I read recently that the City was not too happy with the financial performance of Morrisons plc and demanding some changes at board level.
What does this mean? Well it means that those who have invested in Morrisons are not satisfied with the return on their investment and they would like to see the introduction of people who might improve margins for them.
I also read somewhere recently that the biggest supplier, of anything, to Tesco only accounted for some three per cent of Tesco’s turnover.
What does that mean? Well it means Tesco has a lot of suppliers and that, individually, they are small and have little counterveiling power.
The connection between these two observations is that it is the City which drives supermarkets.
The supermarkets then drive their suppliers and they, the suppliers, have precious little scope to avoid the plunder of their margins. Those with the least scope, and, ironically, the greatest business risk, are the fresh produce suppliers.
Fresh produce suppliers have to commit themselves to the long term with heavy capital and skills investment. By and large they produce a product with very little shelf life and, to caricature the position, if they don’t move it today, it goes in the skip tomorrow.
There is no brinkmanship possible. Unlike the manufacturer of baked beans or coffee or wine, the fresh produce supplier cannot withhold delivery, put his stock into the warehouse and play for time and a new deal.
So who are these City slickers who would not last two minutes in the packhouses of the fresh produce industry and what margin do they want to dictate for a supermarket?
On the face of it, supermarketing is a pretty easy job. Everybody has to eat, there are lots of competent suppliers, lots of stores, lots of parking places, pretty good logisitics, great computer technology, rigorous food laws and customers with plenty of cash (particularly the City slickers!).
All in all supermarketing is a low risk enterprise.
So what sort of return on investment might be reasonable for such an enterprise? Two or three per cent above the Bank of England base rate do you think?
Or should it be four or five per cent above base rate giving a nine or ten per cent return on investment? Certainly nine per cent would be very acceptable in the property market
Most reasonable people might say that nine per cent was a pretty good return - but not your average city slicker in a Porsche and Gucci suit. A profit of £380 million on a total capital investment of say £4bn simply isn’t good enough.
That is a 9.5 per cent return on investment. Then there is the wealth generated from share price appreciation - that’s not been compounded back into the investment equation either.
If supermarkets, in a free marketplace, all retail within a spit of each other pricewise, and some make nine per cent returns and others make 20 plus per cent, there must be a reason. Can one be half as efficient as the other? Unlikely.
Or is it simply that one pays its suppliers better prices than another? One is more responsible than the other? One takes a longer term view of its business than the other? One is simply less greedy than the other? One is less powerful than the other? Or one is less driven by the City than the other?
I think we all know the answers to these questions.
But does the government or the Office of Fair Trading?
Clearly not.
In the recent report on supermarkets’ compliance with the Code of Practice it appears that all is well. All suppliers are quite happy and relationships are good.
B******s.
In the recent authoritative report by the well respected analyst Plimsoll, “What is happening in the UK Horticulture Industry”, which appraises the top 1,000 companies, the findings are most alarming.
• 294 companies have been issued with health warnings
• Performance is mixed throughout the industry
• There is over £1bn worth of profit lost every year
• Debt is having a negative effect on the industry and
• Company sell offs are increasing
By and large, what’s left of the horticultural industry in the UK is run by highly professional and effective managers.
Thus, the parlous state of its circumstances can largely be ascribed to the pressures exerted on supermarket bosses by the City and the degree to which they in turn plunder the margins of their supply base.
There can be no doubt that free enterprise generates the most benefits for all, but with free enterprise comes responsibility.
For any supermarket to be criticised for making a reasonable return on investment whilst another is lauded for making excessive returns has to signal a serious abuse of power and should prompt the government and the people at the OFT to review their competition policies.
And sooner rather than later is recommended.
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