Monday 3 September 2007

Supping with the devil

The big multiple supermarket chains are a powerful bunch. In many areas of food and drink retailing they control three quarters of all items sold. Their success is based on the solid marketing principle of supplying products that their customers want, at prices they can afford.

This good value pricing policy is possible partly to the economies of scale created by buying in bulk. The competitive nature of retailing means that most of these savings are passed onto the consumer. However since the retailers have so much power they can exert a great deal of excessive pressure on the smaller suppliers.

Now the Competition Commission is demanding access to hundreds of e-mails sent by Tesco and Asda, purportedly demanding further retrospective discounts to fuel a price war between these two groups over the summer.

Why should such practices cause such surprise?

Supermarkets have been doing this for years. Suppliers have been asked to contribute to deals such as “Buy one, get one free”, and provide specially deep price cuts from time to time. Some supermarket groups insist that their own procurement experts advise suppliers how to remain solvent whilst discounting to a greater extent.

Supermarkets also demand contributions to their own marketing campaigns and many smaller companies forego their own branding needs in order to pay these levies.

This is always a mistake.

Do not let supermarkets do your marketing for you. All they are interested in is increased store traffic. They will use your money to increase footfalls but don’t care if customers buy your product as long as they buy something.

In the travel industry, tour operators acted just like supermarkets till the internet weakened the packaged holiday sector. Like supermarkets they offer customers a range of options and don’t really care if the customers choose your country or another, provided it’s bought from them. It still occurs today when overseas operators with strong airline links can offer the Tourist Boards of smaller countries the prospect of increased tourists.

But be warned, once you agree to this demand, you will have to offer all tour operators and airlines similar levels of support.

And when you stop, many will fold their tents and steal away.

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