It can sometimes seem that the multiple retailers in this country are intent on squeezing suppliers all they can, always ready to trot out: “If you can’t do it cheaper, then someone else will.”
So it is refreshing to learn the story of how Sainsbury took steps to protect a traditional, but threatened, source of grocery’s biggest selling item, the banana.
Sainsbury has traditional links with the Windward Islands, a part of the Caribbean that is home to thousands of the world’s banana producers. These growers supply the multiple with 22% of its banana needs.
For all banana producers, these are momentous times, but it is a nerve-racking time for those in the Caribbean. The EU has proposed a single tariff on imports of bananas, due to come into force from January 1. This system is designed to replace the existing regime of licence-based quotas.
Quotas shield Caribbean growers from fierce price competition from low cost Latin American producers. But they are also a barrier to free trade, and the EU agreed to abolish them during WTO talks in 2001.
To maintain some protection for Caribbean producers, whose operational costs are high, the EU has suggested a tariff of E230/tonne on Latin American banana imports. The Latin Americans say this is too high. They have appealed for arbitration, a move likely to delay the new regime.
But whenever it happens, the removal of licences constitutes worrying news for banana growers in the Caribbean.
Already handicapped economically, the system at least means growers have a market for Caribbean bananas (and in fact selling licences they don’t need to the Latin Americans is a lucrative sideline for many farmers in the region).
The removal of licences was also of concern to Sainsbury. The multiple has had supply links with the Windward Islands - Grenada, St Vincent, St Lucia and Dominica - for half a century, and its custom is vital to the 4,000 farmers there. These farmers own small banana plantations on steep slopes that contrast markedly with the sprawling, flat - and ultra-efficient - farms in Latin America, which are staffed by cheap labour.
The price war in the banana category was already making it commercially difficult to justify maintaining trade links with Windward Island growers. There were fears that removal of licences would make things intolerable. Against this backdrop, it might have been tempting - and perhaps even understandable - for Sainsbury to abandon the Windward Islands and switch to a cheaper source of bananas.
However, such a move would have been devastating to farmers on the islands, since Sainsbury buys around half of their crop, depending on the size of the harvest.
The growers supply Sainsbury with fair trade bananas and smaller fruit for its Blue Parrot Café range, key offerings in its fresh produce category.
Banana buyer Matthew North says: “It is an incredibly tough market out there, but we were conscious of the importance of our business to the Windward Islands.
“We have a review of our banana category coming up in January and in preparation for that we wanted to put the Windward Islands in a far more competitive position than they were.”
So what to do? Sainsbury asked one of its other banana suppliers, Mack Multiples, to help. Although it was effectively a rival, Mack felt there were benefits for all if they worked with the Windward Islands in non-competitive areas, rather than against them.
Mack category director Stephen Jordan says: “We realised that to deliver a good product and a good service to Sainsbury we had to work together as suppliers, in much the same way that we do with other categories in the fruit business at Mack. It was clear that co-operation instead of competition would deliver the strongest proposition for the customer.”
Mack recommended bringing in food supply chain consultancy Libra Europe, with whom it had worked previously, to manage the project. Tim Kershaw, director of Libra Europe, says: “The Windward Islands are by far the least economically viable banana producers. Growers were financially breaking even, but that included a degree of revenue from licence sales. Without those, they would be losing money. At the same time Sainsbury wanted a lower price.
“The Sainsbury solution was to get two competing suppliers working together to keep the Windward Islands in the mix and make Sainsbury more competitive on price.”
The Windward Islands had to find a way of stripping out costs, says Kershaw. “We got together with Windward Islands Banana Development & Exporting Company [Wibdeco] - which buys the fruit from growers and exports it - and they said, we have got to find a supply arrangement that gives Sainsbury an overall better price for bananas without hurting anyone.”
Jordan agrees: “Sainsbury and its suppliers were anxious that the pressures on the UK market did not impact on grower returns. This meant the supply chain was the part of the business to scrutinise for savings.”
The solutions the parties devised were simple - but they enabled Wibdeco to make savings worth £6.9m a year. When you consider that Wibdeco’s annual turnover is £69m, it is clear how significant this was.
First under the microscope were processing costs. In the UK, Wibdeco half-owned a processing operation with Fyffes. It was an arrangement that involved sharing two ripening facilities.
However, Wibdeco had no control over the cost of running this business; it was all in the hands of Fyffes. Kershaw says: “When we compared Wibdeco’s costs with Mack’s processing costs, the decision was made that Wibdeco should run its own processing operation. Wibdeco said to Fyffes, you take one plant, and we’ll take the other, and we’ll each do our own thing.
“Wibdeco took the one at Stansted, because logistically that was the best fit. We then helped introduce best practices into the plant. We looked at everything, big and small. We totally changed the line configuration in the factory, for example, and at the other end of the scale renegotiated a contract covering forklift trucks.
“We also expanded the plant so we could bring in some Mack fruit for processing.”
This development was key, says Kershaw. “It enabled Mack to legitimately supply its technical expertise to Wibdeco, and it meant Wibdeco could pass some of its overheads on to Mack for doing the ripening work.”
The amount saved for Wibdeco was an impressive £3.5m a year. The next step was to reduce Wibdeco’s shipping overheads - a crucial, but complex, point in the supply chain. “There’s a whole series of ways you can buy shipping,” says Kershaw. “It’s never as easy as it looks. We benchmarked shipping costs all over the world to see exactly what the best model was, and introduced this to Wibdeco’s business.”
Libra Europe also helped Wibdeco reduce deadweight, empty space on a ship the customer has to pay for. The total amount saved was £2.4m a year.
Next up was transport. “Wibdeco was running its own fleet of trucks,” says Kershaw. “When you subcontract transport, you only pay for the journeys you make. But when you own them, your lorries go out full and come back empty. Fifty percent of your journeys are worthless.”
Libra closed down the transport operation, sold off the 15 lorries in the fleet and farmed out the road freight operation (and happily the subcontractor took on Wibdeco’s drivers to service the contract). Amount saved: £1m a year.
Libra Europe’s work is now switching to the farmers on the islands themselves. Advisors will look at how producers’ businesses are operated and structured, as well as how inputs are purchased.
But for now, at least, the future of the Windward Islands’ banana sector is more secure, and the removal of licences is a prospect less bleak than it once was.
Sainsbury’s North says: “They are still a high cost producer and there is no guarantee they will still supply us after January, and a lot will depend on the tariff decision. But they will be in a considerably stronger position than if we had not done this work.”
Kershaw adds: “What has always surprised me is the level of Sainsbury’s commitment to the Windward Islands.
“This is one of those instances when the reality does not match the image people have of the big, aggressive retailer.”