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Until last summer, there was an office block on Tesco's headquarters complex at Cheshunt in Hertfordshire called Armitage House.
Then, as the downturn started to hit, it was suddenly spruced up and renamed Discounter House. Fair enough — after all, Tesco likes to proclaim itself as “Britain's biggest discounter”.
However, among those companies that supply the supermarket giant, the building soon acquired an altogether more sinister reputation. One by one, suppliers received invitations to attend Discounter House to meet an executive from the firm.
They were given the usual tea or coffee, sat down in a comfy chair and shown a presentational video by Sir Terry Leahy, Tesco's chief executive, extolling the organisation's virtues. Then they were taken to a booth, met by someone who was not the buyer they normally dealt with — and with whom they would have had a good relationship — and duffed up.
That isn't how Tesco saw it, of course. They said it was a renegotiation, or in management- speak, “working with suppliers to ensure ... reductions can be passed back to customers”.
The supplier was presented with a list of prices of the commodities that went into their product, showing how much they had fallen (the suppliers noticed they were not shown prices that had risen). In effect they were given little choice: bring down their terms or cease trading with Britain's biggest supermarket group.
Given Tesco's move, it is hardly surprising that the company is one of those opposing the Competition Commission's wish to create an ombudsman to police grocers' dealings with suppliers. The other members of the “Big Four” supermarkets — Asda, Sainsbury's and Morrison's — have also rejected the proposal, which marks a determined effort by the Commission to introduce and enforce a new industry code of practice.
The defiance of the Four offers further evidence of their dominance of retailing — and should warn us against the uniformity of a Britain ruled by big supermarkets and price-discounters.
They claim that the watchdog would be an unnecessary expense (the Commission reckons it would cost at most £2.4 million to set up, plus another £2.6 million to run, for an industry that each year turns over £70 billion in groceries).
Asda describes it as a “one-sided pressure group for price rises”; Tesco says it will mostly benefit large suppliers.
Their case is weakened, though, by the fact they are only four. Two of the country's leading supermarkets, Marks & Spencer and Waitrose, have come out in favour of the plan. If it was as bad for retailers as the four suggest then it's odd that there should be a clear split. M&S and Waitrose are also in business to make money.
It can be no coincidence that M&S and Waitrose are also two supermarkets who pride themselves on quality and are not known for their low prices. They are always quick to emphasise how well they know their suppliers, from farmers to food manufacturers.
Those that like to stress the cheapness of their prices are the ones who resent any suggestion of a third party coming between them and their suppliers. They will not admit it but they would like to be left alone to do their squeezing.
In many respects, their desire to keep prices down is welcome — particularly now, with consumers feeling the recession's squeeze. But it would be foolish to pretend that price is everything. As they rant about the Commission and their desire to serve the consumer, the Big Four might want to ask themselves: whose side, ultimately, is the watchdog on?
The ombudsman scheme was the result of a two-year inquiry by the Commission into the supermarkets. It found they were “transferring excessive risks and unexpected costs” on to their partners. One of the aspects it highlighted was the way the retailers would claw back retrospective discounts from suppliers — effectively saying: “We know we agreed X, now we want Y”.
Said Peter Freeman, chairman of the Commission: “Our inquiry clearly revealed problems that require action and which, if left unchecked, would damage the consumer.” Yes, these are the very same consumers that Tesco and its rivals say they are making paramount in their antipathy towards the Commission's solution. What Freeman goes on to say that is “we believe that everyone's interests would be served by tackling a problem that has clouded the industry for many years”.
All he and his colleagues are trying to do is to introduce a referee into the game. Contrary to what is being said by the four, there is no suggestion the ombudsman would always find in favour of the little man. Perhaps it says much about the way they treat their suppliers that they should automatically assume that to be the case.
If they get their way and the playing field is not levelled, as Freeman implies, there is a downside for the consumer. The harder they drive their bargains, the more likely it is that eventually a contractor will say “enough” and walk away. They may try to go to another retailer or they may give up completely. That reduces choice and competition for the supermarkets and, in the end, the consumer.
As Bart Becht, head of major consumer goods maker Reckitt Benckiser, warned in relation to Discounter House, Tesco was risking putting suppliers out of business and threatening jobs.
Maybe that is what they want. Ryanair boss Michael O'Leary said recently that: “The winners in a deep recession will always be those companies like Aldi, Lidl, McDonald's and Ryanair” — and he could have added the Big Four supermarkets. Theirs would be a Britain of Poundland discount shops, fast-food outlets, cheap clothes and branches of supermarkets where price is king.
There is one saving grace. In reacting in such a blinkered and hysterical fashion, the four may have miscalculated. So riled is Freeman, whose Commission does not have the power to establish an ombudsman but was hoping to work in co-operation with the industry to create one, that he has written to the Department for Business, Innovation and Skills recommending the Government set one up anyway. He's gone further and said it should have the ability to investigate and to penalise retailers for non-compliance. That raises the prospect of public shaming and hefty fines.
The Big Four supermarkets may yet come to regret the stance they've taken. And for the rest of us, that can be no bad thing.
Reader views (3)
It's very simple. If you don't like what Tesco is doing, then don't shop there. There are plenty of other places to get much better quality food, both in London and outside. They aren't hard to find.
- Clovis, London, 07/08/2009 08:26
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"... That raises the prospect of public shaming ...". Would this be the same public (me included) who fill our baskets and trolleys with BOGOFs and special promos? There's nothing to stop people deserting Tesco and going off to M&S or Waitrose but most choose not to. The goods in their Tesco trolleys show their support for the current strategy.
For suppliers (as in all fields of business) it is always a mistake to make yourself so reliant on one customer that the customer starts dictating terms. You need to be able to go to the negotiating table ready and willing to walk if the deal being offered is unacceptable.
- Tonyb, Melbourne, Australia, 06/08/2009 12:27
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The big four supermarkets are champions of the consumer only in so far as they can get us through their doors and spending our money with them. They are 100% focused on profit, and are 100% focused on maximising this by minimising supplier costs, and by transferring as much risk as they can to their suppliers. Some may say good business, others might say they are exploiting their market position.
They may well come to regret their bullish rejection of the proposal - but only if something is done before the next election, Broon likes to interfere, Cameron doesn't seem to.
- Hutch, High Wycombe, 06/08/2009 11:15
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