Supermarket Competition - Tesco, Asda, Sainsbury and Morrisons - Case Study Example

?Business Introduction The suppliers are an important component of every business irrespective of its nature. The suppliers help the organization in extending their mission and vision via quality, cost and timely delivery of the products. The firm looks at the suppliers as a part of the organization and a partner in their success. The organizations expect the suppliers to use innovative techniques in their practices to meet the requirement of the customers. The organization should maintain a healthy relationship with the suppliers. In order to maintain the healthy relationship the organization should follow some ethical standards while dealing with the suppliers (Palepu, et al., 2007). In recent time some of the retail giants of United Kingdom like Sainsbury, Asda, Morrisons and Tesco have been accused of swindling the suppliers by paying them the bottom prices or finding some other way by which they can pressurise the suppliers to pay the cost of the unsold or perished goods. There are also other ways by which the suppliers are exploited that includes paying lower than the agreed price after the delivery of the order, delaying to pay them, make changes in the order at the last moment, making the suppliers to bear the cost, forcing the supplier to use certain specific expensive hauliers for delivering their goods and often ruining the supplier due to lack of cash flow. The supermarket retailers even pressurised the suppliers to pay for the shoplifted goods and making their profits to rise high, when they are expected to be lower. The study focuses on this issue. Supermarket competition Relentless rise in the supermarkets has given rise to the concern regarding their holdings over the suppliers and the customers. A research conducted by TNS Worldpanel, the market research group has concluded that the big four retail giants of UK Morrisons, Sainsbury's, Asda and Tesco holds almost three quarter of the grocery market that amounts to about 74.4%. Tesco is the leading supermarket that holds the biggest share. The report suggests that for every ?8 the consumer spends ?1 goes towards the business of Tesco. In 2004 it has been recorded that the retail sector of UK amounts to almost ?246bn, which is more than the amount if the economies of Ireland and Switzerland are combined together. This implies that the retail sector offers quite a significant amount (BBC News, 2006). (Source: BBC News, 2006) According to the reports of the All Party Parliamentary Small Shops Group, almost half of 278,630 shops in UK are managed and owned by a sole trader. These small local stores are losing their market because of the growth of the supermarkets that are gradually moving towards the convenience store format. As per the report of Association of Convenience Store for the last twelve months till June of 2005, 2000 independent convenience stores closed their operations owning to the growing competition of the supermarkets. The Office of fair Trading (OFT) has been investigating the two main issues firstly the competition that surrounds the worries regarding the competition in the supermarkets and abusing relationship between the supermarket and the suppliers. The OFT has claimed that there is no restriction on the grocery market, which prompts a widespread scorn from the action group and the local shops. OFT further states that there is no need of incorporating any type of reform in the ways the super markets are operating; though there are claims regarding application of bullying tactics by the four big supermarkets. According to the recent declaration of OFT there are significant indications regarding increase in the purchasing power of the customer of the supermarket (BBC News, 2006). Area of Concern The corner and local shop areas are becoming the potential places for the growth of the supermarkets. The four big supermarkets face certain restrictive measures that pave the pathway for expanding their operations by following the convenient store format. This also helps the supermarkets to target the customers who are cash rich but has less time to pick up groceries while returning back home. This has created concerns for the small shops that are facing increased competition due to the increasing popularity of the supermarkets. The MPs have raised the concern regarding the destruction of the local community due to the shifting of the supermarkets towards the convenience stores. Economic and social concerns are highlighted by the Women’s Institute and Friends of the Earth due to the increasing dominance of the supermarkets. Concerns have been also raised that if the supermarkets reduce their pricing then that may make the small shops move out of the business and are unable to compete with the bigger rivals. The decision of OFT to categorize the retail market into one-stop and convenience has allowed unhindered growth and expansion of the supermarkets. The customers are also complaining regarding lack of stores in the High Street (BBC News, 2005). Super markets and suppliers The tactics that is used by the supermarkets to bargain with the suppliers has been the source of conjecture and speculation for years. This has been considered as the most shadowy area of retailing. Everyone is just concerned about what is going inside the closed rooms where the supermarket buyers and the manufacturers come face to face. The food manufacturers aim to sell their goods at the highest possible price whereas the supermarket buyers want to purchase at the cheapest price. This had been secretes until recently when a secret document from a large food manufacturer who provides supplies to all the four big supermarkets like Wm Morrison, Sainsbury, Asda and Tesco. This document was prepared in the context of briefing the negotiating tactics to the employees who are going to meet the supermarket buyers. The content of the document was hard hitting and eye-opening. As per the document various tactics are used by the supermarkets, which includes strategic and psychological manoeuvres to get the best price quotation from the manufacturers. The supermarkets are seen to use alleged ways that includes insistent poverty, deliberate misunderstanding regarding the conversation and even disturbing the suppliers physically. Moreover, Breaking the Armlock Alliance has also reported that the supermarkets are breaching the code of conduct and exploiting the suppliers. They want much clear and transparent information regarding the buying prices (Stocks, 2009). The tactics used by the supermarket buyer were given colourful names like The Barrister, The Social Smell and The Trojan Horse. The issue between the manufacturers and the supermarkets has taken an important position in the recent times. Over the last years the prices of the raw material and commodities were seen to increase by 100 pence that lead to the increase in the cost of the food manufacturers. The Hovis to Twinings manufacturer, Associated British Foods claimed that this has lead to a rise in the price. The manufacturers are expecting further rise in the price. But the supermarkets were highly deterministic in offering the customers at a much lower price because they were cutting their budgets in order to fight against the global credit crisis. The chief executive of Asda, Andy Bond claimed that the group will take aggressive measures tom initiate price cutting. Tesco has been already reported to cut the price by ?170 million. The issue between the suppliers and the manufacturers have entered into price wars. Consequence: British farmers to pay the cost for price war The price war that has started between the suppliers and the supermarket has worse affected the farmers. The farmers are unable to make profit, no choice on pricing and almost no idea regarding how much they would get for them. Apart from this the packaging is done by the farm but by the company as per the choice of the supermarket. This resulted into twice the cost that would have been required if the packaging would have been done by the firm independently. The farmers feared to raise their voice against this issue because they felt that this may annoy the big shops and the processors and they were afraid of taking such a risk in the situation of market crisis (Poulter, 2008). The National Union of Farmers argued that there is a climate of fear among the small farmers due to the monopolistic environment in the food retail sector. The small farmers are afraid of losing business even if the abuse makes them impoverished and risk of reprisals is there. Henry Dobell, who runs a fruit farm, has given up the production of raspberries and is now growing heritage apples, which he sells to the small local shops because of the reason that he found the business with the supermarkets to be impossible. The demand of the supermarkets was as such that the cost rose by 30% and left him without any profit. He also said that in one year Sainsbury refused to accept the entire raspberry that they produced after they were picked and packed. So the intermediary with whom the supermarket insisted to deal with, all the raspberries were sold to Somerfield and new packaging was bought. This process made the whole transaction to look like two for one offer. At one point the farmer were paid so less for each punnet that it not even cover the cost of putting a lid on it. Such types of potentially restrictive illegal practices has affected about more than 3000 small and medium scale farmers who are either driven into poverty or have been forced to leave the business (Renton, 2011). Measures taken This abuse was effectively addressed by the legislation passed by the government, the groceries adjudicator bill that enforce certain codes of conduct on the ten big supermarkets and their processors laying down the norms on how they should deal with the suppliers. It has provided cross party support. But the supermarket chains among whom almost four supermarkets controls 80% of the food retail has created a fierce attack on the bill stating that this initiative taken by the government may lead to further rise in the price of the food articles, even more than the present rate inflation, which was at 4.9%. However, the ministry committed to keep the inflation down (Peev, 2012). What does the supermarket says on the criticism On this issue the supermarkets claimed that they are providing the customers only what they want and at the same time they are also treating the suppliers fairly. Tesco denies the arguments that due to the rise of the supermarkets the small shops are experiencing competition. According to them consumers uses both small shops and supermarkets at different times. The British Retail Consortium who represents the supermarkets has said that the sector is wholly regulated by the customers. They also argue that by meeting the rising demand of the customers the supermarkets have become so popular. Moreover the competition has been an added benefit for them, which they have utilised till the level best by offering lower price, high quality and greater choices. Moreover the boss of Tesco, Sir Terry Leahy claimed that creation of an ombudsman as demanded by the president of NFU, Peter Kendall, will be of no use to the consumers. Mr Terry accepted that Tesco had not always provided a right balance while dealing with the smaller suppliers but at the same time the farmers should not expect to be treated like kids gloves (Stocks, 2009). On the other hand Sainsbury has claimed that their standard of payment is seen to be widely varying from that of the industry standard. The company has taken major initiatives in explaining the non-food suppliers regarding the step taken by the company to bring the payment standard at par with the industry standard. The company claims that they are committed towards paying their supplier at right time (The Telegraph, 2005; Harley, 2012; Steiner, 2012). Conclusion The above discussion suggests that the increase of the supermarket and their expansion as the convenient store has created huge completion not only among themselves but also for the small shops. They are facing greater challenges to run their operations. On the other hand some of the authorities who represents the supermarket has denied the claims stating that the sector runs due to the consumers and the supermarkets are only utilising the opportunity. On the other hand Tesco has accepted that in some cases they could not the balance the demand of the suppliers. However the ministry has taken relevant steps in order to stop this exploitation of the supplier and enhance fair trade. Reference List BBC News, 2005. Supermarkets 'Hurt UK Business' [online] Available at < http://news.bbc.co.uk/2/hi/business/4120782.stm> [Accessed 6 July 2013]. BBC News, 2006. Q&A: Supermarket Competition Concerns [online] Available at < http://news.bbc.co.uk/2/hi/business/4785544.stm> [Accessed 6 July 2013]. Harley, J., 2012. Sainsbury's in 'hall of shame' over supplier payments. The Telegraph [online] available at < http://www.telegraph.co.uk/finance/yourbusiness/9618599/Sainsburys-in-hall-of-shame-over-supplier-payments.html> [Accessed 6 July 2013]. Palepu, K.G., Healy, P.M., Bernard, V.L., and Peek, E., 2007. Business analysis and valuation: IFRS edition: text and cases. Connecticut: Cengage Learning EMEA. Peev, G., 2012. Supermarkets that bully small suppliers will NOT face fines after ministers cave in to pressure [online] Available at http://www.dailymail.co.uk/news/article-2233710/Supermarkets-bully-small-suppliers-NOT-face-fines-ministers-cave-pressure.html [Accessed 6 July 2013]. Poulter, S. 2008. Supermarkets accused of using 'bully boy tactics' on farmers to give shoppers a cheaper deal [online] Available at [Accessed 6 July 2013]. Renton, A., 2011. British farmers forced to pay the cost of supermarket price wars. The Observer [online] Available at < http://www.guardian.co.uk/environment/2011/jul/02/british-farmers-supermarket-price-wars> [Accessed 6 July 2013]. Steiner, R., 2012. Supermarket giant Sainsbury’s makes suppliers wait for crucial payments. mailOnline [online] available at < http://www.thisismoney.co.uk/money/markets/article-2220269/Sainsbury-s-makes-suppliers-wait-crucial-payments.html> [Accessed 6 July 2013]. Stocks, C., 2009. NFU criticises Tesco's treatment of suppliers [online] Available at < http://www.fwi.co.uk/articles/29/01/2009/114063/nfu-criticises-tesco39s-treatment-of-suppliers.htm#.UdejIztHJB1> [Accessed 6 July 2012]. The Telegraph, 2005. Sainsbury gives suppliers the pip [online] Available at < http://www.telegraph.co.uk/finance/yourbusiness/2912845/Sainsbury-gives-suppliers-the-pip.html> [Accessed 6 July 2013]. Read More