As more retailers squeeze suppliers to offset rising costs and margin erosion, their relationship is suffering. Amy Shields asks what needs to give.

Picture a scene being played out at negotiating tables across the country: a buyer and a supplier sit across from each other. “We need you to cut your margin,” says the buyer. “There are no margins to cut,” replies the supplier. It’s a familiar dialogue and increasingly common.

As retailers face the expiration of forward hedges over the summer and volatile currency markets, they are looking down the supply chain for ways to offset inevitable price increases. As a result, suppliers – especially those in fashion – are bearing the brunt of retailers’ demands for more bang for their buck.

But how far can retailers squeeze suppliers before the proverbial pips squeak? Should the supply chain be braced for more retailers turning the screws?

Last week brought one such headline when Retail Week revealed that Bhs and Arcadia menswear suppliers were up in arms over Sir Philip Green’s decision to hike up the retailer’s discount rate 3 per cent and bring it in line with Arcadia’s womenswear brands. Green says the changes were about harmonising terms across his brands rather than a reflection of the weak pound.

The impact of a pressured supply chain was also highlighted last week when it emerged that Deloitte, the administrator to Principles, was receiving between 150 and 200 calls a day from creditors in relation to the administration. Can further discord be avoided?

Suppliers and retailers say that an open and honest relationship is vital in these challenging times to mitigate the pressures on both parties.

“Everybody has to tighten their belts all the way along the extended supply chain,” says one veteran supplier. “Each year we have to work harder at it. Things evolve, technology improves and performance has to improve. We have to be critical in a constructive way and as a supplier we have to improve.”

Relationships between retailers and suppliers vary considerably. He says: “If you are dealing on price alone you will not be in a good position. Those suppliers with strength and a unique selling proposition can basically dictate to the retailer their own terms.”

However, he maintains that retailers are increasingly using tighter supplier terms as a way of funding business and maintaining cash flow and the problem is likely to become more marked in the clothing sector as it begins to experience inflation.

A close bond

British Retail Consortium director-general Stephen Robertson says that retailers’ relationships with suppliers are often unfairly vilified.

He says: “The fact is retailers and suppliers work extremely closely together. Retailers would be lost without their supply base and suppliers give them their edge.”

“Robust negotiation is a good thing,” adds Robertson. “Do I believe there is tough negotiating going on? Yes, I do. That is what happens between a buyer and a seller.”

Verdict Research lead analyst Maureen Hinton says the situation is compounded by pressures on all sides. “Retailers are being squeezed because of the weakness of the pound and are obviously looking at where to cut costs and putting up prices is a difficult area. Prices have to go up and suppliers’ prices are going up because they have got to add more to the garment – it is a vicious circle,” she says.

Hinton says that retailers are consolidating their supply bases and building relationships with fewer suppliers. “From the retailer point of view, if they push suppliers as hard as they can they will go out of business, causing disruption to their supply chain and disruption in their business,” she adds.

The administration of large suppliers does not generate as much profile as their retail counterparts but the troubles of Bianca Alena (supplier to Bhs, Arcadia and Sainsbury’s), which filed an intention to appoint an administrator in February, and Alert Clothing Company (supplier to Debenhams, Matalan and Tesco), which appointed an administrator in the same month, were warning bells.

One supplier based outside the UK says: “Unfortunately we haven’t seen any initiatives designed to help suppliers. From the buyers that we have encountered so far this year, without exception, the margins they are working to are set higher than last year. Where is that percentage going to come from if not the supplier?”

He would like to see senior management become “more realistic” about target margins set for buyers, but adds: “This isn’t a new situation and it’s one that is not likely to change.”

A system of best trading practices should be drawn up to avoid situations such as the dropping of large orders after the supplier has acquired the raw materials, he says.

“In all such cases we have never had a company accept liability for such cancellations – the expectation being that the supplier takes the liability. In the current climate, working on very slim margins, such cancellations wipe out any profit of ongoing orders,” he says.

Suppliers were unhappy at Green’s move because it is retrospective and came into force after next season’s prices had been agreed.

Some retailers are now walking away from deals where they can’t make money. “So far this decade the word ‘partnership’ has disappeared,” says one fashion supplier who claims he has pulled out of more deals over the past 12 months than in the past five years.

He says that the pendulum, which has swung in favour of the retailer, is swinging back again to the supplier, which not only provides the garments but warehouses them, brand-endorses them and often has design input.

“If retailers want suppliers to generate the service they provide, they have got to pay them well,” he says.

The supplier says that retailers must work more closely together and share the costs. He adds: “There needs to
be openness.”

Hinton warns that the process of incorporating inevitable price rises has to be considered carefully by retailers trying to pass price increases back down the supply chain. “If retailers were to put up their prices to the consumer on like-for-like product they would come unstuck.”

One high-profile retailer says he expects price increases of anywhere up to 5 per cent once the weakness of the pound is offset by falling commodity prices. “Suppliers will be asked to share the pain of that,” he says. He adds that suppliers are also likely to pass the cost on further down through the supply chain, to fall on others such as cotton suppliers and forward freighters.

He says that retailers leaning on suppliers is just one potential reaction to the situation. “In tightened markets this could risk putting the supplier under, although there is still capacity for suppliers. There will be some that give in and out of those that do, for retailers, switching suppliers is easy. The retailer holds the cards.”

Ethics don’t pay the bills

An alternative would involve suppliers compromising on the quality of the clothes they produce to protect margins and retailers moving their production to lower cost places such as China and Bangladesh. However, the use of such markets throws up other side effects.

Ethics can be one of the first things to come under pressure. One retailer says: “It would be a foolish factory that will cut corners in terms of product. Anyone can find new suppliers, but to have the right product, suppliers need to understand the brand. If you have a distinctive brand, then a relationship with your suppliers is critical and you can’t pick them up and drop them.

“Retailers always have the option of putting up prices, but consumers have the option not to shop with them. There is a balance between gaining margin and market forces. To improve out margins you need better designed product and to work well with your suppliers.”

Aurora deputy chief executive Mike Shearwood says the “quality of the relationship” between retailers and suppliers is “more important than ever”.

He explains: “More and more these days, the retailer needs to work with suppliers to ensure there is the right balance between quality and price. Everyone’s margins are getting squeezed.”

Shearwood praises suppliers to Baugur-backed Mosaic, the fashion group that fell into administration earlier this year before being bought out by Shearwood and management as Aurora.
The suppliers continued to work with the business despite having credit insurance pulled following the Icelandic banking debacle.

“It would have been impossible for Mosaic as a business to continue for so long if suppliers hadn’t worked with the brand to help. It was done on good faith and good relationship,” he says.

However, some suppliers to Principles – formerly part of Mosaic – were left up in arms after it went into administration, leaving up to £5m of unsold stock on the water.

Shearwood says that Aurora did its best to assuage those suppliers by supporting former Principles directors to set up the Principles Trading Company – a non-profit business created to return as much money to creditors as possible by selling on stock.

Menswear supplier and Moss Bros board member Simon Berwin says relationships based on trust are achievable, citing the way business was done before trade credit insurance existed. “It was based on trust with each other,” he says.

It is no surprise to see suppliers such as Berwin taking a stake in retailers, providing beneficial synergies to both parties. Bay Trading was bought out of administration by supplier Rinku Group last month. Baird Group recently acquired menswear retailer SRG, supplier Cafer Mahiroglu bought value fashion retailer Select out of administration last year and Indian supplier Alok owns QS, to name but a few.

Suppliers are also increasingly innovating to close the gap between retailer and supplier.

A website, Epiqfashion.com, devoted to selling off stock left on the water following the collapse of Principles has launched in the UK.

One supplier says that the venture shows that selling directly to consumers could be an option for suppliers. Many suppliers already provide design, financing and logistics, and are therefore well set up to bring their products to market themselves.

However, others – retailers and suppliers alike – argue that suppliers are not retailers for a reason.

Hinton says: “Suppliers need the outlets and they don’t have the capability of taking over chains. Equally Inditex’s vertical supply chain is not easy to do. Retailing is different to manufacturing.

“If you are running a business and you have got to run it as efficiently as possible, then you have got to have a direct relationship with your suppliers. When things get better suppliers will remember the retailers that have been good to them.”

One retailer says: “Relationships are key and if we abuse them and make it one-sided, some time we are going to need somebody. When everyone is suffering, people always remember.”

What the suppliers say

“The margins buyers are working to are set higher than last year. Where is that percentage going to come from if not the supplier?”

“If retailers want suppliers to generate the service they provide, they have got to pay them well”

What the buyers say

“If you have a distinctive brand, then a relationship with your suppliers is critical and you can’t pick them up and drop them”

“For retailers, switching suppliers is easy. The retailer holds the cards”