March 18, 2021

When big retailers go shopping together

Robin Hood (source: okalinichenko-Fotolia)
okalinichenko-Fotolia
Robin Hood: Stole from the rich and, as historical romance would have it, gave to the poor. Was he the first retailer? (illustration: okalinichenko-Fotolia)
European retailer buying alliances such as Agecore, AlidisAMS, Coopernic, EMD or Eurelec have pretty harmless sounding names. But the larger ones have come in for a lot of stick recently. This is particularly the case if you are a member based in France where you are most likely to be clobbered by the local competition authorities.

French giant Leclerc is still contesting the intellectual justice of a €117m fine threatened in 2017 for an alleged cavalier approach to European terms & conditions in relation to suppliers. Now, fellow retailer cooperative Intermarché is under investigation for allegedly also straying from the straight and narrow path of trade virtue and faces a potential fine of €150m. Both organisations protest their innocence.

So, are members of European retail alliances the villains of the piece, waylaying harmless brand manufacturers like masked highwaymen along the roadside? Or are they well-meaning souls who only want to donate the money they have negotiated from suppliers to the consumer? And could it be that their good intentions have simply been misunderstood by a judiciary besotted with love for powerful local farmers and wooed by sophisticated supplier lobbies with flash wallets?

As neither side could provide us with a non-partisan answer, we asked INSEAD marketing professor Marcel Corstjens to give our readers as neutral a view as possible of one of the most contentious and emotive issues in the trade today...



"A Robin Hood-type of outcome"  


Professor Marcel Corstjens, INSEAD (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
Professor Marcel Corstjens
Professor Corstjens, the French competition authorities have been particularly tough on those French retailers who have joined European retail buying groups. Does this spell the end of these alliances if all French members have to drop out?

Far from it, there are so many other countries in Europe that buying groups could always continue without a French partner. In fact, I believe that buying alliances will become much larger and that we might even soon see some transatlantic ones between major European and US retailers. Here both parties could focus on the 70 or so global brands who offer a similar set of portfolios on both sides of the Atlantic.

Are retailer alliances employing bully-boy tactics against suppliers?

I would like to say first that bullying is never acceptable. Contrary to some of the more ridiculous claims in the press, however, major retailer joint ventures, such as Agecore or Coopernic, are not negotiating with farmers or small local suppliers. There are hardly more than 100 large pan-European suppliers, around 25 of whom cover about 80 per cent of the market.

Sometimes retailer alliances even deal with suppliers who have an 80-per-cent share of an individual market and who can therefore take care of themselves very well.

Is there any evidence that suppliers are abusing this power?

Prices of the exact same SKUs should be the same across Europe, after accounting for country-specific cost differences in advertising, labour, transportation etc. Various studies show that for some brand SKUs the price varies by as little as 7 per cent, but many have price differences of more than 25 per cent across EU countries.

It's hard to believe that this is due only to local cost differences. Incidentally, the fact that brand owners vary the size of their SKUs from country to country has little to do with local consumer preferences.

The very same regulators who regularly impose heavy fines on retailers in the name of consumer protection have done precious little to adjust this situation. In fact, retailer buying alliances are the only ones who have tried to close the gap.

If buying alliances are such a force for the good, why have some national legislators penalised them for the way they have negotiated with brand manufacturers?

Parliamentary commissions are composed of elected public officials who are probably eminent politicians but unfortunately often have limited knowledge of the trade and its complicated web of interactions. It's like apprentice electricians trying to inspect a nuclear power station.

They don't seem to grasp something very fundamental: Retailers are doing exactly what regulators want, i.e., they are supplying consumers with good and affordable products.

Professor Marcel Corstjens, INSEAD (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
"Various studies show that for some brand SKUs the price varies by as little as seven per cent, but many have price differences of more than 25 per cent across EU countries"
So, politicians should stop trying to regulate buying groups?

They have, no doubt, the best of intentions, but where they have interfered to date, the unintended consequences have been generally dire. For example, the loi Galland, as passed into French law in 1996, intended to regulate relations retailer-supplier relations and to protect farmers, small retailers, small suppliers and consumers.

This legislation has also produced vast distortions on the market. By specifying a maximum corridor for rebates and other dirigiste measures, trade relations were put in a straitjacket. This has left the French FMCG market notoriously less profitable for both retailers and brand owners compared to other countries.

Where, by contrast, government bodies have taken the trouble to make an in-depth analysis of competition on consumer markets, as with the Groceries Market Investigation in the UK, the facts have forced the regulator to conclude that retailers are broadly a force for the good.

Many suppliers would beg to differ and feel that retail buying alliance members are only enriching themselves at their expense…

Do you really believe that Agecore, Coopernic & Co. can milk such huge global suppliers as Mars, Nestlé, Procter & Gamble or Coca-Cola without offering an adequate quid pro quo?

If you look at their bottom line and share performance, retailers haven’t become noticeably more profitable through membership of buying organizations such as Agecore. What they negotiate from suppliers, they compete away among themselves, or give away to consumers in the form of lower prices on the supermarket shelf. They are no philanthropists, but horizontal competition between retailers has led to Robin Hood-type outcomes.

Meanwhile, the buying organizations themselves aren’t keeping anything in their pockets and don’t hinder the flow of money to consumers.

Professor Marcel Corstjens, INSEAD (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
"I believe that buying alliances will become much larger and that we might even soon see some transatlantic ones between major European and US retailers"
So, what advantages do individual retailers gain from membership in a European buying alliance?

European buying groups stimulate efficiency and competition within our economic system. They also avoid diseconomies of scale. When individual retailers try to buy internationally, or expand their store networks internationally, they almost invariably fail. This is because they rapidly become subject to dysfunctions of scale.

Here I would refer you to the strong economic evidence provided by George Stigler, the Nobel prize winner for economics in 1982. In terms of economic organization, there are different average costs for different functions. Buying groups enable national retailers to act close to the consumer in their retail offering, while obtaining international buying scale.

Could you give some practical examples?

Leclerc continues to gain national market share from global retail giant Carrefour in France because it has been able to attain increasingly good buying terms via Coopernic while preserving the local and entrepreneurial approach of its members, without the complications of having to be in 30-odd countries.

Meanwhile, even those retailers, such as Aldi and Lidl, who have simple and broadly standardised formats, find themselves having to adapt locally to some extent and incur costs.

And, finally, a media question: European retail buying alliances have come in for some bad press of late. Have they been treated fairly?

Reporting is one-sided and shows a clear bias towards suppliers. The press should be more neutral. Manufacturers have defended their point of view very well while retailers have made mistakes and generally been rather passive in the way they communicate. But one can't blame brand owners for that.

To put it more bluntly, retailers have done a lousy job in defending their point of view, while the likes of NestléMars and Coca-Cola have an excellent lobby with the EU and national competition authorities.


Lebensmittel Zeitung print and digital (photo: LZ)
LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Die Händler agieren dilettantisch' by news editors Mike Dawson & Jan Mende on pages 29 & 30 of Lebensmittel Zeitung, no. 11, 19.03.2021










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1 Comment (Write a comment)

  1. Tim
    Created 21 March, 2021 16:33 | Permanent link

    Manufacturer as apprentice

    Buying groups are obviously a very niche market, given the few global suppliers covering 80 per cent of the market, as Professor Corstjens suggests.

    This, remarkably, leads to a quasi-communist state of affairs within a capitalist economy. The pricing of products becomes regimented across retailers, suggesting in fact competition is a useful fiction.

    It is most amusing to consider politicians as “apprentice electricians trying to inspect a nuclear power station". Not just in this context, but also for the British managing Brexit –- clearly the political classes have failed. That said, there are other “apprentice electricians” in the form of small and medium-sized manufacturers who dare to investigate supplying the buying groups.

    The buying group paperwork for smaller manufacturers is onerous to say the least and to be immediately asked to sign Non-Disclosure Agreements is intimidating. This level of bureaucracy would necessitate employing one or more members of staff to manage the administration.

    The Return On Investment is not commercially viable for the smaller producer. Indeed, in the dairy sector claims that private label opportunities would run on a six-month cycle do not seem to either understand private label packaging requirements or stock management to meet sales. Suggesting the need for two or three years contracts is laughed out of court.

    Corporate mentality (retailers) speaks to corporate mentality (buying groups) speaks to corporate mentality (manufacturers). How will Covid-19 impact these trade relations? Will they place the players in a tougher straitjacket, reducing the range on offer to the consumer in the name of efficiency, or will another economy open up of localiism?

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