UK Manufacturing - Porter’s Five Forces and Supplier Power

The case of Premier Foods and the 'pay to stay' payments that they were extracting from their suppliers gives an opportunity to use the Porter's Five Forces model to analyse the food manufacturing industry in the UK. Last week, BBC's Newsnight carried a report about Premier Foods, who manufacture many key brands including Ambrosia, Mr Kipling, Oxo and Bisto.The online report comes with a 5-minute video clip which sets up the topic nicely. Newsnight's Laura Kuenssberg interviews engineer Bob Horsely, who had a contract to supply maintenance services to Ambrosia's factory in Devon. He received a letter from Premier Foods saying that "We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas. We will now require you to make an investment payment to support our growth." When he queried this, he received another letter: "We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list." In other words, pay up or we won't buy from you any more.

It seems that the practice of pay-and-stay is not unusual in manufacturing and retailing. Manufacturers do make payments to retailers in order to gain access to their shelf space. After a competition inquiry, tighter rules were issued for the supermarkets under the Groceries' Code; how well this is being adhered to in retailing was examined by another BBC broadcast about Tesco last month, and is the subject of an earlier blog Tesco and the pressures of a price war. However, that does not cover manufacturing. Premier Foods has been in financial trouble recently, and says that it is trying to invest in growth; it makes the point that, if it succeeds, that can only be to the benefit of its suppliers. Their version of the practice is that the payments from suppliers are invested in a growth programme which invests in innovation, marketing and promotions. In a cut-throat business, CEO Gavin Darby says that "Many of our suppliers have chosen to invest with us and have grown their business as a result, despite the challenging market environment".

However, the Newsnight programme brought forth a lot of comment and criticism; other suppliers called it blackmail, the government spoke of 'deep concern, and the Institute of Directors said the scheme risked adding to the public's loss of faith in business. IoD director general Simon Walker said the news was "deeply disturbing". At the weekend, Premier backtracked; Mr Darby said: "Over the last few days it has become apparent that this mechanism has been widely misunderstood and misinterpreted. In this situation, we are fully prepared to simplify the details of our future programme to a more conventional type of discount negotiation, potentially based on price, value or volume based rebates, or lump sums."

Who holds the balance of power, in the supplier - manufacturer relationship?