BRITAIN, according to Napoleon, is a nation of shopkeepers, but are we falling out of love with our most prominent shops? The supermarket chains have been getting a bad press recently. A report by the New Economics Foundation has accused them (among others) of turning Britain's high streets into clones. Consumers are starting to notice the lack of local produce and the disappearance of small local shops.
Reflecting more direct customer discontent, some of the chains - in fact all of them apart from Tesco and Waitrose - are in financial trouble for one reason or another (in striking contrast to the banks, for example, which are all raking in record profits). And despite repeated acquittals by the Office of Fair Trading, there are persistent rumblings from suppliers about exploitation and abusive tactics used by the retailers' purchasing departments.
So far, the groups seem unwilling to see a pattern. Sure, customers punish retailers that run out of blueberries or baked beans. But that hardly dents the dominance over the shopping scene that they have built up over many years, economically, socially and managerially.
Economically, the retail chains are officially deemed to be 'a good thing'. Their tight control over prices is credited with helping to keep inflation in check, and, despite the mutterings, the verdict of the competition authorities is that although smaller shopkeepers have lost out, competition between the chains is keeping choice wide enough for consumers to benefit overall.
Socially, the supermarkets can justifiably claim to have transformed British consuming habits, driving ever-longer shopping hours, including Sundays, and changing British food shoppers from the most staid to some of the most enthusiastically eclectic in the world.
Managerially, too, the supermarkets have much to boast about. A big supermarket is a marvel of logistics and management discipline - for its supply chain and people management as well as its financial results, Tesco, in particular, is consistently one of the UK's most admired companies.
So should Tesco be worried by the grumbles? The answer is: yes, it should. And for evidence, it needs to look at one of the few things it doesn't stock in its stores - aerospace parts.
In a fascinating study of the aerospace industry in the Academy of Management Executive earlier this year, two US professors, Christian Rossetti and Thomas Choi, describe the 'dark side' of supplier relationships: just what happens when powerful, well regarded businesses at the top of the food chain (as it were) are so focused on short-term profits that they fail to read the signs of supplier and customer discontent.
Briefly, what happened was this: under pressure from cash-strapped airlines to cut their prices, aerospace manufacturers in the 1990s decided to adopt 'strategic sourcing'. Copied from the Japanese, strategic sourcing means reducing supplier numbers and concentrating orders on a favoured few close partners, with the dual aim of cutting management costs and achieving economies of scale.
All so progressive - except that the manufacturers only adopted half the prescription. Overlooking the fact that long-term relationships can only work in conditions of honesty and trust, having reduced supplier numbers they proceeded to squeeze the survivors for price and play them just as opportunistically as before.
The result was counter-productive to a degree that no one could have predicted. To survive, the suppliers started bypassing the manufacturers and, first surreptitiously, then openly, selling parts direct to airline customers. The airlines, which had long resented the high prices manufacturers charged for spares, were delighted. The manufacturers, whose profits largely derived from this quarter, had inadvertently created competitors for the most lucrative part of their market.
It got worse. By lowering maintenance costs, suppliers effectively lengthened the economic lifecycle of the aircraft the manufacturers sold, damaging their profitability again. As they grew in confidence, suppliers became potent competitors, beating manufacturers hands down not only on price but also in speed of response and quality.
Rationalisation went so far that some suppliers became monopolies, reversing the previous relationship of power. Where rationalisation was accompanied by outsourcing (which was often), the manufacturer often suffered a debilitating loss of knowledge, again weakening its position often it found that switching suppliers could now cost more in recreating lost knowledge than the saving gained from the move.
Overall, the professors describe the result as a 'debacle'. By their own behaviour, huge airframe and engine manufacturers allowed suppliers, largely small companies traditionally regarded as being at their mercy, to turn the tables, 'with widespread and broad implications for the industry'.
Supermarkets aren't the same as aircraft manufacturers. But the authors note that they believe similar forces are at work. And you can see parallels, in both the tactics used (forced annual price reductions, extended payment terms, forced inventory levels, not to mention listing and promotion fees specific to the retail industry) and the consequences.
The latter are, so far, small in scale. But what are the farmers' markets and websites which sell everything from herbs to speciality breeds of meat but a kind of disintermediation - an alliance of customers and small suppliers to cut out the bully in the middle? Importantly, this is a trend that the supermarkets should expect to continue. After all, it is they that have helped to create a more discerning customer. They should hardly be surprised if now that we have got over the excitement of quantity - Thai fish sauce, basil and year-round mangoes at every street corner - we now want quality: better meat, more organics, less salt, sugar and fat., and more local supply.
No business model lasts for ever, as food and retail companies illustrate to remarkable effect. McDonald's, Woolworths, Marks & Spencer, Sainsbury's and more recently Morrisons and Asda have all run foul of changing customer taste. Could it happen to Tesco? That seems far-fetched. But the lesson of aerospace is that the moment of greatest market power is potentially also the moment of greatest vulnerability.
The Observer, 19 June 2005