Of all the practices operated by some supermarket chains today, the most odious and probably the most resented has to be that of the over-rider.
Nowadays this over-rider has a number of euphemisms, “Promotional Support Fund”, “Volume Rebate”, “Marketing Initiative Contribution”, the creativity goes on. But when that envelope containing the invoice thuds on the supplier’s desk the reaction remains the same - pig sick.
And what are these over-riders all about anyway? Why can’t suppliers and customers operate in a normal or traditional trading pattern. Why is it that some supermarkets don’t get involved with this nonsense while others see it as an integral part of their culture?
You want to sell this product to me? How much do you want for it? Can I mark it up and sell it for the derived price? Is it competitive with others in the supply and demand equation? And is it safe? Pretty simple really. Everybody knows where they are, no messing about, there is a deal or there isn’t.
Well the truth has to be found somewhere but as an outsider to the world of supermarket buying departments, one can only postulate. However, I don’t believe it has anything to do with euphemistic descriptions.
Could it be that supermarkets see over-riders as a useful device to circumvent margin investigations? Recently the OFT completed a survey to establish if suppliers were getting a fair share of the retail price. This was of course the wrong question in the first place, but actually, surprise surprise, the survey found that the supplier was generally getting a fair share.
But was this fair share calculated before or after over-riders were applied? My guess is that the examination excluded over-rider considerations. Did any supplier feel brave enough to even raise the point?
This is a very important issue. In normal circumstances a supermarket will look for something like a 30 per cent margin. It will deduct running expenses and overheads of around 26 per cent and leave a margin of four percent on sales. Seems reasonable - more than most in the fresh produce industry generate - but defensible.
If a two per cent over-rider is then deducted from suppliers’ remittances and added to the normal supermarket trading profit, the impact is dramatic. It increases a supermarket profit performance by a massive 50 per cent.
At the same time it decimates a supplier’s bottom line and ferments a passionate, seething but suppressed resentment.
Alternatively, do over-riders provide a pool of funds which can be stored up and used for corporate purposes? Declare your half-year results on normal margin information then pour in over-rider funds to enhance Christmas trading results or end of year performances. All very useful for the share price.
Irrespective of the rationale, I believe the imposition of over-riders is fundamentally wrong and in breach of my interpretation of the Supermarket Code of Practice as enunciated by the OFT.
I believe it is very clear in its code, as illustrated in my opinion by the following:
Part II, Subsection 4
No retrospective reduction in price without reasonable notice.
A supermarket shall not directly or indirectly require a supplier to reduce the agreed price of, or increase the agreed discount, for any product unless reasonable notice of such requirement is given to that supplier in writing before the relevant supplies of that product are made.
Part II, Subsection 5
No obligation to contribute to marketing costs.
A supermarket shall not, directly or indirectly, unreasonably require a supplier to make payments towards that supermarket’s costs of buyer visits, artwork & packaging design, consumer or market research, refurbishment of stores or hospitality.
Part II, Subsection 9
Limited circumstances for lump sum payments as a condition of being a supplier.
A supermarket shall not directly or indirectly require a supplier to make any lump sum payments as a condition of stocking or listing that suppliers products unless either:
a) such payment is made in relation to a promotion,
b) such payment is made in respect of new products.
Part III, Subsection 14
Suppliers not predominantly to fund promotions.
A supermarket shall not, directly or indirectly, unreasonably require a supplier predominantly to fund a promotion.
From every angle, it appears to me that the imposition of over-riders is a breach of the code.
“Ahh, but all our suppliers have signed documents which enthusiastically support the concept of returning X per cent to us each year for these purposes”, will be the outraged cry from some supermarket buying departments.
“We have the letters to prove it”, they will add.
And it is true, they will have.
But any supplier facing the threat of his volumes being reduced or being delisted altogether will readily sign almost anything - a bit like a torture victim, anything to stop the pain. He may be locked up for life but that is better than death, he may think.
There can be little doubt in many suppliers minds that, in most instances, the payment of an over-rider is a pre-condition of being a supplier to some of the nation’s leading grocers. The best line I have heard was, “We are the best club in town and this is the membership fee”. No mention of purpose there then.
It is my belief that all over-riders, or any incarnation of the name, imposed after April 20, 2001 when the Code of Practice effectively came into force, are a serious breach of that code. It seems unlikely that suppliers will have the bravery to refuse to pay them so it must fall to the OFT to stop the practice.
Every wriggle and device dreamt up by supermarkets to justify and maintain the practice must be thwarted by the OFT. Reflect on this. If you were a supermarket chief executive with a profit level of, let us just say a billion or two pounds, and let’s just say, a third of that came from over-riders, I guess you would do a bit of wriggling.
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