Trolley wars charts the history of the UK ‘big four’ (Tesco, ASDA, Sainsbury, and Morrison), their struggles for supremacy, and the history of the men and women who led them. It is the history of how a small group of retailers have come to dominate the grocery market, including non-food, in the UK.
In 2004, the ‘big four’ made a combined profit of £3.5bn and sales for a value of £75bn. This means that average profits were 4.6 per cent. In clothing retailing, for example, profits tend to be higher, close to 8 per cent.
They controlled three quarters of the UK grocery market, including some non-food. But the big winner has been Tesco, which with profits of £1.6bn and a share of 29 per cent of the grocery market is head and shoulders above of the rest: Asda, Sainsbury, and Morrison. At a world level Tesco only comes third after the American Wal-Mart and the French Carrefour.
This situation gives them a buying power that dictates supplier prices and conditions of supply. But it wasn’t always like that. The shift of power from suppliers to retailers started to take place after the British parliament abolished the resale price maintenance act in 1964. At that time, small growers were the norm and most of them got their supplies into wholesale markets.
Suppliers could negotiate in their favour for the price of their goods, which had the same price in a big supermarket as in a corner shop. Retailers, led by Tesco’s founder, Jack Cohen, waged a campaign against the act on the grounds that suppliers kept prices artificially high and were “robbing people monstrously”. And they won.
What is the driving force behind the retailers’ rapid growth and hegemony?
John Sainsbury, the founder of the first Sainsbury shop in 1869, said as early as 1890, when he had thriving branches all over London, that he had to speed up the growth of his company, “otherwise, we shall be beaten in our position as buyers in the sources of production.” Buying power was the key question to beat the prices of other rival retailers. In 1915, he owned 121 branches and employed 2,000 staff. Retailing also became a huge business, first in London and later in the rest of Britain, because of the rapid increase in the urban population. London increased its size from 3,223,000 millions in 1861 to 7,251,000 in 1911.
Expansion took place by acquiring new sites but also by buying up retailing companies. Tesco was the biggest buyer of sites and stores, particularly in the 1990s, when they were expanding at a rate of 25 new superstores per year. The biggest acquisitions, so far, took place when Wal-Mart acquired Asda in 1999, and Morrison acquired Safeway at the end of 2003. But tighter planning permission for supermarkets in Britain, and the objections to further acquisitions by the Office of Fair Trading are putting limits to supermarket expansion. This is aimed at avoiding monopoly practices.
As a consequence of competition between retailers, prices have gone down 9.4 per cent between 1989 and 1998. This is an expression of their ferocious competition to attract shoppers. A factor that accelerated this tendency was the arrival, in the early 1990s, of continental discounters such as Aldi, Lidl and Netto. In Germany and France, for example, prices are still between 12 and 16 per cent lower than in the UK. The big supermarket chains were forced to lower prices down to block the growth of the continental discounters.
For example, at that time, in what was known as the ‘baked bean war’, the price of a can of beans went down to 4 pence. The early 1990s was also a time of economic recession in the UK and shoppers, particularly those hit by the crisis, welcomed reductions in the prices of basic products. Tesco took the lead launching its value range of low-priced items in blue and white packaging. Since then Tesco has developed two different lines of products to offer choice to shoppers with different buying power: value line, Tesco’s own labels, and a choice of dearer branded products. All the big supermarkets had to join this price cutting war to not fall behind.
To cut prices down, supermarkets have two strategies. First, they can reduce their own margins to increase sales. Second, they can try and reduce costs by cutting down the prices paid to suppliers. The success in reducing the prices paid to suppliers will depend on their buying power, which allows them to get volume discounts. David Webster, Safeway chairman, said in 2003 that Tesco, for example, because of sheer size, could buy 5 per cent cheaper than Safeway, while Wal-Mart could buy 10 per cent cheaper. That was the reason why the board of directors of Safeway started to negotiate an absorption in 2002. All the main chains made a bid for Safeway, but at the end the Competition Commission only gave the go ahead to Morrison. On the other hand, the higher the volume of sales, the narrower the margins supermarkets can afford. Therefore, constant expansion is a drive to survive. The relationship between supermarkets and suppliers
In any case, supermarkets try always to negotiate the best possible deals with suppliers to keep their shelves always full of their own label products, which tend to be cheaper, and branded products, which tend to offer higher quality. The negotiation of good prices is as important as having a continuous supply. Therefore, retailers tend to form partnerships with suppliers. In this way, by winning contracts with retailers, some suppliers have made some of the biggest fortunes in the UK.
Gulam Noon, proprietor of Noon Products and Sainsbury’s supplier of chilled Indian food, for example, was listed in the Sunday Time Rich List in 2004 with a personal fortune of more than £50m. Noon Products also supplies to Morrison and Waitrose, but the partnership with Sainsbury, 60 per cent of Noon’s business, is so close that when in 1994 a fired destroyed one of his factories, Noon said, David Sainsbury [Sainsbury’s chairman] rang me umpteen times and said they would not buy a single pack of Indian food from anyone else.
They put up a sign in the stores saying, “due to a fire at out supplier this range of products is temporarily suspended”.
But this sort of relationship is not the norm. Asda, for example, decided to cut back their three milk suppliers to just one in 2004. There was an excess of supply in the milk market and Asda offered a contract, for a lower price but a bigger volume to only one supplier. Arla won the contract and is supplying all the milk to Asda, but it lost its contract with Sainsbury, which also reduced the number of milk suppliers, from three to two. Asda dropped Robert Wiseman Dairies, which subsequently won contracts with Sainsbury and Tesco. Dairy Crest, the other supplier that Asda dropped, wasn’t able to secure a contract with anyone else. We can surmise that it also represented a big loss for the dairy farmers supplying Dairy Crest.
In the buyer led grocery market, suppliers are at the mercy of retailers. So to concentrate offers and gain better contracts, suppliers also tend to increase their size, volume and reliability to secure contracts. This allows them to offer lower prices. Wal-Mart, for instance, got a contract in 2003 with Del-Monte, the third largest producer of bananas in the world, which operates from Costa Rica and Cameroon. Asda (owned by Wal-Mart) drastically cut the price of bananas and caused losses of £30m to the rest of supermarkets in the UK. Subsequently BBC radio reported that Caribbean producers, who were less efficient and the traditional suppliers of the UK market, would go out of business because they couldn’t offer prices as low as those of Del-Monte. Smaller suppliers, then, have the hardest time. Because they are so small and fragmented, they don’t have leverage. And retailers can easily bully them into selling at any price. John Nott, former Tory minister and chairman of Hillsdown Holding, a food supplier, said about its customers Sainsbury, Tesco, Safeway, Asda and Marks & Spencer,
Together they represent a complex monopoly, using their overwhelming buying power to squeeze their suppliers, most of them in the farming industry… At its most ruthless stood Sainsbury. On several occasions I visited its headquarters to see the Purchasing Director. The atmosphere… was poisonous; apparently miserable staff and an arrogance towards suppliers, consistent with the bullying approach of a third-rate corporal in a bad regiment.
The purchasing director was Tom Vyner, famous for being ruthless and quick to threaten to de-list products or reduce their shelf space if suppliers didn’t lower their prices. To have an even tighter control over suppliers, Sainsbury went as far as introducing the PICO (Price in, Cost out) ‘open-book’ system in 2002. So suppliers have to open their accounts to Sainsbury buyers and these will tell them how to eliminate cost to reduce their prices.
Other retailers are no better. After Wal-Mart acquired Asda in 1999, Tesco counterattacked by slashing prices. So they started to renegotiate prices with suppliers. One of them said, If you are small supplier, you slog all the way to Cheshunt [Tesco’s headquarters] to see a buyer… They routinely keep you waiting in that horrible reception area for an hour to two hours and when they eventually appear they ask what you are doing there, or say that the meeting is not in their diary. Sometimes they just tell you they have no time to see you. Then they grudgingly agree to give you five minutes so you are at a complete psychological disadvantage when the negotiation begins. They do it so you will be glad to come away with an order for any quantity at any price.
But here, Judi Bevan warns against an excess of sympathy for small suppliers, particularly the farmers. She admits that ‘by 2002 the proportion farmers received had dropped to a quarter of what their products sold for in the shops.’
But then she adds that ‘Farming is an industry and, like any other factory, if a farm does not make a profit, it will go out of business.’ In her opinion, an excess of supply also motivates low prices for farmers. So, when less efficient farmers go out of business and offer is reduced prices go up again.
On the other hand, according to the opinion of free marketers, which Judi Bevan voices, the subsidies of the Common Agricultural Policy keep the price of food artificially high, as much as 25 per cent above the world food market level. This harms poor farmers in developing countries, more suitable for producing food, and also means higher prices for consumers. Who are the winners?
In the early 1990s, a ready-meal manufacturer made the following comment about the attitudes of his different costumers:
‘Marks & Spencer want their suppliers to make a profit, Sainsbury doesn’t want them to make a profit, Tesco doesn’t care whether their suppliers make a profit and Asda doesn’t know if their suppliers make a profit.’
At the end of the day, profit is the only motivation behind retailers’ actions. The difference among them is the way they proceed to secure it.
One interesting aspect of the book is that Judi Bevan gives constant but diverse information about who are the real winners in the grocery business, but she never puts it together or draws any conclusion from it. For her, the big winner is Tesco, and, to a lesser extent, the consumers, who get better prices and have more choice (although she admits this is debateable).
In my opinion, the big winners in this business are the big shareholders of the big supermarket chains; the small group of top executives in the board of directors, with annual incomes between £1/2 million and £1 million sterling, and, again, the shareholders and top executives of the big suppliers who get the orders. Bevan’s book is highly readable and aimed to a general audience.
It provides a general understanding of the rise and hegemony of retailers in the grocery market, and the ways in which they compete with each other. It also provides interesting insights into the motivations and personalities of the individuals who run supermarket chains. It barely touches, though, on the lives of those hundreds of thousands of low-paid employees who don’t have any share in the big profits that supermarkets make. The book is about those few who are making the fortunes.
This book, however, could appeal to mushroom growers interested in learning more about the logic and pyschology behind the ways in which retailers deals with suppliers.
Judi Bevan (2005) Trolley Wars: The Battle of the Supermarkets, Profile Books