星空传媒

One thing supermarkets are superb at is using their buying power to squeeze their suppliers鈥� margins. When the construction market was booming, consultants and contractors had some protection; now that it is in famine, they have none. So far this year, fees have been cut by 40%, contracts have been renegotiated and payment periods have stretched to 90 days. In effect, the industry has been forced to offer a permanent January sale.

Up until now, Tesco has been setting the pace for other chains, but it seems the others are catching up. Fee cuts of about 25% are now seen as 鈥渇airly standard鈥�, according to one senior source. 星空传媒 can also reveal that some retailers are going further, demanding money back from firms to which they award more than one contract.

Even though they are being forced to offer discounts and cashback, contractors and consultants are reluctant to leave a sector that offers 拢2.5bn of work a year. Instead, they are having to come up with ways to survive in the market 鈥� and some are taking the fight back to the retailers with cuts of their own.

Bargain basement

One of the most controversial policies being adopted by some retailers is a rebate system. This hits contractors and consultants that win large sums of work with a particular retailer with a demand to pay back money from earlier contracts when new work is won, effectively lowering the fee received for all the work. Rates vary, but can be as much as 7.5% of the contract value, according to a senior consultant. The source says: 鈥淚t鈥檚 triggered if you get over a certain volume. Typically, if you win work worth up to 拢500,000 in fees then you鈥檙e fine. But if you get more, they will ask for some money back.鈥� The level of rebate rises according to the amount of work done, so a firm earning 拢1m-拢2m, for example, will be charged more than one earning 拢500,000-拢1m. The system is understood to be more common in retailers with larger programmes. The consultant source says: 鈥淭here are some chunky requests; it鈥檚 a voracious bidding war among providers.鈥� It is understood that some retailers have used the system previously, but sources say it has become more prevalent during the recession.

It is understood that the Co-op, which recently took over Somerfield, is among those employing the policy. Supply chain sources say that Tesco has also made similar requests, with one company claiming it was asked to pay a six-figure sum. However, a Tesco spokesperson denies that the company is using a rebate system.

Although Tesco denies the charge, its tough attitude to its suppliers in other respects is well known. But the fact that tough tactics are being used by the Co-op, a brand that prides itself on its cuddly image, might come as a surprise. A Co-op spokesperson declines to confirm or deny its policy towards suppliers: 鈥淲e employ numerous contractors and many more would work with us if the opportunity arose. However, details of contracts must remain confidential.鈥�

Tesco鈥檚 tough attitude to its suppliers is notorious, but the fact that it is being copied by the Co-op might come as a surprise

 

Catherine Tobiasinsky, head of retail at EC Harris, says the fact that even clients like Co-op are getting tougher is an indication of the market: 鈥淭here鈥檚 a generic direction of travel now among retailers. There鈥檚 nobody out there with soft terms.鈥� She adds that the Co-op鈥檚 拢1.6bn takeover of Somerfield in March had led it to review its supply chain arrangements. 鈥淕enerally, there has been price deflation, the merger is used to bring supply chains in line with that.鈥�

Another source in the Co-op鈥檚 supply chain says: 鈥淚t might be a shock in terms of brand. But the Co-op has large in-house teams, which creates an 鈥榰s and them鈥� situation. You feel it could take the work in-house if you don鈥檛 give it what it wants.鈥�

In fact, frameworks up and down the sector are being retendered or scrapped as clients try to get out of deals agreed when tender prices were rising. 鈥淣umerous retailers are looking to retender their frameworks, and others are also in direct negotiations to reduce costs,鈥� says Richard Taylor, head of retail at Davis Langdon. Companies also say there is a growing tendency to tender projects individually. Clive Pople, retail director at Willmott Dixon, which works with Morrisons and Waitrose, says clients are focusing on lowest bids rather than outturn costs. 鈥淎lthough retailers are still seeing the delivery benefits of frameworks, there is a tendency to introduce price competition.鈥�

Retailers are also continuing to ask for fee cuts from consultants, a practice that emerged in January when Tesco wrote to its supply chain asking for reductions of up to 40% on previous rates. One source says: 鈥淭esco are ahead of the market, but it鈥檚 the same thing wherever you go. It鈥檚 quite frightening.鈥� The Co-op, again, is one of those understood to be asking for cuts. 鈥淚t鈥檚 not Tesco-style, but it鈥檚 double-digit percentages.鈥�

The source ventures that the spread of the fee-cutting could be partly explained by the Tesco diaspora. The supermarket, which has had a high churn rate in its development team over the past three years, recently axed about 30 jobs in its property division. 鈥淭here鈥檚 been a lot of migration of Tesco 鈥榯alent鈥� and we鈥檙e seeing a lot of Tesco-style practice.鈥�

Hitting back

The consensus among the suppliers is that retail may always have been tough, but the sector is now pushing the supply chain to its limits. 鈥淭hey鈥檙e looking to drive the last penny out of a deal,鈥� is the verdict of one contractor.

A source at a major consultant says their firm is taking senior staff out of projects where it can use a junior alternative

 

However, with the Construction Products Association forecasting a 42% decline in retail new build over the next 18 months, the big clients in the sector represent vital work for those who can get it (see box, below). For this reason, most suppliers are reluctant to walk away from them, meaning they are being forced to review their own services to cope with the pressure on costs.

EC Harris is one firm that has altered its strategy. 鈥淚t鈥檚 an economic reality for us,鈥� says Tobiasinsky. 鈥淚t鈥檚 forced us to scrutinise how we resource and deliver pieces of work and programmes to drive greater efficiency.鈥� One efficiency is to provide clients with a combined cost and project manager. 鈥淲e鈥檙e asking people now to work in different ways than they would have done before.鈥�

Another source at a major consultant, who does not want to be named, says their firm is taking senior staff out of projects where it can use a junior alternative. The source says: 鈥淲e鈥檝e taken anything that鈥檚 not actually part of the required scope out of our offering. We鈥檙e delivering what the client wants and no extras. We鈥檙e working with clients to look at 鈥榡uniorising鈥� the team. In retail that鈥檚 possible as it鈥檚 a standardised format. Quite frankly we find efficiencies.鈥�

Davis Langdon is adopting the opposite approach. It is taking more of a hit on its own costs to keep winning work. The firm says it 鈥渞ecognises the benefits of major repeat client programmes鈥� and off the back of this undertakes specific research projects at little or no cost. It is also seconding people into retailers to assist with their programmes.

Such moves, however, are not an option for smaller players. The managing director of one niche consultant says his work with Marks & Spencer dried up at Christmas, and since then he has avoided new work in retail. 鈥淓ven on frameworks, clients are asking for as much as 40% off,鈥� he says. 鈥淲e haven鈥檛 been pushing in the sector since our work went dead, for that reason. We鈥檝e got enough elsewhere.鈥�

Bob Rendell, managing director of Leadbitter, echoes the view that clients are putting unbearable pressure on their supply chains. 鈥淧eople are getting discounts already in the prices quoted by contractors as the supply chain has been discounting over the past 12 months,鈥� he says. 鈥淭hey鈥檙e at a level now where they鈥檙e becoming unsustainable for many companies. If clients are asking for discounts they should have been doing it two years ago. All they鈥檙e going to do is cause supply chain failures.鈥�

Such views are likely to cut little ice with the retailers. As one consultant puts it, the industry is up against an aggressive commercial mentality and has to deal with it. 鈥淎t the end of the day, you go shopping and you look for bargains. If baked beans are 20p in one place and 30p in another, you鈥檒l buy the 20p ones. They鈥檙e working the market to their advantage, but they鈥檒l be around for a while and there isn鈥檛 much we can do.鈥�