Tuesday, Jun 14, 2011
Gulf News
Dubai: Local supermarket operators hit by the double-whammy of food price volatility and the need to maintain pre-set prices on 40 essentials are asking suppliers to share the costs. Some of the leading names in the business have already initiated the process and are hopeful that a cost-sharing formula advantageous to both parties will be worked out.
It requires that suppliers will need to make some compromise on the prices they sell of food essentials to the supermarket operators.
This would mean a reduction in the supplier margins, but industry sources said this is the need of the hour.
It was recently that the local authorities brought in fixed pricing on a range of food staples and agreed to by all the leading retailers in the trade. The fixed prices will remain for the rest of the year.
But in a climate of extreme food inflation and one which is expected to continue, retailer margins have been impacted by the new price control regime.
Hence the need to rope in the suppliers into sharing some of the burden. We cannot go into the details of what are being discussed at this stage, but the intention is to convince our suppliers that we cannot bear the entire cost of the fixed price regime, said V. Nandakumar, corporate spokesperson at the Emke Group, which operates the Lulu chain. There are many ways that suppliers could bring down their overheads and an obvious one that comes to mind is cut marketing related costs.
Sacrifice
Such savings can compensate for whatever sacrifice on margins they need to make on sharing the cost of food price controls.
Seeking the direct involvement of suppliers in the price mechanism represents a major step for supermarket operators. Until now, the latters response to the food price volatility, which has been there in increasing intensity since early 2010, has been to circumvent the middleman in sourcing arrangements. This helped them drop one layer on the expenses side.
Another was to push more aggressively with their own and lower priced private labels for essentials such as rice, flour, sugar and a whole lot more.
But such has been the extent of the unpredictability of food prices that these steps have only worked to an extent and then some. Now, supermarket operators, by getting suppliers to share the costs, are adding a crucial third element to their counter strategy.
Anwer Ameen managing director at Regency Group which operates the Grand chain of supermarkets, said a more direct approach vis--vis the suppliers should be considered. Price controls should be imposed on the suppliers as well because retail prices in the absence of government imposed controls are also a factor of what they charge the retailer, he said.
To create a level playing field, retailers would welcome such a move from the authorities.
Meanwhile, supermarket operators are looking to within their own operations to see where they can make more cost savings. Marketing and promotional budgets seem an obvious candidate.
Campaigns that are more relevant to all shoppers on an immediate basis will be the emphasis, said a senior manager with a supermarket operator. High-profile promotions such as raffle draws for cars will no longer be the flavour of the season as they do not necessarily benefit the majority of the shoppers.
And for retailers, any saving that can be made makes the bottom-line look better.
Thats all that counts in a marketplace where price volatility seems to be a constant. According to Nandakumar, there is merit in the argument.
Definitely, the emphasis now on would be activities which will benefit a larger cross-section of shoppers rather than the lucky few who end up winning in raffle draws. This way we eliminate the luck factor and the frequency and scale of mega-promotions would definitely come down. Not to mention, the cost of running them as well.
By Manoj Nair, Associate Editor
Gulf News 2011. All rights reserved.
