli-based products.

The listing fee (or joining fee) paid by supplier to retailer could be an upfront payment, free stock or a percentage of sales. Its size depends on how many stores a supplier gets into, what the product is and what the margins are. “There are so many variables,” says the supplier.

Rebates

Beyond the initial listing fee, suppliers — all suppliers — pay the retailer monthly or quarterly rebates. This is a trade discount, but it can also include advertising and distribution fees. The bundle of charges is negotiated with each supplier annually and is treated as confidential. The same supplier says: “I'm paying 7.5% of my total invoice back to Shoprite, 10.5% to Pick n Pay and 12.5% to Spar, though this includes distribution.”

The smaller suppliers the FM spoke to say they pay between 7.5% and 18% in trade rebates and related fees. They say this is much higher than the rates for big national suppliers, who are able to negotiate on the basis of volumes.

However, Pick n Pay director of merchandising Kevin Korb denies that smaller companies are paying more. “We work out our rebate structures per product category, not per company,” he says.

One supplier of food-flavouring products recently requested a rebate reduction. The response, she says, was not positive and she did not push the discussion further. “I cannot compromise our relationship; our business has grown 200% since we began supplying the big chains. We need them.”

Arbitrary costs

The costs don't end with rebates. There are other, seemingly more arbitrary, costs. Pick n Pay, says a supplier of fruit products, “expects us to contribute to store openings and refurbishments”, a cost that varies between R400 and R1000. “It could even be for a store in which we don't have a listing. I watch my statements very closely.”

But the retailers say the small players are not at a disadvantage. “We need the smaller players,” says Korb. “My top 20 suppliers generate 47% of total sales. That is a concentration of power and it is not healthy.” Pick n Pay's strategy, he says, is to grow its supplier base.

Shoprite marketing director Brian Weyers says: “If we don't nurture small suppliers, we have nothing to protect ourselves against the big suppliers.” Shoprite will assist suppliers with a bridging loan if they have cash-flow problems, and has set up a department to assist small companies with accounting problems.

Stock mix

At the end of the day, retailing is a low-margin, high-volume game. The priority for supermarkets is to get the appropriate stock on and off their shelves as fast as possible. Inventory is a cost factor that defines the retail business, the more so in a recession.

“We carry 18000-20000 items,” says Korb. “I was offered 4600 new products between January and May. We have to continually look at what is selling in a category and what is not. Nonperforming lines must make way for others. Small suppliers can underestimate the complexity of dealing with the big retailers.”

But the smaller suppliers complain that the supermarkets' approach to stock management borders on being abusive. “They will arbitrarily discontinue a line of your products without telling you — sometimes even after an order has been placed. You have no choice but to take those products back,” says the fruit products supplier.

Liability

“If they order product and can't sell it, they just send it back,” says a supplier of products to flavour food.

Says a supplier of whole foods: “If their fridge breaks, if their customer knocks an item off a shelf — we have to take it back at our cost.”

“I am constantly fighting not to take back stock,” says the fruit product supplier. But there is little choice. “The goods receiving department will not accept a new delivery until I have taken back the other stock — even if there is a dispute over it.”

Much of the power, it seems, is wielded by the supermarket buyers, who are able to dictate and set terms. “Working with an experienced, intelligent buyer is a pleasure,” says the fruit product seller. “But if you get a shirty young guy who has something to prove, it can be difficult. They don't always distinguish between a niche product and a high-volume one.”

The suppliers concede that they need big retailers. They also say that though the negotiations are tough, they are above board.

“If you are prepared to work hard and be innovative, then supplying the big retailers is good for business,” says Roastwell Coffees MD Allan Holcombe. “There have been no demands to be unethical. In fact, I have found them to be very small-supplier friendly.”

Source: Financial Mail

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