In most industrialised nations the the supply chain of goods from source to end user has changed little for many years. Firstly there are the producers. Then the wholesaler, then the retailer and then the customer and consumer.
In the U.S. the supply chain has always been pulled by downstream consumers. Europe had a different history where a mixture of world wars and interventionist governments led to supply chains that were pushed from the upstream end. Certainly, the rationing of the 1940's and beyond led to a culture of consumers who got what they were given and were thankful for small mercies.
As Europe has become more affluent, consumers have flexed their muscles and demanded an ever wider array of goods at a range of prices and standards. It has now joined the U.S. and most other industrialised nations with consumer-led supply chains.
A feature of this has been the trend towards large retail chains. Many of these chains have become so large that they have virtually dispensed with wholesalers, preferring instead to purchase goods directly from producers. They have also established the so called "own brand". This is where they have dictated the product specification to the producer and told them to brand it as their own product. And there is more: some of the largest chains have increasingly got themselves involved with all aspects of the supply chain from raw material sourcing, packaging procurement and design, all aspects of distribution and even their suppliers' recruitment policies.
This has resulted in a shift in the balance of power from upstream to downstream. Now that every aspect of the producer's business, including their all important costs, have been tied down by the ever inquisitive retail chain, has the pendulum swung as far as it could? We all know what happens to pendulums when they have gone as far as they can in one direction. Now, I cannot surely be the only person who has thought about this. I am sure that directors of some of the large producers out there must have thought to themselves "how did we let this happen?". Perhaps some of the smaller producers whose management can't even visit the washroom without permission from the retailer (it seems) are also thinking "enough is enough".
Just think of this: who has put the capital and risk into the very expensive plant that is needed in a production environment? Not the retailers. Who has the skilled staff including engineers and designers? Certainly not the retailers. Who has detailed product knowledge within their own spheres? Retail chains, by their very nature specialise in putting largely unskilled staff in large buildings with rows of shelving and a line of checkouts. They can only ever have a superficial knowledge stretching across the vast product ranges they sell.
I know I have painted a picture of poor downtrodden producers that have been conquered by those nasty retailers. Firstly the retailers are not nasty at all - they are just doing their job - so let's not blame them. And there will be many producers out there who rather like the status quo and don't want to rock the boat. OK, so they don't get the kinds of profit margins they would like, but they do get volume. Though in my opinion, the reason why many producers want to leave things as they are is that they are slaves, even if they don't realise it.
It's a kind of drug dependency, but with the drug being high volume sales and the drug pusher being the retail chain. It's a familiar pattern. The producer is forced to reduce costs by a retailer promising higher volume in return for a greater share of the margin, so the producer invests in larger production facilities, faster machinery and takes on more staff. This is fine until the producer realises that he is now dependent on the retailer. The producer is now in the position where he must be given volume orders in order to ammortise his costs. The retailer says: I can give you volume, but you must give us more margin. For some producers the moment of truth comes when they need to take a leap into a big new production facility in order to keep up with these demands. So, they take on a loan and expand the business. Now they need a constant fix of volume business, not only to keep the factory going, but in order for their business to avoid bankruptcy. Some producers who have converted to this high volume business have gone so far with it, and have partnered so closely with their master retailer that they simply see themselves as an extension to the retailer and will not contemplate change.
Others may feel differently. They may be run by more independently-minded bosses, or may have kept up sales to other outlets in order to keep some trade going that is outside the sphere of the retail chain. I am sure that some producers want to see that pendulum start to make its way back, even if it is just a little way. But what can they do? Well, things are changing out there, so opportunities may arise sooner than expected.
Firstly, there is safety in numbers. Just ask the unions, or a herd of wilderbeest. I can see alliances taking shape over the next few years between non-competing producers who, between them, can offer a full range of products to consumers. Why can't they open their own retail outlets? Remember, the billions made by today's retail chains will no longer need to be serviced, so prices will be very competitive and margin healthy.
Secondly, there is pressure on fuel supply and prices. There has been a recent blip that might fall off again, but most experts agree that the long term trend is that prices will rise. As fuel costs begin to impact margins and even product prices there will be pressure to retail goods as close to their source as possible. It may even make sense to sell goods directly from a producer's own shop. In the UK, local farmer's markets have taken a significant slice of business away from supermarkets. I am suggesting here that this principle could be extended to more local selling opportunities from producers and not just farmers.
Thirdly, there is an increasing trend - mainly driven by legislation - to re-use parts in products that are at the end of their life and to re-use packaging. This reverse distribution will benefit once again from having producers as close to consumers as possible and it may benefit further by cutting out the retailer altogether for the return of goods.
Finally of course, there is the internet - shopping on line. Not a cashier or a shopping trolley in sight. Yes, distribution infrastructure is still required, but remember that many bricks and mortar retailers have still not fully got to grips with the structures that are required to distribute internet sales. The internet gives producers a wonderful opportunity to change the order of things to their advantage and sell directly to end users.
What many large retail chains have done has been breathtaking and can only be admired. They took control of their supply chains and used their new influence and power to their advantage and therefore to the advantage of their shareholders. Just remember though, that retail chains consist of unremarkable buildings, staffed with unskilled labour and with low-tech plant. They do not produce goods (usually) and they do not own any brands apart from their own. Their main asset is customer goodwill with the large throughputs of customers visiting their sites. If this throughput is threatened by high fuel prices or because of alternative attractions, then these large buildings will become white elephants. If this ever happens, the decline could be swift and decisive, for those retailers are just as addicted to their customers as producers are to them.
There is a lot to be said for buying your products as closely as possible to their source. Arkay Hygiene sells fly killers. Yes they are stocked by retailers, but Arkay Hygiene sells most of them directly from their web site at http://www.eeeee.co.uk. Perhaps they are already ahead of the game.
