Food and Drink: Tills that ring at the check-in: No wonder supermarkets in Britain make such huge profits: they demand payment for putting products on their shelves. Joanna Blythman reports

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Indy Lifestyle Online
TO SEE your product on supermarket shelves is nearly every food producer and manufacturer's dream. Supermarket sales represent an opportunity, the only opportunity, to break out of the ghetto of small specialist shops into the big time. The carrot they dangle is tantalising - access to 65 per cent of Britain's food sales market.

But increasingly, would-be suppliers are starting to mutiny against the conditions and bullying tactics imposed upon them by the big multiples. More often, producers and manufacturers are viewing the chance to do business with these food retailing giants as a poisoned chalice. Through a system of disguised payments (variously known as 'product support packages', 'listing allowances', 'promotional packages' and 'multi-buy agreements'), levied at different stages of the trading procedure, food retailing multiples are ensuring that they make the highest profits of any supermarkets in the world, while the supplier foots the bill.

This week Tesco declared half-year pre-tax profits of pounds 253m. In May, the Argyll Group, which owns Safeway, reported record profits of pounds 364.5m. In the same month Sainsbury reported pre-tax profits of pounds 628m, with operating margins of 8 per cent - three or four times higher than typical US or continental grocers.

UK supermarkets extract a deal from suppliers that effectively insures them against risky or untested products. This system of payments is standard practice in the food trade, with every major British supermarket chain involved. It is not just a British practice either: supermarkets in France and the US operate in the same way. The system seems to militate against the small, innovative producer on a modest budget and against true variety for the consumer. How does it all work?

Imagine you are a producer of a new and interesting foodstuff, hypothetically, a farmhouse cheese. The cheese has been well received in specialist shops and has attracted critical acclaim. What you need now is more sales. The first door you must knock on in order to approach a supermarket is that of the relevant buyer or 'trading controller'. You make your pitch and come away after several meetings with an expression of interest. Before you proceed you will have given assurances that you will conform to rigorous safety and hygiene requirements (which may in themselves involve expense). The more detailed points of the financial agreement are to be thrashed out thereafter. That is when the trouble starts.

'We were really cock-a-hoop that Supermarket X was going to stock it - until we saw its terms. The first shock was a preliminary fee, the so-called 'listing allowance'. It was looking for a figure which approximated to 5 per cent of the anticipated turnover, just to put the products on the shelves,' says one producer in the north of England. Further investigations suggest that this particular supplier did rather well - a more typical rate for listing (or 'slotting') allowances being 12 per cent. Only this month, a big supermarket chain was accused of demanding up to pounds 200,000 from one supplier before it would stock its products. The store would not comment on the case in detail but said any contributions would be towards promotions that were linked to the product.

The story continues. 'It was made clear to us that in addition to a listing allowance, we would give the company a straight profit margin of 30 per cent. That seemed OK until we cottoned on to the fact that we would be expected to take part in what is known as 'compensation'. In other words, the supermarket would offer 'price saver' and 'extra value' cut-price promotions to the consumer, funded at our expense. It insists on maintaining its DPP (direct product profitability). So with cut-price deals we had to agree to sell the product for less yet allow the company to make the same profit on it while representing that as a 'good deal' to the consumer. We did our sums and there was just no way we could meet all the demands without making a loss.'

There are other ways in which supermarkets demand money from their suppliers. One common method is promotions, often centred round one-page newspaper advertisements, in-store leaflet drops, and special display cards in supermarket aisles, in which the supplier's product is given the opportunity to be included. But that comes at a price: one which usually runs into thousands of pounds. 'It wasn't offered as an optional extra, you got the feeling that if you didn't agree to play ball, they might not continue to do business with you,' said one jam manufacturer. In an even more extreme case, a drinks manufacturer was asked to pay a sizeable sum to be included in a promotion, even though his product was already on the same supermarket's shelves.

Another strategy is selling 'advertorial' (advertising thinly disguised as editorial) in the store's magazine, which is distributed to customers. One Scottish chain, Wm Low, charged one supplier pounds 1,500 for inclusion. There are also relatively trivial bones of contention. One is the routine 'breakages' allowance, also funded by the supplier. Another is Asda's 'invitation' to suppliers to come up with a 'contribution' to support promotions around the opening of every new store.

But a more serious matter is payment to terms. Only Marks & Spencer and Waitrose are known in the trade to pay suppliers within 30 days. Other large chains, despite being paid in cash by consumers, insist on being given longer to pay - 60 to 90 days is not unheard of. Having bought your way in, promoted, compensated and advertised, you cannot breathe a sigh of relief. If your product sells better than anticipated, the supermarket comes back to you retrospectively for a bigger cut. The producer takes the risk, yet the supermarket reserves its right to take the profit. If you are unlucky and the product does not sell well, you can expect to be peremptorily delisted - dropped. (As yet in Britain, you do not have to pay for being ditched. In the US, apparently, it costs.)

Nobody denies supermarkets the right to make a profit. There is a 93 per cent failure rate for new product launches and there is no reason why supermarkets should operate in an altruistic way. But what is disingenuous is that supermarkets continue to represent their services and prices to the consumer as good deals, afforded out of the generosity of their hearts. When an advertisement says prices are being slashed by 10 per cent in leading stores this week, the invisible sub-text is that suppliers are cutting their prices while the chain maintains its profit margin.

When asked to comment, J Sainsbury issued this statement: 'It is Sainsbury's policy never to disclose its suppliers, nor to discuss its arrangements with them.' Safeway echoed this sentiment: 'We don't discuss questions of terms and conditions with suppliers.' But when asked directly whether or not suppliers were ever asked for money up front, Safeway's spokesman replied: 'Even the Government has to put money behind getting arms deals into countries.'

With 65 per cent of the British food sales market sewn up, the big food retailers have enormous power in the matter of deciding what foods they will make available. If suppliers are required to pay through the nose to be allowed into the club, then consequently it is only the big players, those with tidy promotional budgets, who can afford to play the game. That is bad news for all those who would like to see more genuine choice, more local and more artisan products on supermarket shelves.

Speaking to suppliers, it is clear there is room for negotiation. If your product fits in with the company image - for example, super-green and right-on - then payments may be waived for the sake of the good press that will follow. But generally you will be expected to pay up. One European supplier, resigned to coughing up a huge down-payment to the Masonic Order of supermarkets, puts it this way: 'You hate it, but you have to play along with it. If not, you're finished.'