In most industrialised nations the the supply chain
of goods from source to end user has changed little
for many years. Firstly there are the producers.
Then the wholesaler, then the retailer and then the
customer and consumer.
In the U.S. the supply chain has always been pulled
by downstream consumers. Europe had a different
history where a mixture of world wars and
interventionist governments led to supply chains
that were pushed from the upstream end. Certainly,
the rationing of the 1940's and beyond led to a
culture of consumers who got what they were given
and were thankful for small mercies.
As Europe has become more affluent, consumers have
flexed their muscles and demanded an ever wider
array of goods at a range of prices and standards.
It has now joined the U.S. and most other
industrialised nations with consumer-led supply
chains.
A feature of this has been the trend towards large
retail chains. Many of these chains have become so
large that they have virtually dispensed with
wholesalers, preferring instead to purchase goods
directly from producers. They have also established
the so called "own brand". This is where they have
dictated the product specification to the producer
and told them to brand it as their own product. And
there is more: some of the largest chains have
increasingly got themselves involved with all
aspects of the supply chain from raw material
sourcing, packaging procurement and design, all
aspects of distribution and even their suppliers'
recruitment policies.
This has resulted in a shift in the balance of power
from upstream to downstream. Now that every aspect
of the producer's business, including their all
important costs, have been tied down by the ever
inquisitive retail chain, has the pendulum swung as
far as it could? We all know what happens to
pendulums when they have gone as far as they can in
one direction. Now, I cannot surely be the only
person who has thought about this. I am sure that
directors of some of the large producers out there
must have thought to themselves "how did we let this
happen?". Perhaps some of the smaller producers
whose management can't even visit the washroom
without permission from the retailer (it seems) are
also thinking "enough is enough".
Just think of this: who has put the capital and risk
into the very expensive plant that is needed in a
production environment? Not the retailers. Who has
the skilled staff including engineers and designers?
Certainly not the retailers. Who has detailed
product knowledge within their own spheres? Retail
chains, by their very nature specialise in putting
largely unskilled staff in large buildings with rows
of shelving and a line of checkouts. They can only
ever have a superficial knowledge stretching accross
the vast product ranges they sell.
I know I have painted a picture of poor downtrodden
producers that have been conquered by those nasty
retailers. Firstly the retailers are not nasty at
all - they are just doing their job - so let's not
blame them. And there will be many producers out
there who rather like the status quo and don't want
to rock the boat. OK, so they don't get the kinds of
profit margins they would like, but they do get
volume. Though in my opinion, the reason why many
producers want to leave things as they are is that
they are slaves, even if they don't realise it.
It's a kind of drug dependancy, but with the drug
being high volume sales and the drug pusher being
the retail chain. It's a familiar pattern. The
producer is forced to reduce costs by a retailer
promising higher volume in return for a greater
share of the margin, so the producer invests in
larger production facilities, faster machinery and
takes on more staff. This is fine until the producer
realises that he is now dependent on the retailer.
The producer is now in the position where he must be
given volume orders in order to ammortise his costs.
The retailer says: I can give you volume, but you
must give us more margin. For some producers the
moment of truth comes when they need to take a leap
into a big new production facility in order to keep
up with these demands. So, they take on a loan and
expand the business. Now they need a constant fix of
volume business, not only to keep the factory going,
but in order for their business to avoid bankruptcy.
Some producers who have converted to this high
volume business have gone so far with it, and have
partnered so closely with their master retailer that
they simply see themselves as an extension to the
retailer and will not contemplate change.
Others may feel differently. They may be run by more
indpendently-minded bosses, or may have kept up
sales to other outlets in order to keep some trade
going that is outside the sphere of the retail
chain. I am sure that some producers want to see
that pendulum start to make its way back, even if it
is just a little way. But what can they do? Well,
things are changing out there, so opportunities may
arise sooner than expected.
Firstly, there is safety in numbers. Just ask the
unions, or a herd of wilderbeest. I can see
alliances taking shape over the next few years
between non-competing producers who, between them,
can offer a full range of products to consumers. Why
can't they open their own retail outlets? Remember,
the billions made by today's retail chains will no
longer need to be serviced, so prices will be very
competitive and margin healthy.
Secondly, there is pressure on fuel supply and
prices. There has been a recent blip that might fall
off again, but most experts agree that the long term
trend is that prices will rise. As fuel costs begin
to impact margins and even product prices there will
be pressure to retail goods as close to their source
as possible. It may even make sense to sell goods
directly from a producer's own shop. In the UK,
local farmer's markets have taken a significant
slice of business away from supermarkets. I am
suggesting here that this principle could be
extended to more local selling opportunities from
producers and not just farmers.
Thirdly, there is an increasing trend - mainly
driven by legislation - to re-use parts in products
that are at the end of their life and to re-use
packaging. This reverse distribution will benefit
once again from having producers as close to
consumers as possible and it may benefit further by
cutting out the retailer altogether for the return
of goods.
Finally of course, there is the internet - shopping
on line. Not a cashier or a shopping trolley in
sight. Yes, distribution infrastructure is still
required, but remember that many bricks and mortar
retailers have still not fully got to grips with the
structures that are required to distribute internet
sales. The internet gives producers a wonderful
opportunity to change the order of things to their
advantage and sell directly to end users.
What many large retail chains have done has been
breathtaking and can only be admired. They took
control of their supply chains and used their new
influence and power to their advantage and therefore
to the advantage of their shareholders. Just
remember though, that retail chains consist of
unremarkable buildings, staffed with unskilled
labour and with low-tech plant. They do not produce
goods (usually) and they do not own any brands apart
from their own. Their main asset is customer
goodwill with the large throughputs of customers
visiting their sites. If this throughput is
threatened by high fuel prices or because of
alternative attractions, then these large buildings
will become white elephants. If this ever happens,
the decline could be swift and decisive, for those
retailers are just as addicted to their customers as
producers are to them.
There is a lot to be said for buying your products
as closely as possible to their source. Arkay
Hygiene sells fly killers. Yes they are stocked by
retailers, but Arkay Hygiene sells most of them
directly from their web site at www.eeeee.co.uk.
Perhaps they are already ahead of the game.
