They are the customers who over-order promotional stock and sell it on to other retailers or wholesalers. How can suppliers stop this ‘unethical’ practice? Julian Hunt and Liz Hamson report

Earlier this year, a sales director at a leading supplier was puzzled to see a number of lines appearing on the shelves of a retail chain that he had not supplied the products to for several weeks. “This retailer gets fantastic terms from us - there is no way it could have bought these lines on better terms from someone else. Unless, that is, someone else had rolled in the promotional discount they were given and sold the stock to them,” he says. “It looks as though these lines have gone into one customer and been sold straight to another.”

If he is right - and he is still trying to gather the evidence - then his company is the latest to suspect it has been caught out by a practice known as diverting.

In the States, the issue is arguably better understood than over here. Suppliers over there clamp down on those customers they dub ‘the diverters’ who over-order promotional stock - whether deliberately or accidentally - and then sell it on to other retailers or wholesalers. On this side of the Atlantic, however, the issue does not seem to be as widely recognised. It’s certainly not an issue that is talked about publicly very often.

Yet it is clear that the story outlined above is not an isolated case. We spoke to one commercial director who faced a similar problem. He suspected that stock from non-grocery channels was making its way into some of the multiple grocers. The problem stopped almost as soon as his company took the decision to end promotional activity in the suspect channel, and tackled those customers who were buying the stock.

He says: “The problem has not gone away for the industry, judging by what I hear other people say. But we have managed the problem and I think done it pretty well.”

So how big a problem is stock diversion for UK suppliers? And is it getting any worse?

Putting a handle on it is difficult. When we touched on this issue last year, one senior executive in a big company reckoned the trading of promotional stock between customers had become such a headache for suppliers of branded goods that it could account for as much as 1% of all grocery sales in the UK.

Our first sales director estimates that his business is losing millions of pounds a year as a result of diverting. “Some of it stems from retailers over-ordering and selling goods on - others are unscrupulous and doing redemptions.”

He is referring to retrospective discounts, which suppliers tend to opt for instead of reduced invoice prices these days.

Retrospective discounts should mitigate the diverting problem because goods are sold to the retailer at the full invoice price and the retailer is only paid once it has presented paperwork proof of the number of redemptions. But they are open to abuse, he says. “Suppliers are nervous that all they get by way of proof is a piece of paper with a figure on it. It is completely unsatisfactory. It needs to be properly audited.

“Retailers should provide more details on the number of triggers they have hit. Sometimes these so-called proofs are little more than scraps of paper.”

The abuse can be blatant, he says, adding: “I knew of one sales representative who saw a girl with a scanner gun just scanning a barcode repeatedly. The rep asked what she was up to and she said that she was scanning redemptions.”

Another supplier has heard cases of retailers scanning goods at the back door, claiming their retrospective discounts even though the stock has never hit the shelves and then selling the unsold stock on to another retailer, which then claims the discount for a second time. “It’s about as unethical as you could get,” he says.

Many of those who sit on The Grocer’s reader panel of senior executives in the grocery supply industry agree that diverting has become a serious issue.

We quizzed them about this issue and found that 61% of them had heard of promotional stock being diverted, 31% said their brands had been affected by the practice, and they seemed to suggest that such trading was taking place within all grocery channels - wholesale and retail alike. The only consolation is that the headline result is very similar to the findings of a comparable survey carried out just over a year ago - suggesting, that while the trading of promotional stock is a huge annoyance for a sizeable minority of brand owners, it does not seem to be getting worse.

Part of the reason why the practice of diverting is not talked about too much is that many grocery suppliers are busy tackling another huge issue for the trade: grey market trading across the EU. The difference, of course, is that the solution to this problem lies very much in the hands of suppliers who need to ensure they have pricing corridors across Europe that can be defended.

Tackling customers who are diverting promotional stock between themselves in a particular country is more complicated - because it is very hard to prove in the first place and then just as hard to stamp out.

That said, one supplier on our panel is less than sympathetic about those who have been caught up by all this.“It does not surprise me that customers buy from the best price available. We would, wouldn’t we? It is the supplier’s responsibility to ensure some sort of consistency across their selling prices. If a customer then chooses to make little or no margin to sell on goods, so be it.”

Notwithstanding the fact that suppliers must have sensible promotional strategies in place, many fear that it is all too easy for customers to divert stock.

The trick is spotting when promotional stock is being diverted. It isn’t easy, as one supplier points out. He explains: “We have our suspicions some are moving promotional stock in this way, but it is very difficult to track back if you handle large batch sizes.

“We are aware of it because we have shut down other sources in the grey market.”

The message from the suppliers on our survey is that tackling the problem requires vigilance and good systems.

Once you have identified a problem, they add, you should deal with it on two levels. First, you need to make sure you do not run any more of the kinds of deals that helped create your problem in the first place - or you could decide to stop supplying the diverters altogether. Second, if you have the right relationships in place, you should be talking to both the customer buying the stock and the one selling it.

Why? Simple: diverting has ramifications that go way beyond the issue of whether clever traders are getting a great deal.

For starters, the practice can damage otherwise healthy business relationships between suppliers and their customers.

More than that, however, as a number of suppliers on our panel explained, there are concerns around product quality and traceability that should not be ignored by buyers. As one says: “How can they be sure of the integrity of the product if they are not buying it from the supplier? We need to review this practice in view of Sudan 1.”