The real retail equation

This evening I watched the Channel 5 documentary Aldi vs Lidl: Supermarket Wars. The program makers correctly identified the standard set of superficial differences that are plain for all to see. However, while setting out to explain the yawning gap between UK and Continental business models, the detail was a bit sparse. For instance, consumer journalist Harry Wallop does his bit to keep alive the 1966 World Cup mindset, evoking a long departed anachronism rather than twenty first century marketing.

The programme’s narrative starts in the 1990s and portrays the discounters as eccentric oddballs with a business model that worked in Germany but needed tweaking for more lavish UK mindsets. British food retailers had established a stranglehold on the postwar consumer economy and raked off substantial sums of cash from suppliers, known as shelf money, hello money, listing fees, the list was endless. Large retail businesses expected to be paid GBP 5,000 a year per Stock Keeping Unit (SKU) to be listed at 200-300 stores. Example: food manufacturer presents a family of six snack products in the early 1990s and would be asked to stump up thirty thousand quid for listings in up to 300 stores. Any subsequent special offers were funded by suppliers, in the form of free product (physical stock); or credit notes or deductions from existing/current invoices.

Given that even a modest hypermarket would stock 25,000 to 30,000 SKUs in those days, the retailers were making lorryloads of money while pretending to be church mice earning a miserable 4% profit on return. The arrival of the German discounters threatened to blow their cover and the major multiples were not keen on this. The reason Aldi and Lidl could run rings round the big four within a few years of arriving was that the discounters only ever discussed prices with suppliers and never asked for shelf money. Carving out a substantial market presence without constantly squeezing suppliers, the discounters have demonstrated that it can be done and done honestly. That spooked the multiples even more.

Footnote: At the time of writing, continental retailer Carrefour is playing the commercial equivalent of Russian roulette with snacks and soda giant Pepsico. Initially limited to France, Carrefour stores across Germany, Italy and Spain are now all locked in to a life and death fight over trading terms (shelf money). Even if Carrefour dumps Pepsico (unlikely) there is no way that the tonnages of product could be secured from other manufacturers. Also in France, the eponymous independents’ chain E Leclerc is reading the riot act to its suppliers. Running a tighter ship than BlueBeard, second generation chief executive Michel-Edouard is threatening hellfire and brimstone for all those who challenge his figures. For years now, the group has only ever paid for one tonne of potatoes out of every 1.2 tonnes delivered, insisting that there is a lot of slack (waste) with this crop. This is simply not true: any fresh produce department anywhere in Europe that is experiencing more than 2.5% slack across a week would be hauled over the coals.

Grocery Code Adjudicator: inaction in action

Not long ago the Grocery Code Adjudicator’s office published its report for the past year. The reality behind the lukewarm prose is more disturbing than might first appear: the complaints raised are predictably familiar and there are multiple labels for what appear to be depressingly perennial abuses. More to the point, given the confidentiality of the process, it is not possible to determine an order of magnitude for the sums involved. This is not just a nice-to-have ballpark figure, but a true measure of the scale of a continuing problem.

The presentation and figures can be downloaded here. There are a good two dozen descriptions for the issues that have been raised by suppliers. The rates of change given for year-on-year complaint numbers are within five or six percent of the previous year, which is supposed to mean that everything is under control. The message is a very firm “…nothing to be seen here. No, really, THERE IS NOTHING to be seen here…” Yet the sort of practices that suppliers are complaining about would normally merit criminal investigations. Or would insisting on the letter of the law just put suppliers out of business?

Those who have been in the food industry for years will have acquired a collection of tales of extortion and graft that at first hearing seem overstated, but which become hard to ignore or dismiss. A lifelong food industry veteran put it this way: “The multiples have been running circles round the government for years. It’s been going on for decades. These days retailers are so used to demanding money left right and centre that it’s hard to know how they keep track of their real costs.”

It is well nigh impossible to assign an order of magnitude or give a steer on how serious the ongoing abuse might be in the grocery trade. Let us be as circumspect as possible in unpacking this one. Let us assume, for instance, that there is only one instance of a dispute under any of these headings and that the percentage figure, rather than referring to a case load, is a crude measure of the sums of money involved. Anything bolder than that would suggest a totally compromised food industry. Don’t rule that out, by the way.

Now take the following two GCA sub-headings as examples:

(a) Requests for payments to keep your existing business with a Retailer (pay to stay)

(b) Requests for lump sum payments relating to Retailer margin shortfall not agreed at the start of the contract period.

These both look suspiciously like blackmail, but let’s try to estimate an order of magnitude for these actions. Shelf money demands are usually based on a fixed sum per SKU per product range, for a listing across two to three hundred sales outlets. To get an idea of the sums of money that can be involved, assume the product concerned costs one pound and comes in five flavours and three pack sizes (sub-total 15 SKUs). Pull a pay to stay value out of thin air of GBP 5000 for each SKU listing across 250 sales outlets, fifteen SKUs times GBP 5000, guesstimate budget GBP 75000. If the retailer has a markup of 20p, the pay to stay demand is equivalent to a supplier “giving” 375,000 units of product (20p times 375,000 = GBP 75,000). While it is not unheard of for retailers to withhold all or part of an invoice, it is not in the suppliers’ interest to hand over lorryloads of product, which will earn the retailer the full retail price at the checkout: literally having their cake and eating it.

Given that a hypermarket can easily have up to 20,000 food SKUs, not counting own-label lines, you could end up with an aggregate demand for shelf money running to millions of pounds if they were all to be counted towards a shelf money Christmas list. Given that these are very large wadges of money to conceal on a balance sheet, our imaginary retailer will probably need all the accounting strategies they can think of to hide the true state of the cash flows. Again, to avoid overstatement, we will assume that each heading only refers to a single instance of a commercial abuse.

In choosing a theoretical sum of GBP 5000 per SKU for shelf money, this could be seen as an exaggeration. However, one simple factor ramping up shelf money demands is the simple proliferation of the high street formats for mainstream food retailers. It is highly improbable that a retail multiple would forego an established shelf money framework when opening high street stores. However, competing convenience stores simply do not have the kind of clout that a major multiple can bring to bear on brand owners in a store format that leans heavily on established brands.

The office of Grocery Code Adjudicator was set up about 20 years ago and spent about half that time building up its role as a trusted arbiter, a lap dog rather than a watchdog. It is hard to imagine that it has done more than scratch the surface of the very real problems facing food manufacturers and brand owners in their dealings with a clique of very powerful customers, the multiple retailers.

Retail watchdog

The Groceries Code Adjudicator is tasked with ensuring fair play between market forces and retailers trying to manipulate things. There were many dubious practices in play at the end of the twentieth century and with retailers holding the whip hand over suppliers, an external agency was long overdue. The position of Groceries Code Adjudicator was first discussed in 2009 and it was long in the making. Its terms of reference are here. The Groceries Code Adjudicator Act of 2013 set up the retail watchdog, which operates out of one of London’s dockland office blocks.

Answerable to what was then the Department for Business, Energy and Industrial Strategy, the adjudicator had a handful of seconded secretarial staff. Just over a dozen retailers with annual sales of more than one billion pounds and now including Amazon, have compliance officers. These are members of the retailers’ management staff, charged with enforcing the provisions of the Act.

There is one major shortcoming with the framing of the act, though. While there are many links in a supply chain, only the retailer and the supplier who is paid by the retailer are covered by the legislation. As yet, there is no attempt to legislate for the more complex structures and working relationships that exist in the food industry.

Blunt instrument

Tesco has tried to revive shelf money for its online retail operation. At the end of the 2022-3 financial year the multiple announced its plan to impose two flat rate “fulfillment fees” : 12p/unit for branded goods, 5p/unit for own label lines. Short for Stock Keeping Unit (SKU), a unit is an item offered for sale. This incredibly blunt instrument was to be applied and charged to suppliers with threats of punitive retribution in the event of non-co-operation.

In practice it is not even remotely level-handed: suppliers of a £12 bottle of wine would face a one percent margin haircut, while companies supplying goods with a £1 price point face a 12 percent total margin wipeout. Not surprisingly, no-one is playing ball. The Grocery Code Adjudicator faces a major challenge, even though Tesco is out of order in this case. Watch this space.

NFU president Minette Batters told Urban Food Chains: “This move from Tesco is a stark demonstration of the lack of fairness within the supply chain. At a time when crippling production costs mean many farmers and growers can’t afford to continue producing food at scale, resulting in supermarket shortages of fruit, salads and eggs, the food industry desperately needs fairness and collaboration, not further erosion of trust.

Looking ahead

Gaps in supply chains are set to become a regular feature of the UK economy. In April, supermarket chain Morrisons started limiting customers to two sweet peppers per shopping trip because of procurement difficulties for salad ingredients. Cold weather in southern Europe has led to shortages across the continent, while high energy costs have deterred UK growers from planting early greenhouse salad crops. Supplies of early season tomatoes and cucumbers have also been affected.

Traditional sources for these crops are Spain, Morocco and neighbouring north African countries. The combination of higher fuel costs for imported salad crops and the cold snap has wreaked havoc.

In March, the UK recorded headline Consumer Price Index (CPI) inflation of 10% But take a closer look at the Office of National Statistics data and consumers will learn that food inflation is running at around 19% (CPIH 12-month rate for March 2023). Climate disruption is just one of many factors that will have a generalised effect on future developments in many sectors. Animal products of all kinds have already been heavily impacted in recent months and the sector can be expected to see further upward pressure on prices if producers are going to stay in business.

Pricing experts?

Ask any economist and they will tell you that economics is a science, founded on mathematics and using none but the most reputable methodologies known to  data science. The acid test of any scientific discipline is to be able to replicate previous experiments and repeat the results to within an acceptable margin.

To be sure, if you take the same data and crunch the numbers using the same calculations, you will get the same results as the previous economist. But economists are a diverse bunch, not to mention the smørgesbord of economic policy recommendations to be shared as the opportunity arises.

If this sounds less than serious in its tone or intent, it may be that it is not written by A Proper Economist (always spelt out in full, never abbreviated).  A Proper Economist can be relied upon to analyse market data and forecast the likely price trends within a given sector. If, on the other hand, you wanted to know the retail price of a grocery line for the coming year, that would be a closely-guarded secret between a supermarket buyer and her (or his) supplier.

With the digitisation of the retail checkouts in the early 1990s came a tidal wave of sales data that  probably paid for itself in months, if not weeks. For the first time in recorded history the multiples knew exactly how many units of which lines they were selling; where they had multiple suppliers of own-label products, the multiples could start to make direct comparisons between suppliers and the margins they were generating. Individual suppliers knew what volumes each was shipping to retail customers, but only the category managers had the whole picture.

The supermarket buyers’ secret weapon of choice in those days was a miniature tape recorder and microcassettes, to which verbal contracts worth millions of pounds were recorded. If any hard copies were ever made, these would have been kept in a safe. Supermarket buyers and category managers are overlapping roles. They were always instantly recognisable at trade fairs, leaving suppliers’ stands with their tape recorder pressed to their ear, playing back the small print as it was wrung out of the supplier. There was no question of suppliers passing  on price increases arising from higher prices on the international markets: the standard response in those days was: “find cost savings in your business…”

Not that buyers ever applied that principle to their own dealings with suppliers. Food manufacturers presenting new ranges and products to multiple retailers would face requests for a listing fee and, often as not, a request for special offer stock. Listing fees were also referred to as hello money or  shelf money, among other names. They used to start around £5000 per SKU for listings in an agreed number of outlets. Shelf money was never refunded if a product was delisted, but would be requested for years to come during the life of the listing.

Special offers were not what they might have appeared to be, either. The retailer charges the consumer for the special offer part of the price. But does the multiple give away the offer component of the price? Hell no! They recovered that from the suppliers, who systematically funded the offers, providing free stock directly or having the equivalent money withheld from invoices for other products. Either way, the retailer banked the full price on special offers. From the retailer’s point of view, it is having your cake and eating it. Even though the Grocery Code Adjudicator’s office has cleaned up the retailers’ act, the industry is still haunted by the ghosts of past sales targets.

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Every little hurts…

European food retailer Tesco has group sales of more than GBP 50 billion and saw its profitability soar by nearly 60%. The group is active in eastern Europe as well as the UK, where it operates convenience buying group and wholesaler Booker foods in addition to the ubiquitous supermarkets. Here are a few headline figures from its annual report.



Group sales

GBP 53.4 billion

GBP 54.8 billion

up 3%

Group profit

GBP 1.8 billion

GBP 2.8 billion

up 58.9%

To give an idea of the scale of these results, the 2021 GDP of Rwanda was 11.7 billion USD.

Tesco financial 2022 results are available at, the Rwanda GDP figure supplied by Google based on World Bank data.

Eustice shopping tips

George Eustice (photo: UK parliament/free to use)

When trying to save money while shopping for food, stating the blindingly obvious is not going to go down well. Food and farming minister George Eustice (pictured) take note. For those who frequent the supermarket aisles at regular intervals, there is no need for well-paid MPs to chip in with their two pennyworth, as reported in The Guardian this week.
Supermarket shelves are laid out to make it easy to spot cheap products, so advising shoppers to consider cheaper fighting brands is unnecessary. Just saying that simply trading down will enable shoppers to “…contain and manage their household budget…” is rubbing salt into the wounds.
Possibly more damaging to his ministerial credibility was Eustice’s assertion that the UK has a “…very competitive retail market with 10 big supermarkets…” resulting in “…a lot of competition to keep prices down.” Since all retailers face open-ended rises in energy and haulage costs, food is not about to get any cheaper. And that is before phasing in veterinary certificates and the cost of food safety checks on imported animal products.

Migros marks major milestone

Swiss retail giant Migros has achieved the first stage of its 2030 carbon neutrality plan. All the multiple’s retail premises have completed their transition to become carbon neutral.

As the country’s largest food business and retailer, Migros operates the lion’s share of the national retail park. It has been a dominant force on the national retail scene for decades.

Between now and 2030, Migros will cut a further 80% of its greenhouse gas emissions from its business activities, including its extensive food manufacturing arm.

Instead of buying carbon credits to offset its remaining environmental overheads, Migros will “inset” its remaining emissions. One example of this arrangement is a project working with 1,000 Thai peasant families to raise the environmental standards of their rice growing. For instance, there are gains to be made by not flooding paddy fields, which area significant source of methane emissions. The result is a contribution towards a potential reduction of  60% in  the crop’s carbon footprint worldwide.

Nose before yes, says Morrisons

Yorkshire-based supermarket Morrisons is going to give up using best-before dates on a lot of its liquid milk lines and is telling customers to sniff the milk as they take it out of the fridge and make their own minds up as to whether or not it is fit to drink. The story appeared on the BBC, which added that milk is one of the most heavily wasted foodstuffs, with 490 million pints being dumped every year, 85 million of which is slung out because it had passed its best-before date. Properly managed refrigeration can keep milk wholesome beyond this time, which is a suggestion not a statement of fact.