Skip to content
trust

Will government inquiries improve the relationship between suppliers and supermarkets?

Background

In the last 5 years numerous factors beyond the control of suppliers and supermarkets have disrupted supply chains and consumer demand. These include COVID, wars, severe weather, inflation, increasing CODB (cost of doing business), COL (cost of living). Obviously in this environment relationships between suppliers and supermarkets could be strained.

This quick blog suggests recommendations ranging from mandatory codes to divestiture of stores will not improve the relationship between suppliers and supermarkets. The government inquiries highlight the fundamental issue is a lack of trust between suppliers and supermarkets. The inquiries focus on limiting power will not build trust between suppliers and supermarkets … it may make the situation worse.  

Supplier / supermarket relationship

My blog, There is no perfect category relationship, highlights there are numerous different styles of category relationships that are successful. Also, overtime category relationship processes / dynamics can change. Some suggest category relationships go through different stages. For example, The Category Management Assocation (Category Management Mastery: The key to growth, 2013) suggests category relationships go through 5 different stages. Importantly research highlights that successful relationships do normally have the same psychological factors (trust and loyalty).

Trust results in greater openness between suppliers and retailers and thus greater knowledge and appreciation for each other’s contribution to the relationship. Consistent with this reasoning, several studies find positive associations between trust and economic performance (e.g. Geyskens, Steenkamp, and Kumar 1998; Zaheer, McEvily, and Perrone 1998) as well as between trust and distributive justice (e.g., Kumar, Scheer, and Steenkamp 1995).’

Do Suppliers Benefit from Collaborative Relationships with Large Retailers? An Empirical Investigation of Efficient Consumer Response Adoption Daniel Corsten & Nirmalya Kumar. Journal of Marketing 69 (July 2005), 80–94

IMHO (in my humble opinion) if government inquiries wish to improve the relationship between suppliers and supermarkets, they need recommendations that build trust. Depending on culture of the business / region the process to build trust can vary. In Western culture transparency (e.g. sharing and committing to goals) is an important element in trust.

‘transparency breeds trust. CPG companies that have chosen to be transparent in their retail partnerships – being open about their long-term strategies, sharing insights and opportunities, aligning on metrics, and seeking collaboration beyond the traditional commercial areas – have gained the trust of retailers and, consequently, have outperformed their peers.’

Power partnerships’: Manufacturer – retailer collaborations that work, Kari Alldredge, Brandon Brown, Lindsay Hirsch and Travis Reaves, McKinsey, 2019

Industry Dynamics

As outlined in my blog, Who has the power? , power is the ability to influence.

manufacturers largely controlled the elements of the marketing mix – price, distribution, product, advertising and promotion. Today, except for a few developing countries, this scenario no longer exists”.

Charan (Origins of Category Management)

Historically, e.g. 1980’s, it was normally that major brands had ‘power’ in the market. Due to the increasing share of major supermarkets (e.g. Coles, Woolworths) and increasing sales of P/L (private label) ‘power’ has slowly transferred to supermarkets. Interestingly, in the last 20 years supermarket power has shifted towards hard discounters (e.g. Aldi) and marketplaces (e.g. Amazon). This has occurred in Australia and other markets. Interestingly these 2 groups still have relatively low share vs major supermarkets such as Coles and Woolworths in Australia.

“From 2017 to 2019, large brands (more than $750 million in revenue) in the US lost volume at the rate of 1.5 percent a year. At the same time, small brands grew 1.7 percent, and private label grew 4.3 percent”

McKinsey , What got us here won’t get us there : a new model for the consumer goods industry, 2020

This change in industry dynamics partly explains the declining levels of trust with suppliers and supermarkets. Suppliers feel threatened due to long-term declining power, growth of P/L. Major supermarkets, such as Coles and Woolworths, feel threatened by new entrants in Australia including Aldi, Costco and Amazon. The threat of declining sales can lead to aggressive behaviour by both suppliers and supermarkets to try to maintain sales / share (the status quo).

It could be argued government legislation assisting new entrants (e.g. Aldi, Costco and Amazon) is actually a contributor to the declining level of trust between suppliers and supermarkets. An obvious example is Aldi’s strong P/L offer forcing Coles and Woolworths to lower prices, whilst trying to maintain margin. Report of the ACCC inquiry into the competitiveness of retails for standard groceries in 2008 noted:

ALDI creates a strong competitive dynamic on the products it stocks and puts pressure on Coles and Woolworths to offer many of their private label products at prices not seen before ALDI’s entry.

If inquiries recommend decreasing the ‘power’ of major supermarkets then industry dynamics could change dramatically in a short period of time. This would have a negative impact on many relationships between suppliers and supermarkets.

Supplier / Supermarket behaviour

IMHO the inquiries are trying to deal with the issue of a lack of trust in the supplier / supermarket relationship. This is not a new issue. For example, in 2014 Brady noted:

‘with the growth of supermarket power as well as the growing consumer acceptance of private label brands, there is no longer the same mutual benefit to the supermarkets of maintaining balanced relationships with the suppliers, and this has occurred at the expense of trust’

The impact of the rise in private label brands on supplier-retailer relationships, Catherine Sutton Brady, IMP Conference 2014

The obvious question is then what could build trust between suppliers and supermarkets? The following model highlights the importance of prior actions, communication and mutual commitment between the parties. Most practitioners would describe this situation as a mutually beneficial relationship. An obvious challenge for any recommendation an inquiry makes is that suppliers and supermarkets will remember prior actions.

Collaboration and commitment to in a regional supermarket supply chain

Rebecca Dunning, Journal of Agriculture, Food Systems, and Community Development, 6 (4), 21 – 39

Food and Grocery Code of Conduct Review

‘The basic reason for the Code coming into existence in 2015 was an imbalance of market power between supermarkets and their suppliers, especially smaller suppliers.’

Dr Emerson

As noted, the Food and Grocery Code was established due to strained relationships between suppliers and supermarkets. So, this is an on-going, not new, issue. Dr Emersons’ initial report concluded that the existing Food and Grocery Code of Conduct (the Code) is not effective. IMHO the reason why the code, and legislation in general, is not effective is because it does not build trust between suppliers and supermarkets. The focus is on ‘power’ and ‘justice’ and not building mutually beneficial relationships.

After 40 meetings and reviewing 56 submissions Dr Emerson, independent reviewer of the food and grocery code of conduct, has released his interim report. His recommendations include making the code mandatory, financial penalties for non-compliance and changing the dispute resolution process to address suppliers fear of retribution.

The Code should place greater emphasis on addressing the fear of retribution. This can be achieved by including protection against retribution in the purpose of the Code and by prohibiting any conduct that constitutes retribution against a supplier.

According to Kumar distributive justice is ‘perceived fairness of the outcomes received’ and procedural justice is ‘the perceived fairness of the powerful party’s process for managing the relationship.’  Kumar (The Power of Trust in Manufacturer – Retailer Relationships, Nirmalya Kumar, Harvard Business Review, November – December 1996 Issue).

I suggest that Dr Emerson recommendations focus on power to deliver justice. He is hoping to remedy the heavy imbalance in market power between suppliers and supermarkets. He hopes to achieve this by making the code mandatory and allowing the ACCC to enforce the code through the courts. Also, he suggests replacing code arbiters (engaged by supermarkets) with code mediators and/or suppliers choosing independent mediators to offer suppliers a low-cost alternative to court proceedings. IMHO these recommendations will not be successful for the same reason the current code is not successful. The recommendations do not build trust in the supplier / supermarket relationship.

Simply put the recommendations may increase the likelihood of a supplier receiving financial compensation but the suppliers’ range could still be deleted. More importantly this process would decrease the level of trust in the supplier / supermarket relationship. The long-term outcome could be more adversarial relationships between suppliers and supermarkets.

Another important point to consider is will suppliers trust the new process (mediation, ACCC)? There have only been a few complaints made under the current code. Is this because suppliers view the government, including ACCC, as a ‘toothless tiger’. So, will a ‘stronger’ code actually change behaviours of suppliers and supermarkets?

ACCC inquiry into supermarket prices

“Our inquiry will examine the nature of the current competitive environment between supermarkets, as well as the barriers to greater competition and new entry in the sector.”

ACCC media release

The ACCC inquiry into supermarket prices is on-going. Interim report due by 31/08/24.

Whilst this inquiry has made no recommendations the statements made by ACCC and inquiry members suggest they will try to limit the power of major supermarkets. Again, the focus on ‘power’ will not address a lack of trust between suppliers and supermarkets.  

“Giving our courts and competition regulators the power to smash the supermarket duopoly will help rein them in.”

Greens Economic Justice Spokesperson Senator McKim

Summation

The relationship between some, not all, suppliers and supermarkets has been adversarial for decades. This is due to a number of factors, including changing industry dynamics, decreasing the level of trust between suppliers and supermarkets.

The current Food and Grocery code has not been effective in dealing with this issue. The focus on ‘power’ has not dealt with the underlying issue of declining trust between suppliers and supermarkets. The current inquiries are also focusing on ‘power’. The recommendations will not address the real issue.

The solution is recommendations that build trust in the supplier / supermarket relationship.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation. Contact Details .