The Retailer Dictatorship

“Big supermarkets chains fight for lower prices and make the life of the industry each day harder.”

Exame, a well-known Brazilian business magazine

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My goal in this article is to present the divergences between the Brazilian supermarkets and the wholesales, providing an overview of how the negotiation process involving both parties regarding the supply of the stores and the exploitation of the industry by the retailers – supermarkets.

The Brazilian wholesalers´ margins are struggling due to constant demand of price discounting and fees by the big supermarket chains, as well as shorter delivery deadlines and an increase in the demands for promotions, sales on special dates, charges to keep the product in the best places of the shelter, subsidies and contributions in the opening of new supermarket stores. “A space in the shelter can cost us around R$ 10,000 (approximately $ 5,000)”, says the CEO of an important Brazilian food chain.

The huge concentration of supermarkets has given them more bargaining power in the supply chains; in 1997, the 5 biggest supermarket chains represented for 27% of sales, increasing to 39% in the beginning of 2001. Another factor is the surplus of supply of Brazilian products and the lack of differentiation between them, therefore retailers are indifferent regarding products “A” or “B”, taking into account that the quality is identical in both cases. These are two examples that have given the retailers more bargain power. Some retailers support the argument of their critical importance with the fact that around 70% of purchases decision take place inside the supermarkets, as a reason to increase the fees to the industry.

Some of the industries’ employees say that the retailers even have a Buyer’s Guide; which contains the following rules for the negotiation within the industries:

• Think about the vendor as your number one enemy;
• Never accept the first offer, let the seller beg: it gives more space for bargaining;
• Don’t feel sorry about the seller, play the game of the evils;
• Do not avoid the use of strong arguments, even if they are false. For example, telling the seller that their competitor has more products to offer and deliveries in a shorter period.

If these rumors say is true, we can say that the Brazilian industry is in a difficult bargaining position. Analysts of Booz-Allen consultancy see this phenomenon as an economic values transfer from the industry to the retailers. They estimate that between 15% and 20% of the industry value of sales stay with the retailers.

This also leads the industry to decrease investments in publicity and media, besides other strategic initiatives, decreasing the brand equity of the companies. It is estimated that 61% of the marketing investments made by this sector belong to the retailers, according to Interbrands, remaining too little money to invest in the brand.

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** Article written based on a report of Exame’s magazine, published in June 06th, 2002 – A Ditadura do Varejo, por Nelson Blecher **