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1 August 2015

Power

Tag(s): Business, Marketing
As a proud Brit I have resigned myself to watching the UK slip down most of the league tables. So it was with some surprise and pleasure that I read of a new index compiled by Facebook, ComRes and the PR firm Portland[i] that placed Britain at the top and China bottom.[ii] This was a survey of 30 countries assessing their “soft power” – the ability to coax and persuade. The UK scored highly for its “engagement” with the world. It has more diplomatic missions and its travellers are welcome without visas in more countries than any other. Its cultural power is rated highly in that it produces world famous pop stars and the most popular football teams. Its university education is second only to the US for attracting worldwide talent while the US slips down the table for its aggressive foreign policy.
 
The concept of power is complex, not least in business. Here are some extracts of what I wrote on the subject in my book The 20 Ps of Marketing.
 
“Retailer Power
 
 The abuse of Market Power by major retailers is so prevalent that it is simply accepted as a fact of life by most suppliers. They will wearily joke “lie back and enjoy it”. Some large suppliers, particularly those with a global footprint have the resources to deal with it and are capable of looking after them. But other smaller suppliers find it very difficult to survive on the thin margins left them by unscrupulous buyers who are themselves under tremendous pressure to produce short-term results and are themselves likely to face attrition. Retailers now demand allowances for listing a Product, allowances for continuing to list a Product and allowances for having listed a Product. You pay going in, you pay while you’re there and you pay going out. From time to time when their own  shareholders or top management are putting the buying department under renewed pressure they will write to suppliers demanding some new allowance for having the effrontery to have an account with them.
 
 The Competition authorities are there to deal with such abuses of Power but despite regularly investigating the supermarkets they never find evidence of such abuse. This is predictable because few if any suppliers have the courage to blow the whistle on a customer on whom they depend. Turkeys and Christmas come to mind. The Competition authorities have been responsible over many years for the gradual destruction of the British High Street which used to typically feature a variety of skilled retailers, local business men and women who made and reinvested their Profits in the community. They have been replaced by chains of charity shops while the supermarkets have sucked the trade out of town and the Profits out of the region altogether and down (or up) to their head offices in London or Yorkshire.
 
 The supermarkets have also successfully defended themselves against such charges by saying that it is the consumer who decides and it is the consumer who gets a good deal. And here they have a point. It is the consumer who decides though I suspect that most have little idea of the damage their collective decisions have done to the local economy and to the British way of life. The Law of the Commons prevails. Further the consumer has benefitted from many of the innovations that the better retailers have brought, including the variety of goods, the range of Pricing alternatives, the introduction of healthier foodstuffs and the internationalization of the grocery basket. The reader may recall from the introduction to this book that my first work experience was to fill shelves in a supermarket. At that time the refrigerator was full of lard and margarine made from animal fats and very little cooking oil was on sale. Now huge numbers of oils including the best Virgin Olive Oils are in abundance and there is little lard to be seen. I have no doubt that this is primarily down to the supermarkets.

 One should also note that the big four supermarket chains that have prevailed have seen off significant competition. They have prospered while Alldays, Bejam, Carrefour, David Greig, Europa, Fine Fare, Gateway, Hillards, International Stores, Jacksons,  Keymarkets, Lipton’s, MacFisheries, Normans, One Stop, Presto, Quality Fare, Richway, Safeway, Templeton’s, Victor Value, Wm Low and countless thousands of others have been swallowed up. In prospering it is their shareholders who have benefitted with very high net margins when compared with other international players. Though less today there was a time in the 1980s and 1990s when the leading supermarket chains were reporting up to 7% net profits, an extraordinary level in a business primarily based on selling food and other necessities. I suspect the supermarkets have learnt that this was unwise and now reinvest their Profits in aggressive competition, acquiring land banks and overseas expansion. The first might be deemed desirable if the only test is Price competitiveness, but the Price is not only the Price of goods in the supermarket trolley but also the Price of ever diminishing alternatives, unhealthy concentration of Power and loss of capacity at the supplier level.
 
 Some years ago I joined a small food brokerage business. Our model was to use our skills to help manufacturers, both British and overseas, achieve distribution through the Powerful supermarket chains. We represented toiletries companies that had distribution in the traditional chemist outlets but now wanted to expand through grocery distribution. We represented a manufacturer of pet accessories that had distribution through the traditional pet trade but now wanted to expand through the grocery outlets, and so on. It was remarkably easy to make significant increases in their business in this way. But of course in the long term such actions were feeding the Power of the monster at the expense of these traditional outlets. I recall a sales manager at Procter & Gamble boasting to me that he held the company record for the highest single order of Daz. He had “sold" 8,000 cases to a relatively new discounter called Kwiksave. Such orders no doubt gained a little in efficiency for P&G, but not that much. However, it gave Kwiksave an edge over its local rivals and over time helped put them out of business. Thus the inappropriate targeting of one sales manager and his ilk contributed to the demise of hundreds and thousands of retailers and ironically of many such sales managers as such large forces are no longer required by the likes of Procter & Gamble.
 
 Because the UK has an unhealthy level of retail concentration our balance of payments as a nation is unduly affected with considerable damage to the competitiveness of our economy. If a Japanese manufacturer, for example, wants to introduce its Products here in the UK then its efficiency as a manufacturer will be combined with the efficiency of the British retail distribution and the Product in question will reach the British customer quickly and efficiently. Try to reverse the process and the inefficiency of the British manufacturer combined with the inefficiency of the Japanese distribution, which is labyrinthine in complexity, means the British Product has very little chance of reaching the Japanese home. In recent years this model has expanded to cover most of the Far East with South Korea, China and several other nations queuing up to siphon their Products through the efficient British retail trade. No wonder Napoleon called us “A nation of shopkeepers”.
 
Consumer Power
 
 Nevertheless the customer has the ultimate Power. The money comes from the Market and it is a foolish Marketer who forgets that. Whatever position one holds in the value chain the cash flows up the chain from the final customer. There are many ways to influence that customer and this book is dedicated to that process but finally the customer decides. One of the most effective of all Marketing techniques is the one that is most difficult to control, that of word of mouth. Jeff Bezos, the very successful founder of Amazon, says “If you do build a great experience, customers tell each other about that. Word of mouth is very Powerful.” A Market where word of mouth has always been amazingly Powerful is that of recorded music. Early adopters hear a new piece of music on the radio or over the internet. They buy the record instore or download the track from a web based supplier like iTunes. Then they play it to their friends who follow suit. If the process happens quickly enough, and there is sufficient energy in the system for this to take place usually, then the track becomes a “hit”. As an example of the remarkable Powers of penetration the best of recorded music can achieve consider that one in four British households owns a copy of Pink Floyd’s Dark Side of the Moon.“
 
This comes from Chapter 14 of my book “The 20 Ps of Marketing”. I wrote that chapter about five years ago and if I were writing a second edition today would need to update it with the travails of the major supermarket chains which in some ways have over played their Powerful hands. They have invested in the wrong types of stores, are now trying to extricate themselves from their excessive land banks and are being squeezed by discounters like Aldi and Lidl, upmarket chains like M&S and Waitrose, and online merchants like Amazon. But they continue to abuse their Power as Tesco’s accounting scandal demonstrates. To those of us who know them well that was not a shock.
 
If you wish to order a copy of the book there is a link on the home page of this website
 

[i] http://www.portland-communications.com/ Tim Allan, who had worked in Communication with Tony Blair in opposition and 10 Downing St founded Portland in 2001. I was then CEO of NXT plc and not long after that met Tim with a view to appointing them to manage our PR. We decided to go with a more City oriented firm.
 
[ii] http://softpower30.portland-communications.com/ranking
 
 
Copyright David C Pearson 2015 All rights reserved
 



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