Jmcrnal ~J/Retailing am/C.n~umer Services. Vol. 5, No. 2, pp. 77 86, 1998 ,~ 1998 Elsevier Science Lid All rights reserved Printed in Great Britain 0969-6989/98 $19.00 + 000
Pergamon
PI I:S0969-6989(97)00004-0
Power relations in the UK grocery supply chain Developments in the 1990s Emmanuel Ogbonna Card([f Business School, University of Wales CardiJf Colum Drive, Cardi[f CF1 3EU, UK
Barry Wilkinson School oJ Management. University of Bath, Bath BA2 7Ay UK
The heightened dependence of grocery manufacturers on a small number of major grocery retailers is well documented. Retailer concentration, new channels of physical goods distribution, the emergence of own label products, and the use of new information systems have combined to increase the capacity of the retail giants to exert power over their suppliers. However, our research suggests a more complex picture and therefore the need for further exploration of power in the grocery supply chain. This is because first, differentiated relations between suppliers and buyers complicate the picture of supplier dependence; secondly, because ambiguity and contradictions arise from legitimate activities. © 1998 Elsevier Science Ltd. All rights reserved Keywords: power relations, grocery sector, U K
Introduction Fundamental changes in the UK grocery sector over the last few decades are well documented. Researchers have focused on the changing relationship between retailers and their suppliers and the widespread consensus is that the balance of power has shifted from grocery manufacturers to grocery retailers (Akehurst, 1983; Baden-Fuller, 1986; Dawson and Shaw, 1990; Wrigley, 1993; Burt and Sparks, 1994). This article explores this assumption by using empirical data gathered from retailers and manufacturers. The picture we paint is more complex than many have suggested: differentiated and contradictory relationships between retailers and manufacturers must be understood, and the influence of a changing institutional context embracing conventions of 'fair trade' must be taken into account. After describing the methodology, the article provides a review of some of the relevant literature on interorganisational power re!ations. This is followed by an outline of the UK grocery sector, then a discussion of the impact of industry concentration and recent developments in systems of distribution, product labelling, and information processing. Interviews conducted by the authors with retail and manufacturing managers show a complex set of power dynamics at play. Finally, on the basis of our findings and analysis, we provide a commentary on the
need for further research to explore the changing relationships more fully.
Methods In addition to an analysis of broad sectoral trends, we conducted a series of interviews during 1992 and 1994 with senior managers in large grocery manufacturers, and with both senior head office managers and buyers in some of the UK's leading grocery retail companies. Previous studies have tended to abstract conclusions primarily from quantitative data, such as concentration ratios, market shares and percentages of goods sourced through centralised distribution channels. While this is important, it neglects the subjective judgements of power relations by key actors which can have a bearing on how and when power is exercised. Our qualitative data is derived from semistructured interviews with 50 managers ~ from six of the UK's major grocery manufacturers and five of the top eight grocery retailers. Interviewees were prompted to pass comment on their perceptions of shifts in manufacturerretailer relationships and their consequences for their organisation's current practices and future strategies. We i The term ' M a n a g e r ' is used in a generic sense to refer to senior head office personnel up to director level.
77
E Ogbonna and B Wilkinson
have endeavoured to provide our illustrations from a range of companies to demonstrate what appear to us to be general trends in the industry. The names of participating organisations have not been disclosed and care is taken to preserve the anonymity of the individuals interviewed.
Inter-organisational power relations The concept of power evokes different sentiments from different researchers (March, 1966), in part because researchers have approached the concept from different disciplines. For example, the marketing literature is dominated by a focus on the power implications of 'channel relationships' (EI-Ansary and Stern, 1972; Hunt and Nevin, 1974; Gaski, 1984; Brown and Fern, 1992), the economics literature is concerned with the identification of market structures and the locus of control within it (Palamountain, 1955; Haflebower, 1957; Porter, 1980) and behavioural scientists have focused on the social and psychological dimensions of power-dependence relations (French and Raven, 1959; Pfeffer and Salancik, 1978; Pfeffer, 1981; Das, 1988). Although the literature includes a range of perspectives, most researchers agree on the notion that power resides in the ability of one party to make another do what s/he would not have otherwise done. From research on inter-organisational relations, a number of approaches have emerged to explain how and why such power may be held. For instance, one approach emphasises the degree of sales and profits that one party contributes to the other: the greater the contribution, the greater the level of power (EI-Ansary and Stern, 1972; Kale, 1986; Frazier et al., 1989). Another approach refers to the availability of alternatives and the cost of switching to such alternatives. The argument here is that power will be held where few or no alternatives exist and/or the cost of switching to such alternative is high (Cadotte and Stern, 1979; Porter, 1980). When interpreted in the light of the above, it is possible to argue that dependence becomes a major source of power whether it is explicitly and overtly exercised or not. In short, the dependence perspective is the cornerstone of most theories of power. Dependency theory makes the simple argument that the power to control or influence others resides in the extent of the other's dependence on one for the things s/he values (Emerson, 1962; Hickson et al., 1971 ; Pfeffer, 1981). Such a theory has been applied at many levels, from the relations between married individuals to the relations between economically inter-dependent nation-states. Applying the theory to inter-organisational relations, Pfeffer and Salancik (1978, p.271) have argued that: organisations are controlled by an external source to the extent they depend on that source for a large proportion of input or output. Some writers have emphasised that power to control is not just dependent on variables which can more or less be controlled by the party holding power, but also the extent 78
to which the party over which the power is held has 'countervailing' power. This type of power refers to the ability to counter the other party's power such that it is not exercised or its effect neutralised (Hunt and Nevin, 1974; Etgar, 1976). Indeed, Howe (1990) has used the concept of ~countervailing power' to characterise the relationship between manufacturers and retailers in the UK grocery sector. The presence of 'countervailing' power, which can almost always in practice be found to a greater or lesser degree, forces consideration of the distinction between 'exercised' and 'unexercised' power, and this is an important aspect of the power literature which is pertinent to this paper. As Gaski (1984) has argued, there is a need to distinguish the capacity to exercise power from the actual exercise of power. Wrong (1968) was more vocal in calling for this distinction, observing that one is 'potential power' while the other is 'exercised power'. He went on to argue that it is the exercise of power that forces alteration in behaviour and hence should be the focus of research. Other researchers argue that a focus on the potential to exercise power could render the concept of power meaningless, as this is difficult if not impossible to operationalise (Butaney and Wortzel, 1988). Here we argue that an understanding of both 'exercised' and 'unexercised' power, however difficult the latter variable is to operationalise, is important. Indeed, the distinction between the two is difficult to uphold. That is, even where there is no obvious evidence of power being exercised, power potential may influence behaviour. If a party to a relationship knows that a misdemeanour will inevitably result in detection and retaliation, it is less likely that the misdemeanour will be committed in the first place. The need to impose sanctions (a highly visible exercise of power) is hence reduced with effective systems of surveillance (Rule, 1973: Foucault, 1979; Dandeker, 1990). A separate but related point concerns perceptions of power. While economic and market structures and dependencies may give power capacities to parties to relationships, the likelihood of their exercising power may be influenced by 'taken for granted assumptions' derived from an 'institutional environment' (Brass and Burkhardt, 1993). Hence it is conceivable that while power capacities might change in line with changing market structures, key actors and decision makers may prefer to operate in ways which have been informed by habit, custom and practice, and implicit understandings of 'the way things should be done'. This takes us to a third important point, that considerations of legitimacy and ideology are likely to enter the discussion. Relations between parties to an exchange (eg retailer and manufacturer) are not necessarily based on purely amoral considerations, as economists who assume 'pure markets' would have it, but may be informed by social conventions and notions of 'fair play'. That is, 'markets' may be 'socially constituted' (Granovetter, 1992). For instance, well established norms of cooperation and commitment may reduce the likelihood of a more structurally dependent party being exploited (Provan and Gassenheimer, 1994). This is not to deny that appeals to ethical ideals or social conventions may
Power relations in ttle UK groceo~ supply chain
cynically and consciously be made by economically interested parties purely in order to legitimate a particular relationship or practice. Indeed, institutional sociologists may go too far in discounting economic explanations of business structures and practices (Oliver, 1992; Smith and Meiskins, 1995). But whether the ideological appeal is morally or amorally made (which has to remain an empirical question) social and psychological processes of justification must be understood. All this introduces issues of legitimacy and ideology in retailermanufacturer relations which are often ignored, particularly in the economics and marketing literatures which dominate the subject. Hence we would argue that not only has the study of power relations in the U K grocery sector failed to explore differentiated relationships, it has also tended to neglect the social dimensions of those relations. Most importantly here, is to recognise that retailermanufacturer relations do not exist in a vacuum, but in a wider social and political context which regulates those relations: specifically, both parties may wish to act, or be seen as acting, within 'fair trading' conventions, or in a way which does not impinge unduly on 'consumer sovereignty', however loosely defined these terms might be in practice. In the language of dependency theory, an organisation's power is not necessarily only a function of economic structure. Organisations may also be dependent on political approval or at least acceptance of their activities for their continued legitimacy, and ultimately their existence. We will now discuss some of the broad trends in grocery industry structure and their apparent implications for power capacity, before introducing some of the more detailed industry developments and evidence from our own research which suggest the need to understand first, market differentiation, and secondly, the subjective understandings of power relationships held by key actors in retail and manufacturing companies.
Industry structure: trends in the 1990s Much of the literature on power in the grocery supply chain contends that a necessary, if not sufficient, condition for a shift in power from grocery manufacturers to grocery retailers has been a concentration of the retail sector (Baden-Fuller, 1986; Grant, 1987; Wrigley, 1993). The argument is that the major retailers have been able to take advantage of their size to exercise purchasing power, and to take control of the key variables of distribution and information which adds to power capacity. Retailer concentration since the 1940s is unambiguous and striking. Concentration has been massive, and has continued into the 1990s, as the figures in Table 1 demonstrate. The growth in the market share of the multiples - defined in Table 1 as having 10 or more retail branches - has resulted in a situation where, by the end of 1995, only 10 companies accounted for 58.9% of retail grocery sales, and where the top four retailers alone accounted for 41.1% (IGD, 1993 cited in The Grocer, December 1995).
Table 1 Grocery market shares by types of outlet (% of sales), 1982-92 Year
Multiples
Co-operatives
Independents
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992"
64.7 66.7 68.7 70.1 71.8 72.9 73.9 74.2 75.8 77.8 78.0
13. I 12.6 I1.9 11.6 I1.1 10.9 10.9 10.8 10.3 1(/4 10.4
22.2 20.7 19.4 18.3 17.1 16. I 15.2 15.0 13.9 II .8 11.6
"Estimate. Source: Trends in Groceo, Retailing - - The Market Review IGD, 1993.
Concentration has been attributed to various factors ranging from technology (Dawson and Sparks, 1986; McKinnon, 1990) to branding (Davies et al., 1986; Uncles and Ellis, 1989; Davies, 1992, 1993; Butt, 1992; Fernie, 1992) and availability of funding (Wrigley, 1991 ). Notwithstanding the increasing sophistication of retail strategies and developments reported by researchers, it is the social and economic changes in Britain, characterised by a higher standard of living on the part of a more mobile and more geographically concentrated population that enabled the transformation of the sector. The latter trend was encapsulated in the popular sociological concept of 'affluent worker' in the 1960s and 1970s (Goldthorpe et al., 1968). Continuing concentration into the 1990s has confirmed the establishment of a grocery retail oligopoly. Concentration among the grocery manufacturers, on the other hand, has a much longer history (Grant, 1987), The extent of concentration can vary markedly across different sectors, but is typically high. In the important food sector, which accounts for well over half of all grocery sales, just seven companies accounted for almost half the total turnover by 1988. Within specific grocery manufacturing sectors the degree of concentration is even more marked. For instance, at the turn of the decade Associated British Foods account for about 35% of the UK bakery market, and United Biscuits holds 47'¼, of the biscuit market and 38'¼, of the snack food market (Keynote, 1991 ). Among the six large grocery manufacturers we interviewed (all household names) each could claim between 25 and 54'¼, of a specific but significant grocery product. Both the manufacturers and the retailers are, then, heavily concentrated. However, when we compare the two sides we see that the growth of the largest retailers in the first half of the 1990s has surpassed that of the largest manufacturers. Table 2 compares turnover growth over a four year period among the major players. The 1990s have seen at best a steady growth of major tbod manufacturer turnover, but a continued boom in top retailer turnover. The concentration of food manufacturing has occurred primarily through small company acquisition, but in the context of overcapacity in most sectors (Keynote, 1995). On the surface a high degree of concentration on both sides might point to a balance of power between oligopsonistic buyers and oligopolistic sellers, as is argued by 79
E Ogbonna and B Wilkinson Table 2 Turnover of major food manufacturers and grocery retailers 1991 and 1995 (£ million) Manufacturers
1991
1995
Retailers
1991
1995
Dalgety Associated British Foods Tate and Lyle United Biscuits Reckitt and Coleman Northern Foods
3769 4877 3262 2979 1987 1187
4906 4894 4510 3001 2352 1971
Sainsbury" Tesco" Safeway" Asda Isosceles Kwik Save
8696 7097 4729 4468 3119 1785
12 627 12 094 6069 5285 3156 2992
"Figures for Sainsbury, Safeway and Tesco are for 1992 and 1996. Source: Compiled from Annual Reports.
Howe (1990). However, while the largest grocery manufacturers may hold huge market shares within their specific sectors (for example, Persil washing powder, Heinz baked beans and Kelloggs corn flakes) their goods will, even taking sometimes diverse portfolios into account, nonetheless typically account for no more than one or two per cent of the total throughput of a retailer (Martin, 1990). The implications of this for retailer dependence on specific manufacturers is unclear. Taking Heinz baked beans or Persil washing powder offthe shelf might in itself have little effect on total retail turnover. However, the danger of losing customers loyal to Heinz or Persil to other retailers could in theory prove very costly. On the other hand the implications for manufacturer dependence on large individual retail chains is more clear cut. If 10 or 20% of one's goods are sold through one retail chain, it is difficult to credibly threaten to withdraw and sell elsewhere.2 The power of the large retailers is reflected in the prices of goods charged to the small independents, as opposed to the multiples, who are given significant discounts. According to an Economist Intelligence Unit (1988) report the independents were paying ! 0-12% more than the multiples, partly because manufacturers had come to rely on increased prices to wholesalers (who in turn supply independents) as a means of redressing the imbalance in profit margins. As Grant (1987) observed, until the end of resale price maintenance, manufacturers were the source of almost all product innovations and new product developments, they controlled retail sale prices (and therefore retailers' margins) and physical distribution, they were responsible for almost all advertising, and they powerfully influenced retailers' stocking and displays. The growth of major retail chains, however, led to a shift in the balance of power and gave the large retailer the opportunity to exert influence in areas previously the prerogative of the manufacturer. Perhaps unsurprisingly, food and drink manufacturers shifted their lobbying position from one of opposition to government restrictions on the freedom of manufacturers and retailers to negotiate business terms to one of strong support for a code of conduct (Grant, 1987). We return to this point with recent illustrations later. 2 One survey of under 35 s in superstores (reported in Davies et al., 1986) tbund that 60% would buy another brand rather than visit another store. What the actual effect of removing brands from shelves would be remains, however, a matter lbr speculation. In other words we can only guess about the criticality and substitutability of specific branded goods.
80
Other developments with power implications Size alone does not necessarily increase power, but size has enabled the large grocery retailers to take control over physical goods distribution, to generate vast amounts of customer information, and to introduce own label goods. Added together, these developments have enhanced the power of the major retailers. In the past, manufacturers controlled distribution and 'pushed' goods through relatively small retailers. Today, the vast size of the large retailers means they have been able to move to a system where they can 'pull' goods through from the manufacturers. Large retailers have deliberately moved away from direct purchasing from, and delivery to, stores, towards centralised purchasing and centralised distribution systems based on their own central warehouses, often with computerised ordering and invoicing systems. Researchers have reported major retailers channelling around 90% of their stock through their own large regional distribution centres with many employing the services of specialist third party distribution firms (Fernie, 1992; Howe, 1992). Advantages to retailers include bulk purchase discounts, improved stock control, and tighter security all of which are said to have significantly contributed to the growth of the major retailers (McKinnon, 1990; Fernie, 1992). In this context, it is more likely that the large retailer, rather than the manufacturer, will directly determine stock holding and product range on criteria of space maximisation, turnover, quality and profit margin. Retailers are increasingly likely to desire just-in-time (JIT) deliveries, which can be costly and damaging to the profitability of manufacturers (Duke, 1996). Warner (1988) documented considerable disgruntlement on the part of suppliers to this situation, particularly among smaller manufacturers and the suppliers of class two and three brands. An area of perhaps greater importance than distribution is control over information, particularly customer information. Retailers, having 'spatially disaggregated establishment networks' (Lockett and Holland, 1991), have traditionally suffered problems of coordination and communication. The key recent development here is the ability of a small number of large retailers to generate vast amounts of information through EPOS and related systems on customer buying habits, daily demand variations and geographical variations. In the 1980s the benefits realised from EPOS were
Power relations in the UK groceo~ supply dudn
significant but largely focused on internal efficiencies. For instance, savings were made from cutting out the labour involved in individual pricing of goods and faster and more inefficient throughput at the check-out. Customer throughput information was also used for more efficient staff scheduling, and for limiting fraud by eliminating the opportunity for check-out operators to deliberately enter lower prices on the keyboard (from information provided by Tesco and Asda). Some retailers have also used EPOS information to establish throughput norms and to monitor the number of items per hour that check-out operators pass through (Economist Intelligence Unit, Retail Business no. 385, March 1988). More recently, with the rapid diffusion of EPOS through most of the stores of the major retail chains and with the benefits accruing from improvements in internal efficiencies and delivery scheduling being realised, retailers have increasingly turned attention to more strategic uses of the vast amounts of information being generated based on more sophisticated analyses of the data. These are being made possible with the development of system-wide information technology superstructures (Lockett and Holland, 1991; Cunningham and Tynan, 1993) which involve investments in head office systems with telecommunications links to stores and distribution centres. At the turn of the decade such investments began to overtake investments in EPOS itself (Keynote, 1990). Increasing sophistication of information use can put suppliers (and competitors) who lack such knowledge at a distinct disadvantage (Hogarth-Scott and Parkinson, 1993). In particular, the key developments which bear on the manufacturer-supplier relationship are systems for improving market analysis, and those relating to automated sales and stock handling systems. The more intimate knowledge of consumer behaviour in particular allows the retailers to be precise in attempts to change buying behaviour, with significant successes reported in recent trials (Keynote, 1994). It is the emergence of own label goods which most directly threatens the established major manufacturers. In 1965 only 10% of total packaged grocery sales were retailer own brands, but by 1979 the figure had risen to 22% and to over 27% by 1984 (Retailing World, 1985; Grant, 1987; West, 1988). In 1990, 54% of Tesco's sales were own label (Martin, 1990) and in 1993 Sainsbury, Britain's leading retail chain and the leader in own label products, had 8000 own label lines which accounted for two thirds of sales if fresh meat and produce are included (Keynote, 1994). The latest figures show over one third of the important food sector to be own brands (The Grocer, 29 June 1996). Greater size gave retailers more leverage to obtain favourable deals on own label ranges, and they became a relatively quick and easy means of bolstering margins and profits. Having a successful own label range also helps give retailers a 'store franchise' to counter the manufacturer's 'brand franchise' (Davies et al., 1986; Davies, 1992). The ambition of all the major retailers to extend own label market share still further is confirmed by massive increases in
advertising expenditure focused specifically on own labels (as distinct from general retail promotion) in the late 1980s and early 1990s (Retail Business Quarterly Trade Reviews, No. 32, December, 1994). In 1996, four of the top 10 highest advertised food grocery brands were retailer brands. Some industry analysts believe the encroachment of own label goods is the main factor behind the relatively poor performance of food manufacturers in the first half of the 1990s, and the British Producers and Brand Owners Group have vigorously campaigned (largely unsuccessfully) for greater legal protection against 'copycat' retailer competition. At the same time as introducing more and more own labels on various grocery items, frequently causing considerable publicly expressed consternation on the part of some manufacturers, the retailers have also begun a process which arguably could be called diversification. Own label petrol sales are well established, and retail banks and building societies are now discovering a new source of competition emerging as club cards become more akin to 'own label banking' (The Grocer, 8 June 1996). Having discussed the literature on broad trends in the grocery industry and their implications for power relations, we now turn to our own evidence to explore the power dynamics at play.
Research findings The relationship between the manufacturer and the final consumer is now less likely to be mediated by a whole plethora of small retailers, and more likely by a handful of giant retail chains• As long as retailers were small, autonomous and dispersed, they were highly dependent on the (large) manufacturers. This is no longer the case. As one manager of a grocery manufacturer commented: •.. if you go back to the fifties . . . the strong manufacturers did pretty much try to entbrce their will on the retailers in terms of stockholding, range of stock, payment... (but) the bigger they are the more important to us and, therefore, the more power they have in negotiations• Now the negotiating boot has moved foot and I think it's not surprising that some of the major retailers equally have tried to impose their will on manufacturers and demand better terms.[Senior Manager, Manufacturer 1] However, some manufacturers still dominate certain market segments, and both major retailers and manufacturers suggested a balance of power: 1 believe the issue of concentration in tbod retailing and the perceived power associated with this has to be viewed in context. For example, while the petfood market is highly concentrated, the fresh food market is highly fragmented...[Buying Director, Retailer 1] Everyone complains about the major retailers having too much power but they either do not know or they choose to ignore the fact that Nestle, Pedigree, Unilever and Procter and Gamble each have between 30 and 60% of their respective markets. [Trading Manager, Retailer 2] 81
E Ogbonna and B Wilkinson
We are a major manufacturer of food with a world-wide presence. In the UK, we have about two and a half per cent of everything that is sold in a supermarket and our leading brand has 60% of the market. [General Manager, Manufacturer 2] We enjoy a professional trading relationship with retailers. We have very strong brand franchise in many areas and the retailers know this. They know they can't push us around as they do with some of the smaller players. [Sales Director, Manufacturer 3] A balance of power is further suggested by the fact that so far there is little evidence of retailers simply dictating the price of branded manufacturers' goods. Our interviews with major food manufacturers revealed little evidence of the retailers having detailed knowledge of manufacturer cost structures and profit margins which would be essential if retailers wished to exert a detailed control. Neither our interviews nor other evidence reveals widespread attempts to directly dictate prices. On one occasion in 1977, Tesco removed all Nescafe and Maxwell House coffee from supermarket shelves for a month, thereby forcing them to cut prices (Martin, 1990). And one manufacturer we interviewed related a similar recent episode, but which, in this case, ended in the retailer capitulating. However, these instances appear to have been exceptional, implying that the retailers' continued dependence on manufacturers' brands, at least in some sectors, limits retailer exertion of direct control. This is likely to be the case particularly where, as one m a n u f a c t u r i n g m a n a g e r put it to us, 'understood but unspoken' agreements to resist price cutting or supply own label exist between oligopolistic manufacturers. On the other hand, as concentration increases further, and as own label goods come to dominate more and more grocery sectors, more direct retailer influence over manufacturers' operations cannot be ruled out. The same applies to the quality of goods. Evidence of retailers dictating quality is sparse, and only one of the six major manufacturers we interviewed agreed that its quality systems had been improved in the light of changing retail strategies in the 1980s. All companies, including the latter, claimed any quality measures they had taken were at their own initiative. Again, however, more direct retailer influence cannot be ruled out as a possibility in the future. Both retail and manufacturing managers were indicating that specific sectors of grocery retailing andmanufacturing are heavily concentrated. By implication, the relationship between the leading firms in heavily concentrated sectors (retailers and manufacturers with high market shares) is likely to differ from that involving the retailer with high market share and a manufacturer with low market share and vice versa. However, while both large manufacturers and large retailers generally argued for the new situation to be characterised as one of mutual dependence, they generally agreed that retailers have greater advantages in certain important respects. For instance: A problem for us is that 80% of our business is with retailers and 50% of that is with major retailers. Although 82
we have very strong brand loyalty, we rely on the retailers to get the products to the consumers. [Senior Development Manager, Manufacturer 4] There is an inherent conflict between suppliers and retailers because the former is volume driven and the latter is value driven. We have several products and brands and we can't afford to be volume driven. [Senior Buyer, Retailer
3] In our dealings with retailers, we have to realise that they are both our customers and competitors and we are not about to do anything that will help them to erode our market share. [Senior Manager, Manufacturer 6] The retailer interface with the final customer, and the emergence of own label brands, are perceived as highly problematic by the manufacturers. We will now explore these further. The ability to 'get to know the customer' and all the advantages that brings has been improved dramatically through developments in information technology which have enabled increasingly sophisticated data collection and analysis. Both retail and manufacturing managers were acutely aware that the information generated could benefit all in the supply chain. Equally, they all recognised the potential power which control over information accords them. The following views were expressed by retailers: We can easily pull figures on the performance of certain manufacturers especially during product launches or special promotions and we can use these to our advantage both in negotiations and in asking them (suppliers) to make the sizes or even change their packaging to suit us...We can also do this by being selective in the information we show them. [Senior Manager, Retailer 4] We are not in the business of giving information for nothing ..... this is our competitive edge and we are not about to erode it. [Senior Trading Manager, Retailer 2] in contrast, manufacturers were more conciliatory, conceding that the lack of direct access to the data at the disposal of retailers represented a major disadvantage. The following comment was typical: We are very aware that the retail end of the trade has got ready access to the customer...the data is very important to us and this is an important area to look at when one is talking about the relationship between retailers and manufacturers. [Director, Manufacturer 5] In general, manufacturers noted that retailers were becoming more sophisticated in their use of technology, a view which contradicts the popular wisdom that retailers are not fully realising the benefits of the data they generate from their systems (Lockett and Holland, 1991; HogarthScott and Parkinson, 1993). As the number of retailers taking control of their own brands has increased, the emphasis has shifted to the creation of customer loyalty to the store rather than just the product (Uncles and Ellis, 1989; Davies, 1992; Fernie, 1992). There has also been an intensification of competition with an increase in the number of tertiary and budget brands competing with the dominant manufacturers' brands and the retailers' own brands (See Economist Intelligence
Power relations in the UK ~,,rocerv supply chain
Unit, 1993, Retail Business, No 430). Notwithstanding the above, the manufacturers we interviewed claimed not to be badly affected by these developments, as they were operating in markets with high entry barriers which retailers have so far been unsuccessful in breaking. One of those entry barriers was continuing strong brand franchise which the manufacturers preferred not to threaten by supplying own label. Indeed, there were suggestions that sector oligopolists would tacitly collude ip maintaining their position: We are the market leaders in (..) and we don't supply own labels. I think you will find that the other major companies don't either. We don't want to confuse the consumers . . . t h e y know that if they want good (the product) they buy ours. [Director, Manufacturer 5] We have an unwritten rule not to supply own brands. So long as we all keep to this, the retailers will not be able to break our brand franchise because no one can make [the product] as well as ourselves and [another major manufacturer]. [Senior Manager, Manufacturer 6] Two of the six major manufacturers in our study did supply own labels, but here they suggested that their decision was motivated solely by the desire to minimise problems of excess capacity, and that they only did this in areas where there was no major threat to their already established brands. The main potential problem with own label brands identified by the manufacturers was the increasing pace at which retailers could design products identical to those of the manufacturers. This, they claimed, was detrimental to the whole industry in the sense that it could reduce innovation. The changing relationships between retailers and manufacturers has been popularly characterised in many quarters as an emergence of 'partnerships' (Dawson and Shaw, 1990; Fernie, 1992; Hogarth-Scott and Parkinson, 1993). However, it is unclear as to precisely what these partnerships entail. While the manufacturing managers we interviewed largely saw the development of partnerships as the way forward in the industry, the retail managers were more cautious and indicated that partnerships were only pursued where there was clear benefits to the retailer. Some manufacturers presented an optimistic picture: We see them [retailers] as partners in many ways. We involve them in our planning and new product developm e n t . . . W e have structured our business to coincide with their own infrastructure and management structure. I believe both parties have benefited. [General Manager, Manufacturer 2] Other manufacturers were pessimistic: All this talk about partnership only means one thing. They [retailers] want to have even more knowledge of what we do and how we do it so that they can further erode our competitive advantage. [Senior Manager, Manufacturer 3] The retailers on the other hand, despite public claims of 'mutual benefit', were clear in their insistence to us that the pursuit of partnerships was self-interested:
We are developing partnerships with some of our suppliers because we expect the supply base to be consolidated so that instead of receiving three products from three dif ferent suppliers, we would receive them from one at a lower cost. [Director, Retailer 1] We all want partnership so long as it is on our own terms. Retailers will only follow routes where it is in their interest to do so. We have the power to dictate the agenda and will only pursue partnerships in areas where our interests overlap. [Senior Manager, Retailer 4] No matter how close you get to your suppliers, the objective is to make money. Our aim is to enter into partnerships where it is going to help us to achieve our objectives. [Director, Retailer 5] A qualification here is that some of the retailers who are large, but not inside the top four in terms of market share, see a potential disadvantage in the emergence of partnerships. One senior manager from a top eight (but not top four) retailer observed: We are somewhat at a disadvantage. Some suppliers are so heavily in bed with [top retailer A] and [top retailer B] because of their size and history. This means we need to identify alternative competitive approaches. [Director, Retailer 5]
Analysis and conclusions While our empirical evidence confirms the widespread perception of a shift in the balance of power between grocery manufacturers and grocery retailers, it would also suggest qualification of the notion of a shift from a supplierdriven to a buyer-driven commodity chain. More specifically, it would suggest that to speak of power relations in the grocery industry without attaching a referrent is problematic. Our interviews suggest the existence of significant differentiated relationships, each having different power implications. First, there is the relationship between major brand manufacturers and the top three or four retailers. Here, there is a perception of a degree of mutual dependence, and while the advantages retailers are given through market share and customer information may give them a great power capacity, the manufacturers retain a degree of countervailing power through brand franchise. Hence retailers often find that they have to tread carefully. Manufacturers have also been willing to appeal to government to curb retailer power which, they claimed, was to the detriment of customer choice and the price of goods. Political opinion in the 1980s and early 1990s has, however, probably been favourable to the retail oligopoly: the Office of Fair Trading's (OFT) conclusion in 1985 was that lower retailer buying prices were being passed on to customers and that the public interest was not being harmed. But while receiving official blessing, the retailers have had to contend with continued ideological attack. The response of the Food and Drink Federation ( F D F ) to the O F T ruling was to question the interpretation of the phrase 'in the public interest', and accusations of 83
E Ogbonna and B Wilkinson
retailers 'swindling' customers by charging 'exorbitant prices' have continued into the 1990s through the media (The Observer, 1992). Maintaining legitimacy can be an important motivator in developing inter-organisational relations (Oliver, 1990), and it is perhaps in response to a perceived threat to legitimacy that the major retailers increasingly employ the rhetoric of 'partnership' and 'commitment' to characterise their relations with some of their major suppliers (Warner, 1988). Our evidence, however, confirms the observations of other recent work (eg Davies, 1993; Shaw and Gibbs, 1995; Duke, 1996). That is, genuine partnerships are not easily found in the grocery supply chain; relationships are more often strained, and sometimes adversarial. Secondly, there is the relationship between the large manufacturers who are concerned with developments in retail branding and are seeking to develop closer ties with those retailers (who are large but outside the top four) with few or no private brands. This is part of their on-going strategy to maintain brand franchise. It is possibly here that evidence of serious partnerships might be found. Thirdly, there is the relationship between some large retailers and secondary manufacturers. A number of retailers are developing strategic alliances with medium and small suppliers of secondary brands. The reason for this is that retailers see it as a way to counter the power of the major manufacturers. As some managers pointed out: If you can start eroding the power of the major manufacturers, you can stop them from being complacent. [Director, Retailer 1] Manufacturers of branded products are quite secretive and arrogant. They will come to you three months before a product is launched and expect you to come on board. [Senior Manager, Retailer 2] The major manufacturers think they know the products and the customers better than anyone else...We have noticed that they do not always know as much as secondary manufacturers. All they have is brand franchise and we are working with secondary manufacturers to shift this. [Director, Retailer 5] Fourthly, there is the relationship between retailers and the suppliers of own label brands. All the retailers indicated during the interviews that they were pursuing the development of dedicated suppliers, and that they were willing to give greater access to EPOS generated information to such suppliers. Here it is easier for the retailers to develop close relationships in which they dominate, where there is little fear of the supplier gaining advantage from access to information. The relationship is often one of exceptionally high dependence where the own brand supplier is closely controlled: We keep a close eye on our own brand suppliers. We like to know what they are doing and we would like to know that their raw materials are of acceptable quality. [Director, Retailer 3] Whenever we take on a new supplier, we tell them what 84
type of machinery to buy and the systems we require..We would also insist that they achieve the ISO 9000 accreditation. [Senior Manager, Retailer 5] We tell them that we are responsible for the goods that go through our stores and we have to be sure of the quality so as to give our customers what they want 100% of the time. We need to work with them to achieve this. [Senior Manager, Retailer 4] Our conclusions are two-fold: first, differentiated relationships must be understood to gain a more complete picture of the power dynamics at play in the UK grocery industry; secondly, legitimate processes should be included in any analysis of power relations. The major retailers publicly talk of developing 'partnerships' with the dominant branded manufacturers, yet in interviews with the authors talked of direct competition with them (against own label goods) and of the need to 'erode their power'. Brand franchise is the primary defence of the branded manufacturers, and potentially they have on their side public intervention should the retailers overstep the mark. The big manufacturers are capable, as described, of orchestrating opposition to giant retailers' strategies, albeit without great success so far. While both sides appeal to the needs to maintain competition and customer choice, there was no evidence from our own research to suggest that they were pursuing anything other than their own perceived rational interests. N onetheless, the ideological battle - - appeals for the moral high g r o u n d - - was clearly important in the pursuit of competitive advantage. Some of the large (top eight but outside the top four) retailers, on the other hand, were attempting to develop special relations with the branded manufacturers I whether large or small - - in an attempt to attack the top four retailers. At the same time, the biggest retailers perceived an opportunity to use medium sized and small manufacturers, in addition to own label suppliers, to attack the biggest branded manufacturers. And finally, the biggest retailers were creating and developing dedicated suppliers: it was here that the most direct control was being exerted. All this suggests not only more complex relationships than are evident in the literature, but also ambiguity in relationships and uncertainty over their future. In particular, it suggests that medium sized manufacturers may not necessarily be the losers in the current restructuring of the industry. Of course, this research has only gone so far in uncovering the complexity of power dynamics in the UK grocery industry. But it is hoped that indications are given as to the direction of further research. Three aspects deserve special attention. Firstly, the power relations which characterise differentiated relationships need particular attention: for instance, very different power dynamics appear to be at play between retailers and branded manufacturers, and retailers and own label manufacturers. Second, the ambiguity and contradictions in relationships between parties needs further exploration: cooperation (eg a retailer
Power relations in the U K grocery supply chain
promoting a branded good) and direct competition (the same retailer placing a 'copy cat' own label against the same branded good on the shelf) sometimes appear to go hand in hand. Third, the legitimatory and ideological processes which accompany new strategic directions need further study: the meaning and use of ideologically laden rms such as 'cooperation', 'partnership', 'commitment', 'consumer sovereignty' and 'fair trade' are in urgent need of clarification.
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