"Don't tell them, Pike!"

From the BBC:

A supermarket price war is being blamed for a sharp rise in the number of food producers going bust... The company said supermarkets are squeezing producers in order to cut check-out prices and boost profits.

This phenomenon does not just apply to supermarkets, it is of general application.

Thirty-odd years ago, my Mum was a secretary at probably the last surviving textile manufacturer in West Yorkshire, and she attended the meeting with a buyer from one of their largest customers, Marks & Spencer.

The buyer asked my Mum's boss what sort of percentage of the manufacturer's total output went to M&S, so after the meeting, the boss asked my Mum to provide the figures.

UPDATE: As TTG says in the comments, nowadays M&S would probably be able to work this out from the company's published accounts etc, so wouldn't even bother asking.

My Mum then patiently explained to him that he would be absolutely stupid to even consider any such thing (hence the post title, although her boss was not called "Pike"), once one large customer is buying more than a certain fraction of your total output (whether that is a quarter or a third or whatever), they have got you by the short and curlies and can start squeezing your margins, and they will keep squeezing them until you go out of business.

The gimmick being, she explained to us kids, in the long term, a manufacturer needs to cover his fixed costs as well as his direct costs, but in the short term, any new order which at least covers direct costs is worth taking on, even if the resulting profit is not really enough to a share of the fixed costs.

I have seen this time and again, it's one thing they drummed into us on cost accounting on the printing diploma I did. Another example currently in the news is the question of tied pubs, whereby the brewery-cum-landlord persuades a succession of would-be landlords to hand over a large entry fee and bleeds them dry, rinse and repeat (that's a case of one large supplier, not one large customer but apart from that the same rules apply).

It's also prevalent in the motor industry, where most of the large manufacturers just assemble thousands of individual components supplied by relatively small businesses. Once you have tooled up everything to produce one million rear axle widgets for Large Motors Inc you can't just drop everything and tell them to get stuffed when they start knocking the price down and down.

That's the problem - that the only people who can succeed in "business" are those collecting "rent" in the wider sense* - what the solution is, if anything, I don't really know. And for avoidance of doubt, it's not Resale Price Maintenance.

* So if our rear axle widget manufacturer owns a valuable patent, he has shut out his competition for the next twenty years or so and can overcharge Large Motors Co, but even then, the really big companies can always do the little guy over.