Pick ’n Pay, Shoprite/Checkers, Woolworths and Spar now control 94,5% of South Africa’s retail food market. Wielding massive market power, they’ve become increasingly tyrannical in determining terms of trade with suppliers, a recent National Agricultural Marketing (NAMC) report has found.
The report shows how retailer dominance affects producers, uncovering anecdotal evidence of the shrewd – or dirty – tactics these chains employ.
The large volumes these chains sell, give them enormous buying power. The report gathered evidence of how this power is used and misused, increasing the disparity between farmgate and retail prices. Retail stores are perceived as keeping prices “low” for the consumer, but this is done at suppliers’ expense.
As these retailers grow, their procurement systems are becoming more centralised and controlled. Smaller players are cut out, leading to greater concentration in the food processing and retail sector, threatening food security and the vibrancy of the rural landscape.
While tough negotiations can’t be faulted, as South Africa’s major food corporations and large chain stores work towards efficient supply chains, the result is often that small suppliers struggle to survive because of unfavourable terms, and fear being “delisted” or “blacklisted” when speaking out. There’s also substantial evidence that retailers’ practices block out many smaller suppliers.
Other retailers often negatively view a supplier’s good relationship with a rival, like a supplier in the Western Cape who was delisted from Shoprite/Checkers because of its good relationship with Spar and Pick ’n Pay.
Such practices act against government’s aims of promoting small-scale business, and could be a major challenge to BEE.
In writing the report, NAMC council member Prof Johann Kirsten and PhD research student Ali Abdulrahman refer to the autobiography Leading from the Front by John Barry. Barry is the marketing manager of Muller & Phillips, South Africa’s second largest distributor of consumer products including brands like Cremora and Duracell.
According to Barry, Pick ’n Pay began employing “bully-boy tactics” to gain market share. These included demanding smaller, more frequent deliveries to individual stores at better prices than bulk deliveries, and forcing suppliers to unpack their own stock on the shelves. If they refused, Pick ’n Pay would stop doing business with them.
“Pick ‘n Pay is by no means unique in this behaviour,” Prof Kirsten says. The NAMC report refers to a number of one-sided practices in the supplier-retailer relationship, thought to increase food prices as suppliers factor them into their costings. These include confidential rebates, returns on no sales and in-store breakages and losses, poor management of the cold chain, and poor management and care of suppliers’ packaging material, such as crates (causing losses to suppliers as high as 10c/â„“ of milk), long delays before payment, and price being the only issue in the relationship.
Rebates, returns and losses
Confidential rebates are meant to cover the support retailers offer in terms of advertising, shelf space, listings, and the like. They can be as high as 12% to 15%, and can’t easily be recovered from list prices, making it hard for small suppliers to stay in business.
Rebates aren’t conducive to competitiveness, since it’s usually the large retailers who have the power to negotiate them.
Retailers also take different rebates from different suppliers for the same product. “Discounting product prices is mostly financed by the supplier and not the retailer,” Prof Kirsten says. “Spar is different because it only discounts on its own brand of products. But suppliers still have to make a Spar house brand allowance in addition to the rebates.”
South Africa’s supermarket chains also expect suppliers to unconditionally guarantee their products. Suppliers must accept all returns unless they can prove the supermarket was at fault. Sometimes, returns are top of the list when suppliers negotiate deals with retailers. The extent of returns and wastage is often grossly underestimated and can amount to 15%.
Arrangements differ between suppliers. In the case of “sell-or-return” the supplier carries the cost of damaged and/or expired products. In the case of “no-return”, the retailer does.
“There are relatively few “no-return” policies among retailers,” Prof Kirsten says. “Smaller suppliers have no choice but to write-off the product, and recover very little of their losses.” The decision is often between destroying the stock or transporting it back to the factory, but what if the supplier is 1 200km away?
“Returned perishable products usually suffer from cold chain interruptions,” says Prof Kirsten. “Returned cheese, for example, will have to be sold as second or third grade for R15 to R18 less per kilogram than the original wholesale price. To return a chilled product is expensive and risky and most suppliers have burnt their fingers reselling them.”
Although most credit notes are caused by issues within the store, the supplier has to take most of the burden, sometimes several millions of rand in lost revenue. For one dairy supplier who deals with major retailers, roughly 25% of all invoices result in credit notes. With this dairy company issuing 800 to 1 100 invoices monthly, 900 to 1 000 credit notes have to be administered per year, requiring the extra overhead of three more employees. Credit notes are issued for:
Damage which mostly occurs in the store’s backup warehouse, as well as during handling by the retailers.
Pricing, mainly due to uncertainty about the dates of deal periods. The retailer gets the benefit of the doubt, by estimating that it was the cause of only half of the credit notes.
Expired stock, mainly caused by poor stock rotation in the retail store.
Good returns: The retailer would order stock, but return it due to high stocks or lack of time to offload.
Supply cancellation: Mostly caused by a supplier being out of stock.
Prof Kirsten notes, “It’s clear some retailers aren’t abusing the credit note system, but other cases are more complex because each store in a chain independently places and receives orders, making control difficult.”
Cold chains and packaging
The cold chain is a major problem. Most retailers have very poor receiving areas. The delivery of perishable goods could and should be more effective. It could be done at night, to reduce hold-ups and congestion.
Consumers also cause wastage and losses, leaving perishables out of refrigerators in store, or leaving it in the car and returning it for having “gone off”. This cost passes back to the supplier.
Supplier packaging material is a major cost component and poor care of it can be very costly. These losses are sometimes built into the cost structures. Retailers are said to regard crates as a cost to the supplier, even though they use them for their own storage. In some industries, about 2% of the monthly packaging material is lost.
Many suppliers have tried to introduce measures such as deposit payments on crates, but retailers opposed them. Suppliers have given up on solving the problem.
Payment terms vary considerably, from seven- to 90-day credit terms. Suppliers generally finance inventory, while retailers continue to order products when it benefits them, whether to stock up before notified price increases or support suppliers’ promotional activities.
“The general view is that suppliers don’t experience many problems with credit payment terms. Only one retailer took long to pay,” Prof Kirsten says.
“Some retailers are open to negotiation. Others coerce suppliers into less-than-favourable terms with a ‘take it or leave it’ attitude.”
The NAMC hopes the Competition Commission will investigate supermarkets and the merit of introducing new rules for relationships between retail chains and suppliers, especially small and medium suppliers, to prevent retailers’ restrictive practices and their costs to suppliers.
Source: Kirsten and Abdulrahman, The Impact of Market Power and Dominance of Supermarkets on Agricultural Producers in South Africa, NAMC, May 2009. |fw