By Katherine Rich, Chief Executive, New Zealand Food & Grocery Council
"Last December, Foodstuffs North Island made a big splash explaining "why Foodstuffs won't charge suppliers for shelf space anymore".
It was about "democratic shelving", so some brands could not "buy the best shelf space, the pole position at the end of an aisle" for displays. "That's gone", the supermarket chain pronounced.
It was great publicity, technically accurate, but in reality, misleading. What occurred is quite different.
To recall my Outram Sunday School lesson about good fortune often being followed by misfortune, the Lord giveth and the Lord taketh away. The supermarket pronounced it was removing payments for shelf space in one form and then implemented percentage deductions for the same amount and more in many cases.
Rather than a store-by-store negotiation for all displays, this now occurs for only 40 percent of displays in-store called "discretionary displays". These displays at store level will still largely go to the highest bidder. So, no change there.
The supermarket chain now extracts a new "display fee" as a percentage of all sales, regardless of whether a supplier gets lots of displays or none. Some New Zealand Food & Grocery Council members have been paying this display fee all year and have yet to receive a single display in return for the fee. It seems the fee is in return for the mighty privilege of just being on the shelf. This, to many people, would sound very much like a de facto charge for shelf space of the kind apparently ruled out last year.
Foodstuffs North Island's head office sets some 60 percent of displays. It calls them "compulsory displays", except they aren't compulsory, and some stores can seek exemptions or simply choose not to comply. And that's the end of it.
Some big companies negotiated a certain number of displays and accountability, but only a few small to medium-sized ones could do so. One supplier told me they were pleased to negotiate three compulsory displays in return for signing up to Foodstuffs' new business model. But after many months of paying more money, they had received no displays. So, they complained. And what did Foodstuffs do? They appeased the supplier by giving them their three compulsory displays but allocated them zero stores – yes, zero – a solution that can be described only as Monty Pythonesque.
Then there's been the slow and methodical rollout of a new "merchandising term" that amounts to between 3 percent and 7 percent of a product's retail sales value. As suppliers know well, merchandising is all about putting products on shelves arranging displays. This extra demand has caught some suppliers by surprise at what they thought was the end of a range review.
Some suppliers have reported a "just one more thing" approach at the end of a protracted discussion when they've been told their products have been accepted. That additional requirement for acceptance is agreeing to the sizeable merchandising term.
Many smaller suppliers have had no choice but to accept this, so what do New Worlds and Pak'nSave's give them in return? The privilege of store staff placing the product on the shelf is a task many people consider a true retailer cost. Foodstuffs have described this charge as an "investment" in the store's own wages account.
It's an indication of just how much power grocery retailers wield that many stores believe putting the stock on the shelves is not a retail function or a cost they should bear.
Many suppliers over the years have employed their own people to go into stores to check shelves, restock, and prompt reordering because some stores have a poor track record of merchandising and checking stock levels. This has always been discretionary expenditure, and suppliers choose where they make their investment.
Now supermarkets see it as a term, a requirement, and part of a payment for shelf space. Using their immense market power, Foodstuffs North Island is telling some suppliers acceptance of their products is conditional on paying this new merchandising term.
If they disagree, suppliers lose their place on the shelf altogether. Foodstuffs are dancing on the head of a pin to say this is not a charge for shelf space of the sort apparently ruled out with great fanfare last December.
The ability to make such extreme demands for margin and new terms without an exchange of services is symptomatic of the current supermarket duopoly.
If there were genuine competition in the market, these sorts of demands would not get across the line because suppliers would be able to judge they don't make commercial sense and decline.
Remember, these "merchandising" and "display" deductions are just the latest in a long list of other deductions, levies, and rebates supermarkets have started to demand since the creation of the duopoly, including the settlement discount for the privilege of being paid on time. It used to be for prompt payment, but supermarkets take the discount even when they pay months late.
When asked about new demands for payment for putting products on shelves, Foodstuffs said that was in response to suppliers asking for it to happen.
Foodstuffs North Island told the New Zealand Herald, "To ensure their [suppliers'] products are on shelf and presented well for customers, a number of suppliers had decided, or wanted to discuss further, that it is easier for the supplier if the store completes the merchandising service on behalf of the supplier, and the parties have agreed a mutually beneficial arrangement which enables the store to deliver the service the supplier had normally delivered."
To date, I've not heard of one supplier who has sought this solution, and I've heard from only those who felt they had no choice but to agree to yet another fee while having little faith in stores being able to do so the task consistently.
All of them reported reduced sales because stores had not done a good job and had to continue paying their merchandisers to go into stores to double-check the shelves had been stocked properly.
Foodstuffs North Island continues to extract extra money but, with an exception for some big companies, does not promise performance and accountability.
It's time for a Grocery Code of Conduct to introduce greater transparency and contractual certainty.
Many of the solutions proposed in the Commerce Commission's draft Market Study report will go a long way towards strengthening competition for the benefit of suppliers and consumers."