Tag Archive for: Retail

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Why Isn’t Competition Working in the UK Petrol Market?

Why are prices so high in many countries, including the UK? Global forces and events are part of it, but there is increasing evidence that firms providing goods and services are increasing profit margins at the expense of the consumer. This week’s report on petrol prices in the UK from the Competition and Markets Authority (CMA) was an example of this. Calculations show that margins have increased over the last three years and we are all being ripped off to the tune of some 6p per litre. Competition was “not working as well as it should be” said the CMA.

But surely, in a dynamic, capitalist society, excess profits leads to new market entrants, who compete on price and undercut the current providers, whilst still making an adequate return?  The economists would agree that this is the case – but only in a perfect market. And you need certain conditions for that, including that it must be reasonably easy for new entrants to establish themselves.

That is the problem here and in many other markets. For a number of reasons, there are so many things we all buy where we just don’t see real, strong competition, because it is almost impossible for new entrants to break into a market.  Look at petrol retailing. Finding new sites and getting planning permission would be a nightmare. The capital cost of building the premises would be huge, with all the legislation (quite rightly) around petrol storage and handling adding to the burden.

Look at how difficult it has proved for new retail banks to break into a market still dominated by firms that have been around for centuries – even though most consumers don’t rate those providers very highly.  We haven’t had any new supermarket chains in the UK for some 30 years now since Aldi and Lidl (who were already long established elsewhere) started here. Again, the barriers to entry, from planning issues to up-front cost, as well as the financial power of the incumbent firms, all make it very tough.

So we have the cost of entering a market, legislative burdens and incumbent power as key barriers to entry. Geography is another; I’m not going to drive another 10km each way to buy slightly cheaper petrol, and lose all my “savings” on the extra mileage!

But particularly when we come back to corporate procurement, some of the market dominance we see has been caused in apart by the actions of customers and indeed of procurement professionals. I gave five examples of the ways in which this happens in terms of corporate procurement in the Bad Buying book. Here are the first two.

1. Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries, only the largest can meet our needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, who often offer real innovation, flexibility and service, are shut out of the market.
Buyers assume economies of scale, that “bigger is better” and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you  see dis-economies of scale – the buyer pays more as the they spend more.


2. Buyers value consistency above innovation and experimentation. At times, you should value tried and tested solutions over exciting new ideas. “Ladies and gentlemen, welcome to the flight, this is the very first plane to be fitted with an exciting new automatic pilot system, and we will be turning it on once we’re airborne”.  You might not want to hear that!
But take caution too far, and you help create markets dominated by a few large suppliers, with increased risk of buyers suffering from dependence. That’s relevant in private firms and perhaps more so in government, where risk aversion from employees and politicians means companies get into dominant positions because buyers “know” they’re a safe choice. That doesn’t always work out – Serco and Capita seemed to be safe for major UK government work, until both ran into severe financial difficulties. More willingness to engage with other initially smaller suppliers over the years could have created a more dynamic market.

Whilst we may not be able to do anything much personally about the supermarkets dominance of the petrol (and groceries) markets, we can take actions to mitigate the risk that we accidentally help to create monopolies or oligopolies in our business (procurement) lives. We should aways be thinking about how we can contribute to dynamic, competitive markets, with new entrants regularly arriving to put pressure on established firms. That’s the healthy situation that we should hope for and work towards where we can.

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Waitrose Denies that New Systems are Causing Stock Issues

We write pretty regularly about public sector procurement disasters, probably more than we cover private sector failures. When I was researching and writing the Bad Buying book, I found it easier to find stories about government entities than those featuring major private sector firms.

There are a number of reasons for that. Some areas of government spending – such as defence – are just very difficult and complex.  So it is a challenge in any and every country to execute that type of  procurement well. There is also the political factor, politicians who want to leave a “legacy” for instance, or who want to pursue a certain policy despite the fact that there is no procurement solution that is likely to work.

But the biggest reason is probably just the nature of government, meaning there is a higher probability that a disastrous IT system implementation will get into the public domain. So we find out about numerous tech failures in the UK public sector, going back to the DSS ICL “Benefit Card” fiasco, to the ongoing Home Office/Police Airwave failure.

So it was interesting and unusual to see a high profile private sector firm mentioned in the press recently for a significant IT problem. According to the Times, Waitrose, the upmarket supermarket chain and part of the John Lewis Group, has seen problems with stock management in recent months, which is being blamed on the implementation of a new Oracle / JDA ERP system.

But it is an odd example, because although the Times report was quite detailed, Waitrose has strenuously denied that there is a problem. So the newspaper says, “The idea is to replace the partnership’s antiquated systems with the Oracle system. But during the switchover, when the two systems have to temporarily “talk” to each other, the Oracle system has been producing incorrect numbers. Every time a new part of the system is introduced, more problems emerge… “

The report says that product availability has slipped from 3/94% to around 91%  compared to an industry average of 92%. Well, to be honest, that does not sound like a major problem, although many readers did comment on the article to back up the claim, complaining about lack of product in their local stores. Particularly cheese …

Waitrose then denied that there is a particular problem or that there are system issues, claiming that their product availability is still better than several major competitors. But one point which did make me wonder was the statement that the implementation has been ongoing for 6 years now. That does seem like a long time – even given Covid – to get a new system in place.  

Coincidentally, I heard from a friend the other day about another organisation in a very different industry (but one that will be well-known to most readers here) that has had major Oracle implementation problems this year. Now clearly many ERP implementations do succeed, or Oracle and SAP would not have grown to be two of the largest tech firms in the world. But it is also clear that things can go wrong.

I included a salutary tale in the Bad Buying book, all about FoxMeyer, a US pharma distributor. That ERP implementation appeared to set off a train of events that ended up with bankruptcy, and illustrated a number of common failings in IT disasters. The case study seemed to show defining the requirement wrongly; relying too much on external consulting-type expertise for the implementation; several suppliers sharing unclear accountability and blaming each other when things went wrong; trying to integrate different systems that did not really want to integrate; and poor programme management. We all probably recognise some of those warning signs.

So whatever the truth about Waitrose, if your organisation is planning or going through a major systems implementation, be very careful. Get the right expertise lined up, including at a minimum, some internal “intelligent client” resource even if you are using consultants for much of the work.   Be cautious, do your risk management properly, define accountabilities, never assume different systems will integrate easily (e.g. consider the data architecture), plan carefully, put the governance and reporting in place….

It is a long list, so good luck!

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Mars Bar Shortages – Is This The End Of Civilisation?

Never mind Ukraine, the energy and cost of living crisis and the national political paralysis in the UK – a real crisis has hit the headlines. The shops are running out of Mars Bars!  I spent the first nine years of my post-Uni career at Mars in Slough. It was a great firm, and still is, I believe.  But it seems hard to accept the official company line that “high levels of demand” is the cause of these shortages.

Various press reports suggest that many supermarkets and wholesalers are out of Mars Bars, with some shortages reported for other products from Mars Confectionery such as Snickers and Twix.  (Personally, when I had a free choice every morning in the office, I chose Twix over Mars, and actually also preferred Revels, Topic, Maltesers and of course the finest  confectionery product ever invented – Plain Bounty).

Looking at this issue, it’s worth understanding some of the core principles of Mars and indeed the confectionery industry. Most purchases of Mars Bars are “impulse”. Now things have changed a bit over the last 30 years, with a much higher percentage of products bought from supermarkets rather than corner shops, newsagents and sweet shops (remember those?) But even supermarket multipacks are quite likely to be the sort of item that isn’t necessarily on the shopping list, but just gets picked up on impulse.

Other items are “demand” items – customers demand them and will go to another shop if they can’t find it in their usual place. Milk, tea bags, vegetables, maybe beer these days… So if you are selling an impulse item, “availability” is the whole basis of your sales strategy. Forrest Mars Senior (now deceased) was obsessed with getting Mars products on sale and prominently displayed in every possible location where a customer might feel a bit peckish, or fancy a treat. He will be turning in his grave at these stories of out-of-stock products in major retailers. So what has caused the problem?

I think we can rule out the demand factor, whatever the firm is saying. Confectionery sales are correlated with temperature in the sense that heat reduces demand quite significantly. We’ve had the hottest summer ever in the UK. So although it has cooled down a little in the last week or two, I just don’t buy the claim that somehow consumer demand has overwhelmed the Mars factory. So what else could it be?

Well, it could still be temperature related. Chocolate is very temperature-sensitive stuff, as you will know if you’ve ever left a Mars Bar in your car, handbag or jacket pocket on a hot day! Not pleasant…  It may be that the super-hot temperatures we have seen has somehow disrupted production. I seem to remember the Chocolate Room (yes, that is a real thing in the Mars factory) could overheat at times. Perhaps production was reduced in July because of the 40C temperatures and that is feeding through to the shops now? Or maybe finished stock got heat damaged?

Another possibility is supply chain issues – a lack of raw materials, or perhaps even packaging (I speak as the ex-Head of Packaging Buying in Slough). But I suspect that we would have seen more general industry issues if this were the case. Mars has always been one of the best firms in the sector in  terms of procurement, and has followed a more “partnership” approach than many competitors. That is in part because of “mutuality” – one of the famous Five Principles of Mars.

It means that everyone who interacts with the firm should benefit from it and whilst we occasionally joked about that when we were in tough supplier negotiations, basically it did matter. So I find it hard to believe that Mars would be finding the supply chain more difficult than Cadburys, Nestle or Hershey.  However, Hershey has also warned of shortages, so maybe there is something in this hypothesis.

The critical nature of raw materials also means that if there were shortages, I would expect Mars to pay more than most would to preserve supply. As well as the availability and impulse issue above, Mars would be terrified that a 200-Bars-a-year customer might try Cadbury’s Star Bar in the absence of their favourite and think “oh that’s nice”. OK, that’s unlikely as Star Bar is a disgusting “rework product” – maybe I’ll explain that another day. But you get the point.

Could it be staff sickness or shortages? I doubt it. The factory is highly automated now and Mars pays well above the norm so it seems unlikely. Equipment breakdown? Again, Mars is very smart, has top engineers – I just can’t imagine that. Perhaps a commercial dispute with the supermarkets is the issue, as we saw recently with Tesco versus Heinz and Mars Petcare (Whiskas etc).  Well, none of the retailers have said anything and the fact that the wholesale channel is also reporting difficulties seems to suggest this isn’t the case.

The only other possibility I can think of is some quality problem with a large batch of product. Whilst Mars QA and testing is second to none, it is always possible that a dodgy batch of skimmed milk or freeze-dried albumen powder got into the production process somehow. If it was only discovered some days or weeks later, maybe product had to be scrapped? It seems unlikely but it is possible.

Anyway, someone must know. Drop me a confidential note if you know more. In the meantime, Cadburys Caramel, Rowntree’s Toffee Crisp, and Kit Kat (preferably plain chocolate) are the substitutes of choice.  

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Why is the USA Running Out of Baby Formula Milk?

Quite a few stories of procurement and supply chain failure we hear (and quite a few of those included in my Bad Buying book) have at least an element of humour about them. KFC running out of chicken wasn’t very funny for the senior management there, and the customer who phoned the police to complain that he couldn’t get his fried chicken obviously took it seriously.  But for most of us, we probably had a chuckle. Government failings are annoying when it is taxpayers’ hard earned money being wasted; but it is rare to see a case of supply chain failure that actually has the potential to cost the lives of babies.

But that is the situation in the USA, where shortages of formula milk for infants is threatening the health or even the survival of very young children. But why is this happening, in one of the wealthiest, most technically advanced nations in the world, where capitalism has over the decades brought a high standard of living (in global terms) and abundant supply of almost everything and anything to its people?

It is a complicated situation, and I’m only giving an overview here. The shortages appear to be driven to a considerable extent by manufacturing plant shut-downs, driven in part by quality issues identified by the US Food and Drug Administration (FDA). FDA (food and drugs administration).  As Sky News reported, “Abbott Laboratories was forced to shut its site in Sturgis, Michigan and recall a number of its powdered formula products after four babies who had been given formula developed bacterial infections”.  No firm link has been proven but the Michigan factory has been closed for weeks.

Even when the factory re-opens, it will take 8 – 10 weeks to get product back on the shelves, the company says. And once shortages emerge, panic buying inevitably exacerbates the situation, and there may be a bit of a baby boom going on in the US too. The U.S. government also has pretty rigid trade policies, making most formula imported from Europe illegal to buy in the United States. Tariffs act as another deterrent.  Maybe that is genuinely for health reasons; or maybe it is at least in part a nice bit of protectionism to suit the manufacturers.

But from a procurement point of view, this market concentration and the inflexibility of government-funded schemes for lower income people have contributed to the problem. Two companies – Abbott and Reckitt Benckiser – dominate the industry with about 80% national market share.  Nestlé, which sells under its Gerber brand, controls another 10%.

Part of the reason for these firms’ success is that they are the only makers approved by the US government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which supports low-income families. It appears that most States, who fund these schemes, have negotiated deals with just one provider.

The Guardian reports; “ Nearly half of baby formula in the US is bought under the Wic program, aimed at helping low-income women, infants and children. States give exclusive contract rights for this formula to one company under a bidding process. Abbott provides formula to about half of the babies receiving Wic benefits. When these products disappeared, families were left scrambling to find alternatives”.

This has driven what has proved to be an unhealthy level of market concentration, as it also seems that production is also pretty concentrated within firms in terms of the number of production plants. Now procurement can’t always control market dynamics; but could government as well as buyers (in retail chains for instance) have done more to encourage new suppliers and a more competitive market?

So the old principle of consolidation, aggregation and leverage that procurement has lived by for decades has been driving behaviour here. But once shortages kick-in, recipients of the WIC benefit have been unable to find the approved supplier’s product, leaving them in a desperate state – and an example of the unintended consequences of what must have seemed like a sensible procurement strategy. The U.S. House of Representatives has now passed bills to try and address the shortage. One would waive certain requirements that limit brands and quantities of formula recipients of the special supplemental nutrition for women, infants, and children can purchase, according to CBS News.

Again, supply chain and procurement risk and resilience has not been considered as it should have been here, with cost driving the decisions. We’ve seen over the years so many examples where procurement behaviour has driven dependence on a few suppliers – or even just one (there’s an interesting example featuring VW cars in the book, for instance). It rarely ends well. So next time someone says, “we should rationalise our supply base and dramatically reduce the number of suppliers”, do remember that strategy can have benefits, but also caries risks. Be aware of that and develop the strategy accordingly.

Back to the highly concerning baby milk story. I’m sure more will emerge, and if you want a fuller explanation, I can recommend Kelly Barner’s excellent podcast here, in which she goes into more detail in terms of what has been going on.

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