July, 2015

Opinion

Zero-Sum Mentality At Retail Suppresses Innovation

Transparency. It has become a truism at retail that what retailers should want is perfect transparency down their supply chain. The reasoning is obvious: vendors would like to make money, and if a retailer knows exactly what the vendor’s costs are, it can make sure the vendor keeps its profits in line and these low vendor margins can keep down the price the retailer pays. With mainstream retailers flummoxed by the growth of deep discounters, this focus on a transparent supply chain is seen as a necessary tool to keep costs low.

Yet there is real reason to believe this approach is misguided. Typically, transparency requires aligning with certain vendors. After all, one can’t expect transparency with every prospective vendor; one has to partner in some way with particular vendors to get clarity on supply chain costs.

Even then it is difficult. The profitability of any company that handles multiple products and has multiple facilities and multiple customers is to a substantial degree a function of where costs are allocated. And it is rare that retailers have such a grasp on a vendor’s business they can accurately assess what is going on, much less what should go on.

Indeed because the allocation of costs in facilities serving multiple customers is so difficult, some retail executives have thought the answer is exclusivity. In this way of thinking, all a retailer needs to do is align with a particular vendor in such a way that a particular depot is dedicated exclusively to that retailer. Then the retailer can have total transparency, know it is getting the best price and proceed to compete effectively with deep discounters such as Aldi.

That is the idea, at least. If only it were so!

Often the savings don’t materialise at all. For example, to gain total control over a depot a retailer may consolidate purchases from four depots around the country to one consolidated location, but whatever operational efficiencies may be obtained can be easily outweighed by additional trucking costs to cover the whole country from one location. Even assuming that this complete alignment and transparency reduces certain supply chain costs, that isn’t likely to be the crucial variable in retail competition.

Increasingly the produce world is dominated by those suppliers with the best genetics. So what good is it aligning with a company and partnering on some depot somewhere if two months later when a competitor introduces a product with superior flavour, the retailer can’t access it?

There is something verging on irrational with thinking that keeping vendor profits low is the key to success. After all, if retailers suppress the opportunities to profit, then people of ability will seek other venues in which to find success. Surely retailers want a vendor base made up of the best and brightest.

What should retailers want? Vendor flexibility – the ability to seek the best solutions. This is not a peon to the old days of daily trading where vendors were sold down the river for a few pennies; it is a cry for enlightened self-interest on the part of retailers, and that means having the flexibility to recognise that exclusive arrangements may provide transparency, but they also remove the flexibility necessary to offer consumers the optimal choice.

Besides, why should retailers want to get involved in the nooks and crannies of the produce business? Don’t they have enough to do with retail-focused activities? In order for transparency to make any sense at all, retailers have to spend countless hours studying all this transparent data, and few have the expertise to really critique it in a meaningful way. The retailer may well know that the vendor is not overcharging, but that is no assurance the vendor is buying optimally or operating the supply chain with maximum efficiency, much less coming up with new innovations to reduce costs.

In fact, the whole system is anti-innovation. Let us imagine that some clever produce vendor actually developed a new supply chain mechanism that would save money. Under this ultra-transparent model, those savings will go right to the retailer. Guess what… if innovation doesn’t bring profit, nobody will work very hard to be innovative. That can’t be good for the produce industry, for retailers or for consumers.

The search for transparency is an outgrowth of a zero-sum mentality in which retail executives are persuaded that any gain for a supplier is a loss for the retailer. But this is not so. Business is not a zero-sum game, and vendors who come up with better-tasting produce, who develop brands appealing to consumers, who develop supply chain innovations that reduce costs… all these people expand the pie.

Retailers should get past this worry about what other people earn and focus instead on offering consumers what they want and procuring it in an optimal way. Retailers need, of course, to consider the price they pay. Sam Walton used to say he viewed Wal-Mart as the buying agent for the consumer – but how the vendor gets to that price, how much profit the vendor makes, these are distractions. If some produce grower or shipper figures out ways to operate more efficiently or provide better service or superior products and gets rich in the process – more power to him. This innovation is to be encouraged and incentivised.

The religious would note that coveting another’s share is a sin, but all retail executives need to acknowledge that such a focus, coveting the producer’s share of the profit – is a petty and shameful distraction from the job at hand: innovation in the cause of optimal efficiency, satisfying consumers and building demand for fresh produce.