Suppliers’ concerns gave boost to Morrisons
Code of Practice failing to curb ‘predatory’ supermarkets
September 28 2003
Morrisons can, to some extent, thank the major suppliers to the supermarket sector for helping to boost its case for acquiring Safeway.
The Competition Commission report shows that concerns by suppliers over any increase in the buying power of the ‘big three’ was a factor in the decision to block the potential bids for Safeway by Tesco, Asda and Sainsbury’s.
It also raises the prospect of a new investigation into competition across the sector, after suppliers made it clear they do not believe the Code of Practice introduced in 2000 has worked.
An NOP survey commissioned as part of the investigation into the potential bidders for Safeway showed a clear gap between the perceptions of the supermarket operators and those of its suppliers.
All four potential trade bidders told the commission they had good relationship with their suppliers. However, the commission said that among the common themes in suppliers’ submissions with regard to the Safeway takeover were:
* Supermarkets use their buying power to make suppliers reduce their prices or pay costs that should be borne by retailers
*Trading conditions which make it impossible for suppliers to raise prices
*A belief that further concentration of buying power would make the situation worse
* The view that the Code of Practice has failed to curb “what several of the submissions referred to as predatory practices.”
Several large suppliers said that particularly since Wal-Mart’s acquisition of Asda in 1999, other major supermarkets has responded to Asda’s EDLP policy by intensifying pressure on prices. Tesco was said by some to have used Asda EDLP as a benchmark, but has also asked for additional promotional payments and incentives from suppliers.
Although Morrisons came out of the survey broadly more favourably than the big three, there is evidence that many suppliers simply saw it as the least worst option. The report said: “Respondents expected the effect of an acquisition of Safeway by Morrison to be broadly neutral, and by any of the other parties to be detrimental.”
Key findings of the NOP survey, which focussed on small and medium sized suppliers were:
* Around 80 to 90 per cent of each supermarket’s suppliers who gave an opinion said the Code of Practice has not changed their business.
* Morrisons was the least likely to have worsened suppliers’ ability to negotiate over the past four years, but a quarter still claimed their business situation with Morrisons had declined.
* Half of suppliers thought their business situation would improve if Morrisons took over Safeway, compared to around a third for Sainsbury’s and Tesco and just over a fifth for Asda.
While the relationship between supermarket and suppliers will hardly have been helped by the suppliers taking the opportunity to once again publicly criticise the major grocery operators, it is unclear whether there are grounds to strengthen the Code of Practice simply on the basis of this report, which was commissioned to look a specific situation.
With further consolidation looking increasingly likely as the lines between food and non-food retail blur, the government may take a wait and see attitude rather than raise the stakes too soon with another investigation of the market.
