Suppliers fear a high price will be paid all round if the multiples continue their unremitting focus on price. Helen Gregory reports
The warning came from one of the giants in the world supply league. Procter & Gamble European head Paul Polman fired a broadside at Tesco and Asda, warning them that their obsession with prices was driving value out of UK grocery and could cause permanent damage.
"Categories and brands which should offer merchants value are being commoditised," Polman told delegates at this year's IGD convention.
He has a point. In the current grocery climate, low prices are king and the chains continue to scrap over who's the cheapest  a situation set to escalate over the next few weeks as they unwrap their Christmas price-cutting strategies.
Sainsbury, for example, is turning the screws by asking suppliers to "challenge" their costs by 5% as the chain works to increase its price-chopped' activity on longer-term promotions.
So could this relentless devaluing of the market prove the straw that breaks the small supplier's back?
It's something the Competition Commission highlighted when it noted that between 1989 and 1999, food prices had fallen in real terms by 9.4%.
The situation is not helped by the increasingly heavy-handed use of online auctions which even Tesco boss Sir Terry Leahy admits could distort the market.
But he, and most of his peers, disagree with Polman's view. They say moaning is pointless: cheaper deals and prices are inevitable in a modern economy. And their customers seem to agree  after all, how many shoppers do you hear griping about DVDs growing cheaper?
But many suppliers are unhappy. According to a recent Reader Panel in The Grocer (November 2, p22), one third are already experiencing price deflation in their categories. And the panel was unanimous that retailers run the risk of destroying value in the grocery sector if they focus on lower prices and cost-cutting measures.
Losing cachet
They might have a point. Look at what happened to premium clothing brand Tommy Hilfiger when it was discounted and mass distributed  what it has gained in sales, it has lost in cachet.
Dave Stoddart, analyst at Teather & Greenwood, puts it succinctly. "The fmcg boys are stuffed."
He reckons suppliers are building brand equity only to have retailers lower prices to generate extra volume. "They're using someone else's hard work for their purposes." And that reduces its value, says Stoddart. "By reducing prices you're telling shoppers that it's worth less."
Fellow analyst James Collins, at ABN Amro,says Asda's policy of reducing the number of lines to focus on the big brands does remove brand value.
"Suppliers are squealing because, historically, they have been protected and the likes of P&G could dictate to retailers. But now they need retailers as much as retailers need them."
Collins agrees that this devalues a lot of the marketing spend: "Suppliers invest money in building brands and the equity gets destroyed."
After all, we're seeing more premium ranges introduced as everyday products are "improved" in every part of the chain. The question is: when do the Finests of this world become everyday products with the value ripped out of them?
If value is removed, the result can be lower returns to shareholders, lower income, less marketing investment to build the brand or less to spend on innovation. And where bigger firms can absorb the reductions and still afford to fund innovations, most smaller firms cannot.
Tony Durham, P&G associate director, in-store innovation, Western Europe, is blunt. "It's a downward spiral. If the retailer can't achieve a realistic margin that is sustainable, then the retailer won't support new products, and without that support manufacturers cannot provide innovation."
The drinks firms are getting particularly twitchy in the run-up to the festive season and claim that beer discounting is devaluing the market and that bogofs and discounting are eroding profitability and brand loyalty.
Interbrew says: "It only takes one retailer to set off a price war at a time when major retailers are committed to price matching. The question is, how low will prices go?" However retailers have slammed the brewer's remarks with one buyer accusing it of being "detached from reality".
So are we heading towards a situation similar to that in Germany? There, in some categories discounters control the market and deflation has stifled innovation and familiarised shoppers with cheap prices.
Surely the UK won't follow their lead? The answer is not that clear cut when the major multiples, particularly Tesco and Asda, are challenging the discounters on price  particularly with their economy lines  and the discounters describe the big five as their competitors. The boundaries are beginning to blur and the market is not as easily defined as it once was.
And these big price-cutters are also the most successful. Judging by the market share figures, shoppers evidently prefer their stores to the more promotional outlets (shoppers will prefer even more of them after Tesco's deal to secure 5% of the convenience market.) And that virtuous circle which Asda/Wal-Mart keeps trotting out  more volume and investment in price equals more sales  is increasingly pertinent.
However, P&G's Durham insists value is a mixture of price and quality of shopping experience and that the mixture can be lacking in some stores. "If price is the only thing, your stores are going to be incredibly boring to shop in," he says.
So what can manufacturers do? Not much probably. If a supplier thinks a multiple is squeezing too hard, it is unlikely to concentrate on Londis and Costcutter instead.
Perhaps they should do what Sir Terry and his band want: start acting smarter, more efficiently and across different categories to drive down costs so they can better serve the customer. It's what one supplier believes may be harsh, but fair. "High:low strategies are propping up many brands that aren't top notch."
He believes that in the future brands must be more flexible and build more individual relationships with retailers. "What works with one retailer doesn't work with another. It's OK having global strategies, but we have to be more flexible."
Suppliers will have to find the lowest cost to operate and adapt their business models. It might be tough, but the industry might be more efficient.
{{ANALYSIS }}
The warning came from one of the giants in the world supply league. Procter & Gamble European head Paul Polman fired a broadside at Tesco and Asda, warning them that their obsession with prices was driving value out of UK grocery and could cause permanent damage.
"Categories and brands which should offer merchants value are being commoditised," Polman told delegates at this year's IGD convention.
He has a point. In the current grocery climate, low prices are king and the chains continue to scrap over who's the cheapest  a situation set to escalate over the next few weeks as they unwrap their Christmas price-cutting strategies.
Sainsbury, for example, is turning the screws by asking suppliers to "challenge" their costs by 5% as the chain works to increase its price-chopped' activity on longer-term promotions.
So could this relentless devaluing of the market prove the straw that breaks the small supplier's back?
It's something the Competition Commission highlighted when it noted that between 1989 and 1999, food prices had fallen in real terms by 9.4%.
The situation is not helped by the increasingly heavy-handed use of online auctions which even Tesco boss Sir Terry Leahy admits could distort the market.
But he, and most of his peers, disagree with Polman's view. They say moaning is pointless: cheaper deals and prices are inevitable in a modern economy. And their customers seem to agree  after all, how many shoppers do you hear griping about DVDs growing cheaper?
But many suppliers are unhappy. According to a recent Reader Panel in The Grocer (November 2, p22), one third are already experiencing price deflation in their categories. And the panel was unanimous that retailers run the risk of destroying value in the grocery sector if they focus on lower prices and cost-cutting measures.
Losing cachet
They might have a point. Look at what happened to premium clothing brand Tommy Hilfiger when it was discounted and mass distributed  what it has gained in sales, it has lost in cachet.
Dave Stoddart, analyst at Teather & Greenwood, puts it succinctly. "The fmcg boys are stuffed."
He reckons suppliers are building brand equity only to have retailers lower prices to generate extra volume. "They're using someone else's hard work for their purposes." And that reduces its value, says Stoddart. "By reducing prices you're telling shoppers that it's worth less."
Fellow analyst James Collins, at ABN Amro,says Asda's policy of reducing the number of lines to focus on the big brands does remove brand value.
"Suppliers are squealing because, historically, they have been protected and the likes of P&G could dictate to retailers. But now they need retailers as much as retailers need them."
Collins agrees that this devalues a lot of the marketing spend: "Suppliers invest money in building brands and the equity gets destroyed."
After all, we're seeing more premium ranges introduced as everyday products are "improved" in every part of the chain. The question is: when do the Finests of this world become everyday products with the value ripped out of them?
If value is removed, the result can be lower returns to shareholders, lower income, less marketing investment to build the brand or less to spend on innovation. And where bigger firms can absorb the reductions and still afford to fund innovations, most smaller firms cannot.
Tony Durham, P&G associate director, in-store innovation, Western Europe, is blunt. "It's a downward spiral. If the retailer can't achieve a realistic margin that is sustainable, then the retailer won't support new products, and without that support manufacturers cannot provide innovation."
The drinks firms are getting particularly twitchy in the run-up to the festive season and claim that beer discounting is devaluing the market and that bogofs and discounting are eroding profitability and brand loyalty.
Interbrew says: "It only takes one retailer to set off a price war at a time when major retailers are committed to price matching. The question is, how low will prices go?" However retailers have slammed the brewer's remarks with one buyer accusing it of being "detached from reality".
So are we heading towards a situation similar to that in Germany? There, in some categories discounters control the market and deflation has stifled innovation and familiarised shoppers with cheap prices.
Surely the UK won't follow their lead? The answer is not that clear cut when the major multiples, particularly Tesco and Asda, are challenging the discounters on price  particularly with their economy lines  and the discounters describe the big five as their competitors. The boundaries are beginning to blur and the market is not as easily defined as it once was.
And these big price-cutters are also the most successful. Judging by the market share figures, shoppers evidently prefer their stores to the more promotional outlets (shoppers will prefer even more of them after Tesco's deal to secure 5% of the convenience market.) And that virtuous circle which Asda/Wal-Mart keeps trotting out  more volume and investment in price equals more sales  is increasingly pertinent.
However, P&G's Durham insists value is a mixture of price and quality of shopping experience and that the mixture can be lacking in some stores. "If price is the only thing, your stores are going to be incredibly boring to shop in," he says.
So what can manufacturers do? Not much probably. If a supplier thinks a multiple is squeezing too hard, it is unlikely to concentrate on Londis and Costcutter instead.
Perhaps they should do what Sir Terry and his band want: start acting smarter, more efficiently and across different categories to drive down costs so they can better serve the customer. It's what one supplier believes may be harsh, but fair. "High:low strategies are propping up many brands that aren't top notch."
He believes that in the future brands must be more flexible and build more individual relationships with retailers. "What works with one retailer doesn't work with another. It's OK having global strategies, but we have to be more flexible."
Suppliers will have to find the lowest cost to operate and adapt their business models. It might be tough, but the industry might be more efficient.
{{ANALYSIS }}
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