The high cost of a low price: Is supplying large retailers really the promised land?

  1. iStock_Gilaxia
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    Posts: 91 Likes: 18
    3 |

    Amazon made waves this week when it slashed the prices of Whole Foods, the bourgie supermarket chain it acquired earlier this year.

    It was big news, in particular, because for many years Whole Foods was known for its premium pricing. Its reputation for high prices was such that American shoppers wryly dubbed the supermarket chain ‘Whole Paycheck’.

    But despite the high prices, the chain was successful because it catered to a suburban American middle-class sensibility. The stores were masterpieces of design, eschewing the faintly dystopian aesthetic of most supermarkets; all natural light and apron wearing store assistants.

    Most importantly, though, was its produce. Founded by John Mackey in the 80s, the store was the vanguard of the organic food movement. That is, Whole Foods was selling expensive yogurts, kale, and quinoa before it was cool. The store was ground zero for many of the past two decades’ food trends. 

    But Mackey’s dream began to falter in recent years as his low-cost, more muscular competitors adapted to the organic trend by offering Whole Foods-esque products at knockdown prices. The social currency of shopping at Whole Foods - once it’s killer appeal - never stood a chance against the industrial might of America’s low-cost retailers.

    So as the Whole Foods’ fortunes began to wilt (along with Mackey’s philosophical pretensions), the vultures circled. Mackey had long since ceded private control of his business, and against his wishes, the Amazon acquisition was approved by Whole Foods’ insurgent board. Speaking plainly, it was devoured by the same corporate machinery that Mackey believed he could reform and make more humane.

    So when Amazon swooped, purchasing Whole Foods for $13.7bn, it was seen as the coup de grâce to the store’s ‘premium’ brand identity. That diagnosis was confirmed with the swashbuckling price cuts this week: on its first proper day as Whole Foods owner, Amazon slashed food prices by as much as 43%. And that’s just the start, as Fortune pointed out: Whole Foods will need to delve deeper into the bargain bin if they want to compete with competitors Wal-Mart.

    The effect on consumers is obvious. But for Whole Foods’ vast supply chain it’s a shot across the bow: behind every lower price, there’s a supplier getting squeezed. UKBF members are familiar with this: acting as a supplier for a large retailer can be an extremely harsh (and sometimes destructive) relationship. Actually, it was just this past week when UKBFer Wevet asked: for smaller suppliers, when is it worth becoming embroiled in the titanic price wars of the big retailers? He has a solid idea of when it isn't a good idea.

    “I read that a company called Grain D'Or is shutting down its bakery operations costing 250 jobs. Despite a turnover of £28 million, they make a loss,” wrote Wevet. “Their main customers are Tesco and Marks & Spencer.”

    Is it “ego, greed or stupidity which drives businesses to enter into supply agreements” with large retailers like Tesco on terms which lose the supplier money, he asks. “Frequently in my business, I have a good laugh when a customer says they want to do business and they will send over their terms of trading. Sorry, but when I am the seller I require the customer to adhere to my terms of trading.”

    It’s not hard to imagine what path Wevet would take if he was an American supplier being approached by the new price cutting Whole Foods. “I know what makes sense to my business,” he says. “I know what margins I need, I know what payment terms I can live with. If the customer’s trading terms are at odds with my requirements I have a simple answer, no matter what the size of the contract, I will not trade with them.

    “Supermarket suppliers do not seem to realise that doing business with a customer who is going to suck all the profitability out of your company is not worth doing business with. 

    “Remember the adage: sales are vanity profits are sanity.

    “If a customer wants terms, heedless on the difficulty it would cause you, they are not worth dealing with. Your company might not grow as fast but what does that matter if it means that your business is smaller but is profitable and has a future?”

    The Byre agrees with Wevet’s assessment. When you step into the ring with titans, you need to understand a realm of Hobbesian ruthlessness. “If you are small and they are big,” warns the Byre, “they'll push you under to stay afloat.”

  2. WebshopMechanic

    WebshopMechanic UKBF Regular Full Member

    Posts: 218 Likes: 91
    @Francois, I agree that many smaller manufacturers get sucked into the dream that very rarely materialises.

    In my experience, you may get the first deal and make a little bit of cash but, as with Whole Foods, they will always put the squeeze on you further down the line. It's a wonder how anyone can do business with the big guys.

    In the past, I have done business with Apple Inc. When we landed the deal, very naively, we thought our sales would go through the roof. After agreeing to their 70% margin terms (yes 70%), we managed to just about break even.

    We were actually featured in just one Apple email going out to millions but that was along with 10 other products. We got a fair few sales but it was a painful relationship until we decided to end it. We were disappointed that they never even tried to earn their 70% margin.

    I guess the whole thing was an education but I have to say, it did open some doors and gave us some credibility because Apple is stringent with product testing before agreeing to stock it.

    Retail is dead for many products in my opinion. You just can't make it cheap enough and compete with these stupid margins.

    Retailers are really struggling on the high street yet, instead of lowering margins a tiny bit so they can introduce unique suppliers and products to their customers, they continue to screw the little guys to the floorboards.

    And then they wonder why they are losing market share and customer loyalty has disappeared!

    It would be nice if some of these retailers actually began working with manufacturers and producers rather than killing them. They may find themselves regaining the magic they once had.
    Posted: Sep 2, 2017 By: WebshopMechanic Member since: Apr 27, 2017
    Paul Tykhedice likes this.
  3. atmosbob

    atmosbob UKBF Ace Free Member

    Posts: 3,109 Likes: 692
    I'd been supplying a few shops in a national chain when they sent me revised terms. They'd pay 30 days later and deduct 5% for quick payment. I increased my price to them to exactly cover the difference and 12 years later they still haven't noticed they are paying more than my other customers.
    Posted: Sep 3, 2017 By: atmosbob Member since: Oct 26, 2009
  4. Paul Tykhedice

    Paul Tykhedice UKBF Newcomer Free Member

    Posts: 6 Likes: 1
    I was taught, never do anything at a loss and never put all your eggs in one basket. If you can't get a fair price now you never will. The Amazon philosophy is the lowest price wins because that's all they have to offer. Whole Foods is an example that contradicts that, as I'm sure Amazon will find out. Lose the perceived value/buying experience and it's just another store...and will fail I'm sure. The internet has spawned a false market based on tax avoidance, grey goods, bankrupt stock and let's face it, illegal goods. It can only survive until manufacturers, governments and a disappointed public realise that they are killing the golden goose. Apple, for all its faults (and it has many), has a sound business model that is both sustainable and invests in future products. They do it by controlling the supply chain and it works. All goods are now in a global market, these big multinational retailers/shopping carts can't be allowed to dictate the marketplace to any producer, big or small.
    Last edited: Sep 3, 2017
    Posted: Sep 3, 2017 By: Paul Tykhedice Member since: Aug 27, 2017
    Austin VT likes this.