Combating ruthless supermarket buyers

IF THE public knew what they were like, supermarket buyers would probably be less popular than used car salesmen, politicians or journalists.

It takes a certain type of person to make a career of demanding lower prices from suppliers, threatening to reduce their shelf space, and playing them off against each other.

But as car salesmen, politicians and journalists would say, someone has to do it. There are many more suppliers and products than supermarket shelves, and it makes sense to stock products that generate the most profit.

Suppliers and supermarkets constantly compete to exert the most influence over consumers. Suppliers hope their brands will appeal enough for consumers to choose them despite a higher price, or even go elsewhere if they are not in the current store. Supermarkets offer cheaper alternatives and hope consumers will forget about the brands.

For farmers supplying fresh food to supermarkets, this presents major challenges. Creating a brand that attracts the loyalty of consumers is difficult at any time. When the product can vary according to weather or seasonal conditions, has no distinctive pack or label, or it all looks just the same, it is really tough.

A good example is fresh milk, where discounting of home brands has cost milk processors hundreds of millions in lost equity. Most consumers have no particular preference for branded milk because there are no perceived benefits.

With discounting now extending to fruit and vegetables, a similar outcome seems likely. Whether they supply supermarkets directly or through wholesalers, growers will be on the receiving end of the supermarket buyers.

The chances of getting supermarkets to take a different approach are probably no better than of getting used car salesmen to behave responsibly, politicians to be truthful or journalists to be objective. It just isn’t going to happen.

That being the case, producers need to understand their options. There is no future in railing against something that cannot be changed.

A practical option for many is to become a cost-competitive supplier. This is really no different from the approach many take already, except it probably requires a more conscious awareness of what is involved.

By that I mean excellent cost control, the adoption of modern productivity tools as soon as they demonstrate a positive cost-benefit, and achieving sufficient scale. The aim is to reduce unit costs of production to as low or lower than competitor producers. Since quality costs money, this should be no higher than adequate. Producing superior quality produce is pointless unless it attracts a premium price.

But not everyone can become a least-cost producer, some do not want to go down that path, and those who do pursue it are not necessarily prevented from attempting other strategies at the same time.

Broadly, the alternative strategies involve being different. In marketing terms this is called differentiation.

One of these is to use an alternative distribution channel, such as selling direct to small retailers or the public with no middleman. This may offer an opportunity to become recognised and achieve higher prices over an extended period, with no supermarket buyer to ruin it.

Another is to sell the pick of the crop at a premium price. Already the best of some fruit and vegetable crops are sold to export customers at higher prices than domestic buyers are willing to pay. If a domestic premium market could be created outside the supermarkets, growers could create their own brands. Moreover, consumers would come to realise that supermarkets cannot offer low prices and high quality at the same time.

Milk processors are moving down the differentiation path by offering branded forms of reduced fat and high calcium milk to compete with supermarket brands of plain milk. If enough consumers are persuaded, sales of low margin plain milk will decline.

The public might not know about supermarket buyers, but fresh food producers need to find ways to reduce their influence. Like used car salesmen, politicians and journalists, it’s not likely they’ll learn to love them.

David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at reclaimfreedom@gmail.com

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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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