NEWS ANALYSIS

supermarkets buying power Specials Specials

What the buying power of UK supermarkets means for customers

In Paris last month, former Southcorp executive David Combe launched a savage attack on the big UK retailers, explicitly accusing them of acting unlawfully. ‘They consistently commit abuses of retail power which, in Australia, would represent major breaches of Trade Practices laws and would almost certainly result in the offending company being fined massively,’ he said.

Combes cites examples of sharp practice. In one, a retailer decided, ‘unilaterally’, to change an agreed discount. When only half the wine sold, it demanded the supplier take the surplus back.

So are UK supermarkets villains? Their power is not in doubt. Between them, Tesco and Sainsbury’s account for some 50% of all UK wine sales. Tesco turns over £30 billion a year, Sainsbury’s £20bn. They and their main competitors, Safeway and Asda (owned by Wal-Mart, turnover £240bn), compete for a market worth £110m.

Within this robust trading environment, it is inevitable there will be some sharp practice. A senior member of a large independent said there was no doubt supermarket buyers can behave in a ‘heavy handed’ manner, and said that Combe’s examples were realistic – though it was unlikely such practices were systematic.

Anthony Rose, wine critic for UK newspaper The Independent, suggests it was supermarket pressure which led indirectly to the South African additives scandal last year. ‘In their pursuit of cheapness, [supermarkets] are gaining more and more power and putting pressure on producers to keep prices down.’

Sharp or not, it is highly unlikely supermarkets are doing anything illegal, according to Mark Clough QC, a partner in international law firm Ashurst. ‘As long as a company doesn’t have a dominant position it can do what it likes,’ he says. ‘By EU case law, a single company must have 50% of the market to be dominant.’

Sainsbury’s may be vast, but it doesn’t dominate. Even if the collective power of the multiples is such that they have the market sewn up between them, it would have to be proven they were acting in a cartel, knowingly fixing prices, for their practices to be found unlawful.

Most commentators agree there’s nothing unnatural about the ‘muscular’ relationship between retailer and supplier. Consultant and former Sainsbury’s wine chief Allan Cheesman calls it ‘interplay’. Others dismiss Combe’s grievance as ‘the oldest game in the world’.

Christopher Carson, president and CEO of the European branch of the biggest wine company in the world, Constellation Brands, told Decanter, ’I don’t believe the retailers are necessarily arrogant, but they have muscle which from time to time they are bound to flex. That has even been known to happen with companies on the other side of the desk.’

Medium-sized producers are reluctant to speak out, fearful for their relationship with the buyers. As one industry insider told Decanter, ‘no one will comment as they don’t want to burn their bridges.’

So where does this leave the customer? ‘As the supermarkets get bigger and prices get lower, there will be less choice,’ says Tony Mason, wine buyer for Majestic. One thing is certain: it is the supermarkets who ultimately call the tune.

As Robert Hill-Smith of Yalumba says, they ‘are in a strong position to lead the way in compelling people to trade up’. He adds: ‘Diversity is vital, and the best [supermarket] buyers are those who avoid the temptation of painting the world with a grey brush and give their customers interesting, great quality wines.’

But can supermarkets avoid wielding that grey brush, even if they want to? To satisfy shareholders they must drive the hardest bargain possible, and the wines that sell the most are the ones that appeal to the most people – even if they are ‘grey’.

The relationship is combative, to be sure. But when parents argue, the children get forgotten. Are the supermarkets and their suppliers forgetting the most important person in all this – the customer?