Suppliers and retailers: The difference between partnership and confrontation

American Greetings’ audacious manoeuvre against Clinton Cards last week simultaneously sent Clinton Cards into administration and served as a reminder that retailers do not always hold the strongest hand when it comes to supplier relationships.

The 100-year-old manufacturer, which is the second largest greeting cards firm after Hallmark with annual sales of nearly £1bn, bought Clinton Cards’ £35m of debt from Barclays and Royal Bank of Scotland last week. American Greetings, which was already owed $25m (£15.5m) by Clinton, called in the debt, and subsequently triggered the cards retailer’s administration when it was unable to pay.

Frequently retailers are viewed as being able to throw their weight around with suppliers by, for instance, passing increased costs down the supply chain rather than on to consumers and, in many cases, eroding suppliers’ margins.

The power of a single supplier over a retailer, as in the case of Clinton, is unusual but suppliers more widely are becoming increasingly active participants in the fortunes of retailers – for good and ill.

Losing the backing of suppliers – as happened with Game in March – can send a retailer to the wall. Equally, as was the case at HMV, supplier support can be key to securing a retailer’s future.

Clinton conundrum

“The key issue, post-credit crunch, is that everybody has to focus on cash flow and suppliers are increasingly nervous about losing out and not getting paid,” says independent retail analyst Nick Bubb. “For example, when weak retailers do pre-packs, they’re being more hard-nosed and proactive about giving and withdrawing support.”

Conlumino managing director Neil Saunders says: “Although it’s easy to paint American Greetings as the bad guy, it merely acted as the catalyst to a situation that needed to happen.”

Saunders observes that, while American’s tactics were aggressive, Clinton had already made technical breaches of default of its bank facilities and owed American Greetings money. In such circumstances there is justification for the US firm to act to safeguard its interests by speeding up the inevitable process of restructuring.

Barry Gross, partner at City law firm BLP, says: “It is still not clear what American want to do with Clinton but, as it’s a retailer, you would have to assume that the motivation is to gain a retail card business of scale in the UK and make it a success.”

He adds that there is a wider lesson to be drawn. “Suppliers are the lifeblood of any company. If you do not have the product you do not have a business. The market needs to recognise that these are symbiotic relationships,” says Gross.

A different Game

Supplier muscle was also evident at Game, which earlier this year collapsed into administration after losing the support of key games companies.

Suppliers including EA and Nintendo lost faith in Game’s ability to pay them after a series of dire trading updates. The retailer asked suppliers for more generous terms, came close to breaching its borrowing covenants and lost its credit insurance, at which point it gave preferential treatment to some suppliers – infuriating the others.

“Suppliers have to be sure they will be getting their share of the spend,” says Gross. “If the retailer can’t guarantee that suppliers can meet their fixed costs then suppliers are at risk.”

When the hotly anticipated Mass Effect 3, supplied by EA, and Street Fighter X Tekken among others failed to hit Game’s shelves, dedicated gamers – some of whom had pre-ordered – were angry at the retailer and of course took their business elsewhere.

In the event, private investment firm OpCapita swooped for the assets of Game’s UK business, buying 333 stores, and EA and Nintendo have returned to supply the retailer.

There is perhaps another lesson to be drawn from Game. The retailer had suffered for some time from the scheduling of new games and hardware. The Entertainment Retailers Association said last week that it had frequently urged retailers and suppliers to work closely to space out releases in order to make the most of them.

The trade body is angered that the Call of Duty game CoD: Black Ops 2 will roll out in mid-November, two weeks after Assassin’s Creed III and a week after Halo 4.

Suppliers also played a key role in OpCapita’s other purchase this year, Comet. Care was taken that the electricals retailer, bought for £2 from Kesa, won supplier support ahead of its sale to the private investment business.

John Clare, now Comet chairman, met key suppliers shortly before the acquisition to allay fears over credit insurance and instil confidence in the new owners. He said at the time: “This is about focusing on margin improvement, cost structure and cash management.”

Comet’s arch-rival Dixons is already benefiting from a good relationship with suppliers. Dixons boss Sebastian James has pointed out that big suppliers like to deal with his business because it can showcase their product to best effect and explain benefits – a key distinction from price-driven online competitors.

Food fights

In the food sector, supplier relations have been a contentious point for a decade and more. Last week’s confirmation in the Queen’s Speech that there will be an adjudicator to police the Groceries Code shows that a transparent and fair supply chain remains very much a touchstone issue.

A plethora of food suppliers allege that late payment, retrospective charges for promotions and last-minute changes to terms remain commonplace in the grocery world. Suppliers complain such factors mean they are unable to gain a sustainable margin or plan investment for the future.

Sainsbury’s chief executive Justin King has long defended retailers’ position by pointing out many of its suppliers, including Coca Cola and Mars, are bigger than Sainsbury’s and wield more power.

He told Retail Week last week: “No supermarket can do the right thing for its customers without great relationships with its suppliers. A lot of our suppliers are as big if not bigger than we are.”

And departing Tesco boss Richard Brasher, in one of his final speeches to Tesco suppliers last month, asked for their help and ideas to turn around the UK business.

Some suppliers believe big retailers of all sorts exert great power over suppliers, and late payment has been a key issue. The Forum for Private Business (FPB) pointed the finger at a number of retailers including Matalan, Alliance Boots, House of Fraser and Argos, for late payment at the height of the credit crunch in 2008/09. The FPB claims suppliers are unwilling to come forward to report abuse in the supply chain.

An FPB spokesman says: “If you squeeze the suppliers then they will go out of business and then the number of suppliers you can choose from reduces, ultimately impacting on consumer choice.”

Vital support

But in many cases, retailer-supplier relations are strong. A number of retailers ranging from pound stores to value fashion rely on good relations with suppliers who can offer large volumes quickly.

In some cases, as with George at Asda’s acquisition of Turkish supplier GAAT’s sourcing division this month, this can lead to the retailer buying up the business and working directly.

Perhaps the most notable case of supplier support was at HMV earlier this year. In stark contrast to Game, the entertainment suppliers recognised the 91-year-old retailer as a vital route to market.

Labels Universal Music, EMI, Warner Brothers, Sony Music, Universal Pictures and Disney are believed to be among those to have taken 2.5% of HMV’s equity in the form of warrants.

The partnership approach was evidenced earlier this month when HMV hosted a Universal Pictures event to display augmented reality movie clips. “HMV clearly remains a big route to market for several key players,” says Saunders.

“They do not want the industry to consolidate down to just iTunes and Amazon. This only comes about when a retailer is in a weak position and is reliant on the flow of stock offered by suppliers.”

JJB Sports chief executive Keith Jones says the support of suppliers was critical in its fight for survival. Big brands such as Nike and Adidas backed the sportswear chain when it was at its lowest ebb, and continued to supply JJB even when it revealed it was likely to breach its banking covenants last January. Adidas has even provided the retailer with a £15m loan so it can push ahead with its store revamp programme.

Jones says: “Our own efforts were never going to be enough. Without the suppliers [its turnaround] would be impossible, and I’m not just talking about the loans, I’m talking about a genuine partnership in how we deliver the proposition.

“They genuinely believe that JJB is not only their partner but also a business that  is focused on elevating the market and providing the customer with premium branded product.”

Who’s next?

While Clinton, Game and HMV may remain isolated instances, there are still likely to be cases of increased supplier power exerted or partnership extended.

Gross believes that there are lessons to be learnt from other business sectors. He notes: “We have seen the oil distributors take over retail space in filling stations. Realistically only a supplier in the retail game can have the economies of scale to be able to take over a retail business.”

The degree to which supplier power has changed is often defined by which sector a retailer operates in. However, it is those retailers that adopt a partnership approach that are most likely to ensure reliable supplies and a thriving long-term relationship.