The horse meat scandal has got me thinking about relationships between retailers and suppliers, particularly in this zero growth market.

The horse meat scandal has got me thinking about relationships between retailers and suppliers, particularly in this zero growth market.

While there is clearly much more of this crisis to unfold, it comes against the background of a relationship that needs to be more positive and less adversarial.

The reality is that retail is becoming a progressively less profitable business. Most retail businesses have a cost line increasing faster than their sales line.

All too often supplier relationships are seen as the soft underbelly, the low-hanging fruit to transform performance.

Running a business for cash should not be a euphemism for screwing suppliers, but it often is.

The senior team may be under pressure or maybe a new leadership team has come in. The quickest way of conjuring up some incremental margin is the letter to suppliers. This will tell them their terms of trade have changed. Maybe they will get paid more slowly. Maybe they will get paid less. Maybe they will have to contribute to some kind of marketing.

It all adds up to the same thing: squeezing the supplier. So what is the supplier supposed to do?

The supplier will generally respond by despecifying the product: cutting his costs to protect his margin. He has to make a living too.

There will almost always be a cost attached to the stripping of cost. This chain reaction has all too often been ignored, and the implications for the brand franchise and therefore sales simply not understood.

Retailers have been protecting their margins like this for years. In a market that was growing, the fallout in reducing product quality and consequent damage to the brand, to the customer relationship, could sometimes be camouflaged.

This market will not allow that. Customers want more. There is more choice where to shop. And consumers are much less forgiving.

In this retail market a positive relationship with suppliers is essential. Positive means allowing them to earn a margin.

(Look what happens when one side squeezes the other far too hard in reverse: the electrical brands have all but killed off physical retailing). You need a supplier base that is reliable and consistent, not living in permanent fear of extinction.

A closer relationship allows cost reduction to be tackled in a collaborative, planned way. This can often work to the benefit of both sides and has a much better chance of being sustainable.

A brand can be defined in many ways but the best definition I have come across is that a brand is a promise. In retail the added value or profit margin is fundamentally intangible. The brand is everything. If the brand promise is broken or downgraded in some way, there will be a direct impact on market share. The customer will notice, and react.

The retailer’s most valuable asset is its name. Putting that name on a product, or indeed above the shop, is making a promise to customers. This is why a sustainable retail model must incorporate a positive partnership with suppliers.

The master-servant relationship is a price that can no longer be afforded.

  • Richard Hyman, PatelMiller, President