Pricing policies prove tough

24 August, 2007
Grant Thornton's Duncan Swift illustrates how supermarket pressures affect bakers
Page 15 
A recent survey of company directors in the food supply chain conducted by Grant Thornton, leading business and financial adviser to the food industry sought to probe the relationship between supermarkets and their suppliers and the extent of supermarket power.
It found that eight out of 10 (83%) UK food suppliers expect to see more firms within their sector become insolvent during 2007, with more than 50% laying the blame squarely on supermarkets and pointing to price pressure, excessive power, de-listing and the refusal to renegotiate prices in the light of higher costs as the main examples of unreasonable behaviour. Other potential triggers for insolvencies include: rising costs, competition and poor management.Duncan Swift, head of food and agribusiness at Grant Thornton, has specific experience of problems within the bakery sector. He says: "Bakery is a large market within the food supply chain. It has been acutely affected in the past six years by supermarket pressure."It is probably the category which has managed to re-buff the advance of supermarket own-label more than any other, thanks to NPD, resisting the strategy of the main players on occasion by standing very firm on discounts."This normally involves the words: 'We can't do that but we can do this, this and this', referring to price or other financial arrangements for particular products."Swift says there are two key reasons why there have been failures in the bakery sector. "There have been a number of new entrants who think they can reap the fertile ground of own-label supply, but the perceived vacuum is not there."Secondly, certain businesses to fail to have a complete overview of all the financial commitments and their consequences. They don't understand all the parts of their business that interface with the supermarkets. For example it is essential for bakeries to have an accurate Customer Contribution Analysis, also showing cash flow."Swift says this is what tells you if you are making a profit and the level of profitability (or loss) incurred for each customer. "You would be surprised at the number of bakery businesses that have key accounts representing 30% of turnover that is not actually benefiting their bottom line."Recently I have seen a bakery business where a member of the finance team made a financial commitment and did not share it with the rest of the accounts team - it was a cash flow issue - which shook the confidence of that business's financial stakeholders and funders."But it is not all bad news, Swift stresses: "The strength of the bakery sector has been the quality of its products and to say 'no' on occasions "It must stand by that decision and offer alternatives. And, having identified areas that are not making money, you must address these as a priority." n---- === The results revealed: ===? Almost two-thirds (64%) of sup- pliers operate without formal contract terms with supermarkets. Just 22% enjoy written terms? Largely because of no written terms, almost a quarter of suppliers complained of having an order cancelled or significantly reduced within 72 hours of delivery (9% often, 9% a few times, 6% once) without obtaining any form of compensation.? 22% of respondents stated the period of time between the delivery of goods/issue of invoice to receiptof payment had been extended by the supermarket(s) they supply.? Almost 60% of suppliers have no notice period in respect of their supply agreements, so that supermarkets have few, if any, obligation if they were to de-list them. Forty-one per cent of respondents claim to have a notice period, but for half of these, it's purely on a verbal basis.? Over the past three years, almost 80% of suppliers have been sub- jected to supermarket pressure to drop their prices. Suppliers stated that their products are now sold between 0% to 30% more cheaply than three years ago - the average being 8%.? Between 0% and 25% (average of 4%) is the proportion of suppliers gross sales value that is contributed back to supermarkets in the form of volume over-riders, discounts, promotional and marketing contributions and any other payments.



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