UK Retail: Will history repeat itself?
Posted by Tom Lawrence on Mon, Nov 21, 2011 @ 05:17 AM
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It is no secret that UK Retailers are having a tough time at the moment. Although year-on-year sales have increased 0.6%, consumer and business confidence is still low as we enter the festive period. The most recent sign of deteriorating confidence was M&S' announcement that it plans to make suppliers contribute towards its own £600m refurbishment programme.
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We have witnessed these types of approaches before. And they usually fail, both in the public and private sectors. We don't know the detail of the M&S plan, and what, if anything, they are offering suppliers in return - so it's hard to predict how successful it will be. However I can't help wondering - is it smart to ask a supplier, whose margins have already been squeezed during the negotiation process, to now pay for the privilege of working with an organisation beyond what was agreed in the contract?
Firstly, how does the supplier benefit from this? The problem with these types of schemes is that by their nature they are often one sided - i.e. the supplier gets nothing in return for giving up a part of its margin - in the M&S case the suppliers are being asked to pay 1.3% of their annual sales, which will be material. Where they are not one sided, we have seen them to be a triumph of optics over reality, where the supplier is giving a discount either for a significant extension on the contract, or worse because they know that they can claw it back during the life time of the contract.
It is telling but not surprising that there are reports of M&S suppliers which have already refused to pay. All it needs is for that to get out (which it now has) and not only does the scheme fail as other suppliers follow suit, but the reputation of the company in question is impacted. Either way, a degree of trust is broken, and in any future negotiations suppliers may be less willing to be open, honest, and cut their margins to the bone. The longer term result might even be that higher overall prices are paid because suppliers need to commercially 'self-insure' against the risk of periodically being squeezed post-contract.
Has anyone seen instances (or nuances) of where this style of approach has worked and what are the benefits from a suppliers' and the organisation's perspectives?
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