AND THEN THERE WERE FOUR ...

As Morrisons finally lays its hands on Safeway, Helen Gregory examines the effects of a concentrated supermarket landscape on brand owners.

It is only a matter of days until Morrisons' bright yellow livery invades Safeway stores across the country. The Yorkshire chain's shareholders have approved the takeover and it took control of its rival on March 8, ending 14 months of speculation and bidding from the other grocery multiples.

The newly combined fourth force in a ferociously competitive grocery retail environment will have a 15.3% slice of the market, according to Taylor Nelson Sofres. It also stands to gain Safeway's £9bn turnover, 480 stores and eight million customers a week.

Sir Ken Morrison, the chain's boss, is expected to herald the move with a price-cutting campaign that will no doubt be matched by the other supermarkets.

Food prices are set to drop 1% as a result - good news for consumers, but not so good for brand owners.

"There will be a general toughening of conditions and more pressure on margins and costs, with retailers trying to get better and better value," predicts Kevin Hawkins, Safeway's corporate communications director.

Hawkins does not believe that small suppliers will be put out of business by the big retailers. However, he admits the chains are continuing to rationalise their supply base, which means suppliers will feel under greater pressure.

Brand owners have been feeling the heat for quite some time, as retailers looking to squeeze more out of their supply chain encourage them to disclose their accounts through a process known as open book costing.

They are also expected to make heavy investments in retail promotions, including discounts to net price, funding for consumer price reductions and a huge variety of payments, covering areas such as display, listings and joint advertising - accounting for 15% to 25% of sales revenue, according to IBM Business Consulting Services.

It's such a sensitive area that the majority won't talk openly about it, and some manufacturers fear that if they don't play ball, it might mean an end to their fragile relationships. One says his firm is spending more each year: "Buying space, listings fees, buying other people's products out - it's scandalous, but those are the rules of engagement."

Fair deals

Penny Coates, Asda's private label director, says its everyday low pricing (EDLP) policy is about minimising listing fees, adding that it tries to deal with suppliers fairly, based on the space they need. "The only way you can continue to be successful is by working closely with suppliers," she asserts.

However, there has been an undercurrent of feeling among many FMCG firms that the balance of power has shifted too far in the retailers' favour.

This unease resulted in a code of practice - a voluntary agreement by the four largest grocery multiples on trading practices - drawn up in 2002 following a Competition Commission report on the sector in 2000.

The Office of Fair Trading (OFT) expected the code to provide a framework for brand owners to make complaints about their relationships with retailers.

However, there has been a dearth of such complaints, and following an OFT review - which found there had been little change in the past two years - it has now decided to send teams of auditors into the big retailers.

The auditors will report back later this year.

Almost three-quarters of respondents to the OFT's review admitted there was a fear of complaining, with many brand owners worried they would be delisted by the supermarkets and lose business.

Despite this, retailers are keen to prove they are nice guys. Tesco invites brand owners to spend time working in its stores, while Asda has created a 'buddying' scheme, which pairs manufacturers with individual stores for customer research. In the spirit of reciprocity, it also shares detailed sales information through its Retail Links System, which means suppliers can track sales of products at individual Asda stores.

A Tesco spokeswoman also points to its meat and dairy producer clubs, where suppliers share experiences and discuss relationships. "The idea is to plan for the future together - encouraging better understanding of, and improvement for, customers," she explains.

Supermarkets have been striking 'preferred partner' deals with some manufacturers for years, which sees both sides work together to maximise sales and share customer data to inform joint promotions and the adaptation of merchandising.

Some suppliers, such as Procter & Gamble, even have staff based at retailers' head offices.

Collaborative strength

These relationships involve working on a joint business plan and usually having multi-functional teams with marketing, financial and HR people working exclusively for the retailer. It also means conducting joint market research and focus groups, explains Gary Coombe, P&G's general manager of customer business development for UK and Ireland.

He says P&G wants a collaborative relationship with all its retailers.

"The smarter retailers understand that to get the best value, they need to collaborate. Data sharing is part of that, so we can understand how Tesco shoppers respond to promotions, for example."

Tony Smith, sales director at Unilever Bestfoods, says it works with retailers on areas in which it shares common aims, such as shopper research and availability. But he insists: "This is not a case of forming cosy business partnerships between large organisations but about drawing a distinction between long-term shared strategy and short-term day-to-day trading."

These partnerships are evidently working on a practical level for other manufacturers - such as Hovis owner RHM Bread Bakeries, which customises joint promotions for retailers according to their preferred strategy.

"It would be fair to say that the quantity of Hovis sold on these deals has reduced significantly, but that is not simply a reflection of Hovis reducing investment in promotions," says Paula Moss, divisional marketing director at RHM. "Some of this is down to retailers opting to redirect investment into EDLP. Some reflects agreements with retailers to reinvest in alternative activity - for example, launching a product exclusively with one retailer and advertising in national press and running store-based activity to support it."

But as the market consolidates, will the power of a concentrated grocery sector mean that retailers get tougher on brand owners, demanding unreasonable deals and terms? Not according to Cadbury Trebor Bassett's customer relations director, Chris Morgan, who says brands and retailers are working more effectively nowadays.

"No doubt the remaining grocery multiples will continue individually to work hard at gaining market share and with this will come bigger and better promotions. I think there will be more working exclusively with retailers as the chains look for a point of difference," says Morgan.

RHM's Moss adds: "As retailers differentiate their offerings, manufacturers have to be prepared to flex their proposition accordingly."

But these are market-leading manufacturers with big budgets behind them.

Surely all this caring and sharing with retailers will depend on a supplier's size and the strength of their brand?

"Big brands have pulling power and draw people to a shop or to different parts of the store," says P&G's Coombe. But he believes that although bigger suppliers will be winners, innovative smaller companies can still benefit. "It is not about excluding others, but economies of scale do help," he adds.

Unilever Bestfoods also has strong relationships with retailers, but Smith does not believe size always matters. "Retailers listen attentively to any supplier, large or small, if they are seen as being innovative or dynamic," he says.

But it looks likely that while the FMCG heavyweights will continue to perform well, the secondary and tertiary manufacturers have more to worry about. As FMCG manufacturing consolidates further and non-food space expands in stores, less popular ambient and dry grocery brands could be squeezed out as retailers promote own-label fresh and chilled food.

"The major manufacturers are in a better position," says Steve Gotham, senior analyst at Verdict Research, "but smaller companies can still succeed by offering something different or better."

Gotham believes retailers need to maintain the importance of brands and use the manufacturers' brands to differentiate their offer. "Consumers will be disappointed with an own-label range that is too dominant and will feel their choice is being stifled," he says.

Brand value

Brands themselves need to be innovative as well as good value if they want to grab the attention of both retailers and consumers.

Tim Cornell, managing director of The Yellow Submarine consultancy, whose clients include Kraft Foods, Pernod Ricard and Marks & Spencer, says that traditional methods of boosting sales, such as competitions, prize draws and loyalty schemes, are becoming less effective.

He believes that brands are seen as value indicators by shoppers, while own-label is becoming increasingly high quality. "This situation demands a new level of excellence and innovation from manufacturers to stand out from own-label."

Smaller brands will come under even greater pressure to justify their shelf space as the multiple retailers concentrate on shopping for a bigger slice of the convenience store sector, as seen in Tesco's purchase of the T&S chain and Adminstore, and Sainsbury's acquisition of the Bells Stores chain.

Tesco believes that its strategy of acquiring these stores offers suppliers more opportunity for growth - particularly in areas such as fresh food and produce - due to increased demand for these products in local outlets.

While brands that already have strong relationships with the multiple retailers will be able to extend their reach into small stores, those not performing well could be bumped out.

But the big four retailers are convinced the future is bright for suppliers.

"The industry is extremely competitive, and a stronger Morrisons and Safeway group will increase that competition. This is ultimately good for consumers and offers the opportunity for suppliers to grow," insists the Tesco spokeswoman.

And Asda believes that the current climate of more open communication will continue. "We want to serve customers and you need to work together to do that efficiently," says Coates. "I don't think an abuse of power would be the way to do that."

Unilever Bestfoods' Smith sounds a note of realism. He says there will always be friction between retailers and manufacturers over margins or trading terms. But he adds: "What is new is the collective realisation that we can still get on with the business of driving growth for the industry."

SAINSBURY'S

Founded: 1869

Turnover: £18.4bn

Stores: 512

Employees: 145,000

Customers: 13 million a week

Average spend per visit: £30.63

ASDA

Founded: 1965 (bought by Wal-Mart 1999)

Turnover: £12.1bn

Stores: 265 (plus 2 George stores)

Employees: 135,000

Customers: Ten million a week

Average spend per visit: £30.41

MORRISONS

Founded: 1899

Turnover: £4.3bn

Stores: 126

Employees: 50,000

Customers: 3.5 million a week

Average spend per visit: £26.01

TESCO

Founded: 1924

Turnover: £26.3bn

Stores: 815

Employees: 225,000

Customers: 13 million a week

Average spend per visit: £29.22

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