Monday, 24 November 2014

"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.


Anonymous said...

M&S asked? How quaint. In my auditing days (c15 years ago) their likes would just get hold of the published accounts, work out how much of the profit was down to them, and send a credit-note request for whatever they thought their share should be.

Almost every audit of food and textiles companies involved pitched battles over dodgy provisions which the client wanted to have in place because turning in a decent set of numbers was just asking for another margin squeeze.

The thing is, some companies thrived in the environment and they got better and made more money faster than Tesco et al could squeeze them down. Those that failed were on fairly shaky foundations in the first place.

Shiney said...

Not necessarily......

I own a small (v small) supplier to the major supermarkets - not going to name the category so don't ask.

If you supply these guys you have to 'play the game' and know the financial dynamics of their business.... when you can say yes and when you say 'fuck off'. For a supermarket buyer changing suppliers, especially on own label contracts, is a PITA as they have a shit load of paperwork to do - and they are generally lazy b'stards - so as an incumbent you have that in your hand, plus a load of knowledge etc etc. Just know when and how to play it and never, ever get mugged by assuming you run a lifestyle business or are more than 3 months away from meltdown.

Yes we get beaten up from time to time but still make a tidy living thanks very much.

Lola said...

Rear axle widget makers can be BIG too - Hardy Spicer say..

Bayard said...

"Hardy Spicer say.."

Didn't they make the rubber doughnuts that went into the Triumph Vitesse rear suspension?

Lola said...

B. The rubber doughnuts were in Imps and lotus Elans. Herald/Vitesse/Spitfire/GT6 used a swing axle with a UJ (probably made by HS) at the inner end.
From memory they also made stuff like whole axles.
LR Defenders used a Salisbury axle. I think Salisbury is part of Dana Corporation now who, from memory, are a driveline component manufacturer.
And what about Getrag and ZF. Very big gearbox suppliers to all sorts of people.

Mark Wadsworth said...

S, you have understood The Rules and have worked out a clever way round them, so well done. A lot of these suppliers unfortunately don't even understand The Rules so they don't worry about working out how to survive.

L, yes I'm sure car manufacturers buy in some components from large businesses. But I guess that British Leyland and Land Rover are larger than Hardy Spicer or the others you mention?

Bayard said...

L, I beg to differ, having taken said doughnuts off a scrapped Vitesse along with the lower wishbones and fitted them to my Herald, many years ago. However, it might have been a MKII Vitesse. But yes, ISTR that the "Hardy Spicers" were actually UJs, now you come to mention it and they were the ones with balls in them.