Joint Committee on Enterprise and Small Business
To ascertain the impact (if any) of the major U.K. multiple store chains on distributors and agents in Ireland.
Prepared by Senator Mary Henry
2.There have been major changes in the retail trade in Ireland in recent years. Firstly, there has been the arrival of the United Kingdom Multiples and secondly, there has been the take over of some smaller retail chains by larger groups. Much concern has focused on the decline in the number of small independent grocery retailers but the effects on Irish based suppliers, agents, distributors and wholesalers are extremely serious too.
3.To quote from a report by Credit Lyonnais Securities Europe on Tesco on business on the island of Ireland:-
“The pace of change in the south has been slower and will remain so. This is because Tesco not only has to change a backward, under-invested company, it has to change a whole industry.”
“The archaic state of the industry is shown by the fact that 90% of total volumes in Tesco Ireland (South) are direct delivered - often only once a fortnight. Manufacturer representatives, agents, and merchandisers are an integral part of the system. The corollary of all this is a store where the retailer has lost control of the point of sale marketing - it all reeks of the UK of fifteen years ago. It is little wonder that stock levels are considerably higher than in the main chain: we gather that the stores are running 13 days’ stock against 6-7 days in the UK. Stores receive 20% of grocery volumes from their in-house depots once a week. By early 1999, Tesco hopes to make this 60% of grocery volumes, received on daily deliveries. Reducing stock levels by a week’s cover would liberate approximately £15m of working capital.
“Distribution of fresh produce has been consolidated into one distributor. Keelings, and suppliers have been reduced from 30-40 to 10. This has predictably caused huge amounts of anguish in the Irish produce industry. The moves will enable the produce offer to be brought under the own-label umbrella by October this year.”
“The archaic structure of the industry is an opportunity, but benefits will not be unlocked in a hurry. Tesco is facing a root and branch transformation of its systems and supply chain. Tesco needs the industry, or at least its own chosen suppliers, to move with it. Management believes it will take 3 years to bring their Irish supply chain in line with the UK model.”
4.(The report later quotes a “Murphy’s” law prohibiting the development of supermarkets in excess of 3,000 sq. metres. This, I believe, should be Dempsey’s Law, the author’s having some confusion regarding the Minister for the Environment’s name.)
5.Tesco are not the only group to see the need for change in distribution in Ireland, Supervalu having changed to more centralised distribution some years ago.
7.Anecdotal evidence to members of the Small Businesses Committee led us to decide to ask agents, distributors and wholesalers in what way, if any, their businesses were being affected. Helped by information supplied by Senator Paul Coghlan, I wrote to 20 agents/distributors/wholesalers, see letter attached. Sixteen replied. “Shelf Life” newsletter heard of my letter and a front page article on our investigation was published in the July 1998 issue, (photocopy attached). This lead to more letters and phone calls to me from interested parties.
9.Only two of the sixteen original replies said they had no problem. Most expressed concern. To quote from these letters:-
10.1. “I am happy to relate that we have not suffered any adverse trends or loss of product listings with the Retail Chains you mentioned in your letter. To the contrary, we are continuously improving our export business with Marks & Spencer and Tesco. In relation to Supervalu, we are continuing to deliver directly into all stores as our product range is so diverse Supervalu are not ready to take our products on board on a Central Distribution basis.”
However, at this point in time they are still very difficult to answer as up to now there has been very little change to our business since the arrival of Tesco. The key issue facing us is the trade changes that will happen in the future. We can only speculate on these but we can safely assume they will be led by Tesco. Apart from the issues of whether Tesco will import product from the U.K. how they will change their stores (we have seen some of these changes already), what product ranges they will stock, the key issue will be if and when they move to a centralised distribution system. If they move to a centralised system then there will certainly be a major effect with the loss of both salesforce and distribution jobs. However, it must be borne in mind that while this is being laid at Tesco’s door it was an inevitable development with the Irish multiples.”
11.“With regard to Tesco there has been no change in their distribution and there has been a reduction in the amount of space allocated to our products since Tesco took over from Quinnsworth. This has had a negative effect on our sales. A recent change has been the request from Tesco Ireland to pay substantial sums of money for promotions in store. This is in addition to the high percentage which they currently receive for their retrospective discount or Long Term Agreement (LTA) as it is commonly known. We have a concern that if they open up a regional distribution centre that it will have the effect of putting us out of business and the loss of 77 jobs.
12.With regard to Boots we are currently supplying at their request those stores that they purchase from Hayes Conyingham and Robinson but not the stores which have opened under the Boots name themselves. There has been great pressure put on us not to call on these stores in the future and they are looking for a substantial reduction in the price to which we sell to them. Although they are very courteous there is a definite belief that in a very short space of time they will be taking all their products from their major warehouse in Nottingham to a smaller unit either in Belfast or Dublin, thus cutting out Irish Distributors.”
13.The products with which I deal are niche market products. Over the years I had built up quite a business with the Supermarket chains in the ----- element of the business. With the arrival of Tesco this business has almost been eliminated. Previously the products were supplied to Quinnsworth but now they have been delisted. In the other supermarket chains many of the ------ have been delisted due to the competitive situation with Tesco. Since the arrival of Tesco many niche-market products have been delisted by the other chains as they do not sell as fast as the standard products and shelf space must be maintained for fast-moving products to keep the competitive edge on Tesco.”
14.“Despite promises to support Irish suppliers, Tesco are conducting all ‘buying’ and ‘price file’ negotiations in their UK office for transnational brands. They are using their Group muscle to negotiate best trading terms which will adversely impact the Irish suppliers of these products. During discussions with the Commission in Brussels at the time of the acquisition by Tesco UK of Quinnsworth, it was argued that Tesco would be twenty times bigger than its nearest rival in Ireland (Dunnes Stores) and as such would have unfair advantage in the market place. Tesco argued that that would not be the case as Tesco would be managed on a ‘stand alone’ basis and would therefore not have an unfair advantage. The Commission accepted this argument and gave the acquisition its approval on that basis.
“However, in reality Tesco are conducting negotiations in the UK were they have a much stronger franchise and will be able to secure more favourable terms than currently offered by Irish agents who are much smaller.”
“These developments will have a major affect on our business because:-
(a)they will want terms similar to those obtained in the UK.
(b)they will not want sales, merchandising and deliveries to branches (jobs).
(c)they will want to carry out their own warehousing and distribution (jobs).”
15.“Firstly the main problem that has arisen is that the likes of Dunnes, Superquinn and smaller multiples are suspicious of special deals being made by suppliers to Tesco to enable Irish suppliers to remain on that Company’s shelves!. Secondly margins i.e. the profit margins made by the major retailers, has become a major issue and all are wanting larger margins to the detriment of all suppliers large or small.”
16.“My immediate reaction is yes there has been a detrimental effect on sales, marketing and distribution companies and in particular with the arrival of Boots, a large number of companies, including ourselves, have already noticed a dramatic drop off in sales to Boots newly acquired HCR stores and I have no doubt this will continue to an even greater level.
“Within Tesco, there is a major threat hanging over all distribution companies who supply major brands and secondary brands as Tesco continuously make noises about bringing these products in direct from the UK and already they are doing that. I know companies who have had their margins cut as a compromise to this central distribution arrangement. For our part, we have lost one major agency through the introduction of own label products directly imported from the UK by Tesco.”
17.“At the present moment in time our trade with Tesco is maintaining it’s level with comparable periods in 1996 and 1997. We do however expect it to change in the future, given that Tesco have indicated that they are changing over to sales based ordering and the introduction of order consolidators to their business. Also the emphasis that a group such as Tesco put on ‘own label’ products will have the effect of displacing brands from the shelves. The vast majority of these own label products will be imported from the UK.
“With regard to Supervalu, we as a company do not see significant changes in our relationship with this group as they have for many years been operating a central warehouse and distribution system. However, we do see pressure on margins from this outlet as a result of their perception that outlets such as Tesco are able to purchase supplies at a more favourable rate than they are, given the relative size of the two organisations.”
18.“In reply to yours of 15th June our business has not been seriously affected by the arrival in Ireland of the U.K. Multiples. We never did much business with them. A small company like ours however finds it almost impossible to even get an appointment with a multiple buyer be that buyer from an Irish or a U.K. company.”
19.“In reply to your letter of the 15th June on the effects of the UK invasion of the Irish grocery market, our company has conducted business with Dunnes Stores and Power Supermarkets and in the North of Ireland with Wellworths and Stewarts. Since the take over by Tesco the retail element of our business has been in terminal decline.”
I must add that the writer of this letter did explain how they were making up for the loss of turnover with new business.
20.Other businesses replied in the same vein, for example,
“As we are a distributor of food ingredients to manufacturers it is my view that, yes, business has been affected by the arrival of British multiples. However, in their defence and possibly to the detriment of our own business I wish that more Irish manufacturers would see the arrival of foreign multiples as a challenge rather than a threat. We need to shift into a higher gear producing products based on quality and service.”
21.An agent totally unconnected with the grocery trade and Tesco wrote the following:-
“Three years ago we had our first big problem. ------- through their London subsidiary decided that they wanted to take over ‘our’ business and handle it direct from the UK. They were not totally unreasonable, we got approximately 6 months notice, under pressure they re-purchased our stock and under further pressure they took on some of our sales staff. They did not compensate us for our twelve years of ‘building the brand from zero’; neither did we get any compensation for difficulties arising out of the loss of 30% of my company’s turnover. Office, warehouse and general sales staffs were suddenly 30% short of work, but had to be paid. Had it not been for the fact that the company was not too much over extended, the management experienced and willing to pawn their belongings to bankers, and the staff prepared to forgo wage increases, then the business would have gone under and 35 jobs lost.”
“In conclusion, it is reasonable that manufacturers must be allowed to ask for their brands to be given back to them, particularly so if the agent does not perform well. However this was never our problem, quite the contrary, the multinationals were attracted by our good performance and therefore asked for the business transfer.
“Manufacturers must be held to give sufficient notice and in order to allow he distributor/agent to survive, adequate compensation for the building period must be given. Compensation is also needed, as the effected companies will suffer from lack of work for their staff, till such time that alternative products can be brought into line.”
22.Phone calls from several companies suggested that there was an unwillingness to deal with them and that the Dublin office was of cosmetic significance.
23.I had a most useful meeting organised by Sara Morris with Tesco management in their Upper Baggot Street store. They strongly refuted the idea that purchasing was mainly done in the U.K. and that agents were bypassed.
24. Other Areas Investigated
25.To see what could be done to help these firms I contacted the Small Firms Association, An Bord Bia, the Department of Food Economics in UCC, and the National Institute for Transport and Logistics attached to the Dublin Institute of Technology. Patrick Delaney, the Assistant Director of the Small Firms’ Association, now Director, invited me to a seminar conducted by the SFA in Convention House on 25th May 1998 where I made useful contacts. Ms. Una Fitzgibbon of An Bord Bia discussed with me the changes which have taken place in the distribution chain in Ireland and pointed out it had begun long before the arrival of the U.K. multiples. For example, Supervalu has carried out centralised distribution of certain foods such as frozen and chilled food for several years.
26.I had very good discussions with Alan Collins of the Department of Food Economics in U.C.C. His paper “The Challenge of Supply Chain Efficiency: Trends in the UK Grocery Market” is most important and a copy of this is attached.
27.The National Institute for Transport and Logistics has been set up to help the very firms we are trying to protect. Dr. Stefan Bungart is the new director and attached is correspondence I have had with him.
29.In summary, these agents, wholesalers and distributors have serious problems. Some are actively addressing them already. The changes outlined in papers such as that by Alan Collins are inevitable and some very desirable, e.g. fresher food, fewer deliveries to retail outlets, less traffic, etc. The firms affected may not realise help is at hand in the form of the National Institute for Transport and Logistics and this our committee could promote.
30.I was repeatedly thanked for the Committee’s interest in this area and pass on these words of gratitude. Transport and logistics are not the same thing, too much effort to date has gone into looking at transport of goods and not enough into logistics, the flow between the manufacturer and the retailer.
31.May I thank those who helped prepare this report:- Enda Dowling, Andrew Synott from Trinity College.