Tesco: the giant canary in the mine

'Commercial income' like 'collateral damage' is one of those attractively anodyne expressions that hides a decidedly unpleasant reality. In the UK, even some of the most sophisticated members of the business community have only just been introduced to this term that neatly covers all the cash that retailers extract from their suppliers rather than from the more expected source: their customers. 

In the US, where accounts have to reveal the origin of how businesses make their money, the credit rating agency Fitch suggests that almost all of retailers' profits - 8% of the cost of goods - now come directly from suppliers. The UK situation may be even more dramatic. If chartered accountant Duncan Smith of Moore Stephens Food Advisory Group's comments in this BBC piece are to be believed, the big four British supermarkets make £5bn in this way every year - more than their total combined pre-tax profits.

Although the reasons for doing so just now are glaringly obvious, it is far too easy to focus all of our attention on Tesco. Yes, from what we have read, there seems to be little question that Britain's biggest chain played fast and loose with the facts of if and when supplier contributions would be made, but if we set the timings aside, Tesco was far from the only attendee at this orgy. Waitrose, every middle class Brit's favourite shop (when they aren't slumming it at Lidl), also has a price list from which suppliers can choose how to make their contributions and so, apart from the pesky German discounters, does almost everybody else. 

The commercial income Tesco will have got from its Beer, Wine & Spirits department will have been significant, but readers of this article will probably somewhat overestimate the contribution derived from wine companies to the gaping hole in the retailer's projections. To provide some context, the total value of UK retail wine sales is only around twice the £2.8bn spent on cheese in 2014. However, when it comes to providing commercial income, wine will have significantly overperformed when compared to those dairy counters. Cheese is essentially unbranded; half of what we eat is cheddar of some kind, much of it sold under the retailer's own brand and bought from a small number of suppliers. So there aren't as many arms to twist. 

Wine companies in the UK have peculiarly twistable arms, given the relative impossibility of building substantial sales for a brand without passing through the shelves of the big retail chains that control around three quarters of the market. Volumes can be moved through the German discounters, but at low margins and usually under those discounters' own labels. By contrast, the more fragmented nature of the US market - and its size - allow producers who so desire, to sidestep the biggest chains altogether. 

And this is where the most important difference between the markets comes into play. In the US, wine companies have the potential to run their own marketing campaigns and to build and sustain the value of their brands. Under the UK system, they are hit with a double whammy: almost every penny of spare cash is sucked up by retailers who then regularly reduce perceived brand value by cyclical deep discounting. (Heavy price cuts are a feature of the US market too but they are less regular and predictable; when you see a product at a low price, you are more likely to grab it now for fear of never catching that bargain again). A very few, very strong, global brands such as Hardy's and Concha y Toro can buck this trend and run effective campaigns of their own, but they are the glaring exceptions to the rule.

The days when Masters of Wine travelled the world cleverly snapping up bargains wherever they found them are long gone. Today, every sale involves negotiators and quite possibly notorious Joint Business Plans which have much in common with the old days when teachers administering beatings straightfacedly told their unfortunate victims that "This will hurt me more than it hurts you". 

This may not have made the UK a particularly pleasant environment to work in - at least for suppliers who complain about having to deal with serial unexpected requests for additional cash - but, until recently, it seemed to work pretty well for anyone holding shares in the biggest chains. (And, let's face it, there are plenty of shareholders in other sectors who lose little sleep over the contributions supplier-abuse make to their dividends).

But the climate in Britain may really be changing. There are farmer-friendly parliamentarians who had a nibble at this issue a couple of years ago and seem ready to take a much deeper bite this time, and German role models who daily demonstrate that there is another way to play the retail game. A fresh parliamentary enquiry would have no reason to limit its interest to Tesco.

Quite how easy it would be for an entire national retail system to alter its diet, however, is another question...