It’s no surprise that the number of grocery businesses going to the wall has risen. The number of businesses suffering “significant financial distress” is increasing at its fastest rate in three years, according to Begbies Traynor.
The discounters have put pressure on prices, and there have been cost price currency issues since that referendum. Add in declining supply slots via range reductions in the big mults and share gains from the minimalistic discounters, and it all adds up to a torrid time in food town.
On the other hand, there was huge cost in supplying the fragmented pockets of business previously and the promised reward for the suppliers who survive in reduced range situation is bigger volumes on fewer lines with longer contracts. Logically, the remaining suppliers should make efficiency savings, but those gains often evaporate in contract negotiations. Nevertheless, there are suppliers who find the resulting business shakedown to be returning a palatable profit.
If you’ve made it through the range cuts, don’t think it’s time to relax. Take a look at your new customer spread and see how well protected you are against the demise or revolt of any one customer. The rule of thumb in business school is never to have more than 15% of sales with one customer, but this is difficult with grocery’s centralised structure.
The marketplace is full of contradictions just now and it would pay suppliers to watch out for over-reliance on one customer. When retailers’ sales start to decline, the interaction with suppliers becomes more aggressive.
Here are some red flags: Is the CEO’s retail plan working? It’s astonishing how quickly the collaboration mood can turn when shareholder value doesn’t follow immediately for a retailer. Grocery retail is rather obviously saturated and someone has to fail. But say you’ve been awarded a longer contract. As that draws to a close, will you be likely to win it again in the face of competition from suppliers in dire financial straits with overcapacity in their factories? They will undercut you out of desperation.
So spread your business to protect and don’t build a dedicated factory for a customer only to be kicked out of range before the paint is dry.
David Sables is CEO of Sentinel Management Consultants