Morrisons' price cut strategy leaves suppliers reeling

03-Jul-2012 - Last updated on 04-Jul-2012 at 12:12 GMT

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Morrisons has left city analysts unimpressed and suppliers reeling as it battles to achieve millions of pounds of buying discounts - urgently.

As FoodManufacture.co.uk revealed last week, Morrisons summoned hundreds of suppliers to head office briefings on June 18 and said it was seeking to source greater volumes from fewer suppliers, to increase efficiency.

Suppliers said the supermarket was looking for discounts of "half a million pounds" from each of its remaining suppliers under the new arrangements.

It has since emerged from suppliers that Morrisons wants to get new trading terms and product ranges in place on an urgent basis. One-to-one meetings between buyers and suppliers are currently underway to discuss details.

One supplier, who wished to remain anonymous, told us: “They are trying to keep the City happy. They want a quick improvement in their graphs for the quarter, but I can't see anything behind that. Strategy just seems to be all over the place. It's confusing.”

'All over the place'

Analyst Philip Dorgan of Panmure Gordon said: “This is the sort of thing people do when they are struggling, trying to get fewer suppliers and better buying terms. Suppliers often cave in, but it may cause more problems than it's worth, it can also reduce choice for consumers. You can end up throwing out the baby out with the bathwater.”

Clive Black from Shore Capital suggested: “What Morrisons receives, whether it makes a difference to its offer and bottom line, remains to be seen. Also, quite how the suppliers regard Morrisons post any such activity and how its competitors view things will also be noteworthy.”

And Kate Calvert of Seymour Pierce commented: “When you are a smaller player you have to run a lot faster to keep up, there is a lack of volume growth for everyone and I am not surprised that Morrisons is looking to suppliers for discounts.”

She added that while “inconvenient” for the bigger supermarkets any Morrisons' price reductions achieved would “not make a massive difference”.

Meanwhile many suppliers remained shocked at a change attitude in a business which they had always regarded to be “gentlemanly” in its dealing with suppliers.

One supplier said Morrisons would find that it had lost the trust of suppliers: “We are concerned about where they are going with this. It undermines a lot of investment by suppliers in research and development. We won't want to take the risk if we do not think we will get the business longer term. We are a smaller supplier and a bigger player could come in and tender for the business at a loss just to get it. They'll end up with inferior products.”

Bigger shock

Another said: “We had an email about the meeting [on June 18] and when you get that sort of request you know that they will want to shake you down and see what's left in the pockets. The style of the meeting was a bigger shock. It is quite upsetting for us, Morrisons has always worked with suppliers in the past and it's and a lot of Morrisons' staff are upset that this is happening.”

One food firm ceo told FoodManufacture.co.uk this week: “We were called in to a meeting with Morrisons and the tone was surprising. There must be some bigger organisations than us, who are quite exposed [conducting a high proportion of business with Morrisons] who must be very worried now.”

Another said: “We got called in. The message was double your investment or get lost ... nice! To be fair, its margins don't stretch to 40% but the requests are ridiculous and near impossible to absolve.”

A different supplier commented: “No surprise, here really. Another supermarket trying to rip the hearts out of UK food producers. When will it end? The margins achieved by the big four are always upwards of 40% and this must be maintained for any promotional activity. Yet the majority of producers would be lucky to achieve double figures every day and break even on promotion.”

Morrisons said that it had no further comments on the “ongoing process” at present.

Comments from our Linkedin site

Trevor Parkin: “ALDI did the same thing 3 years ago, they stated that to share in their success that they expected a 10% reduction in cost off each and every supplier so nothing new. The supplier I was advising at the time pulled out.”