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Wednesday, 12 September 2012

Albert Heijn unilaterally raises its payment discount by 2 per cent. Suppliers are shocked by this extortion-like practice and ponder on countermeasures.

Very large companies have great and sometimes almost unlimited power over their suppliers. These companies can make or break them and sometimes mean the difference between healthy profits and large losses in one year for these suppliers. 

In economic good times, when everybody earns his daily bread quite easily, this power is seldomly abused. However, these are not good times, so everybody plays for keeps, including the large companies. Suffice it to say that the large companies not always play by the rules, but sometimes abuse their powerful position.

The latest protagonist in this range is Albert Heijn (AH), the largest supermarket chain in The Netherlands with a domestic market share of 33.5%, according to research bureau Nielsen. Albert Heijn is part of Ahold, an internationally active behemoth in supermarkets and convenience stores with €33 bln in net sales and a balance value of €14.9 bln for 2011.

Today, the Dutch financial newspaper Het Financieele Dagblad wrote that Albert Heijn unilaterally raised – by 2% –  the payment discount it receives from its suppliers. This step was announced in a letter that Albert Heijn wrote to all its suppliers. Here are the pertinent snips of this story.

Albert Heijn unilaterally increases the payment discounts that it normally receives from its suppliers and manufacturers of groceries and non-food articles.

By doing so, the largest supermarket chain in The Netherlands forwards the bill of its own expansion plans to its suppliers. This is disclosed by a letter that Albert Heijn wrote to its suppliers and that is in possession of Het Financieele Dagblad. The letter is confirmed by various suppliers of the supermarket chain.

It is the first time that Albert Heijn unilaterally establishes a raise of the discount it receives from its suppliers, being a very large customer. The retailer raises the discount by 2%, effective on Monday, September 17.

An insider points out that this measure is especially targeting small suppliers/manufacturers of food products. “This is crazy. You don’t want to know how many telephone calls of outraged suppliers I received. Family businesses that are supplying Albert Heijn, have an average margin of 1 or 2%. These companies immediately enter into red figures after this measure.

From a legal point of view Albert Heijn has no case at all, according to Edgar du Perron, professor in Private Law at the University of Amsterdam. “But you can always try it and look how the counterparty reacts. Seemingly, this is the kind of power that AH has got”.

“It is very rude from a business point-of-view to make such a statement”, according to a supplier that wants to stay anonymous, as he is entering negotiations for 2013 with Albert Heijn very soon. “As a matter of fact, there is an agreement. You can’t just push that to the side at will”.

Albert Heijn sees this differently: ” The market is dynamic”, according to a spokeswoman, “changes in the meantime are sometimes necessary”.

Last year, when the company was negotating the prices and terms of delivery for 2012, it was yet unknown that Albert Heijn would take over 78 C1000-supermarkets in The Netherlands. Besides that the company invests plenty of money in its expansion in Germany and Belgium. As this will lead to acceleration of growth, the company thinks that it may pass parts of the bill to its suppliers. “As a supplier you grow with us, for instance by volume growth”, according to AH in its letter to its suppliers. “To facilitate this growth, we find it appropriate when you share a part of the burden”. The company doesn’t want to disclose how much money this measure should deliver”.

In 2011, Ahold had net sales of €10.5 bln in The Netherlands, of which I presume that approximately €8 bln is supplied by Albert Heijn alone. As Ahold operates on a margin of 6.3% in The Netherlands, this means approx. €7.5 bln in purchases. When AH could reduce these purchases by 1% due to this extra payment discount, this would mean €75 mln in extra margin. That is IMO more than enough to open at least 3-4 new supermarkets.

I don’t know if my calculations are right, but I’m certain that these payment discounts mean a multi million Euro business for Albert Heijn. From their point of view I understand that the company wants to reduce its purchase costs. However, the margins in the food and small household appliances business are in general very small. I believe the anonymous commenter in the FD-article who states that giving away 2% in extra discount to Albert Heijn could mean red figures over the year for some manufacturers.

What I don’t like is the way in which the company tries to achieve this reduction in purchase costs. Especially for small suppliers and manufacturers of food products Albert Heijn is of utmost importance. Losing this company as a customer would mean a disaster for many of these companies. This is the reason that Albert Heijn can choose for this kind of extortion-like strategy and it is the same reason that most suppliers probably bite their tongues in public, but complain at their peers in private (see the red, italic text in the article).

A nasty side-effect is that when Albert Heijn gets away with this, other large supermarket chains and central buying organizations will try to do the same trick (Jumbo, SuperUnie).

Currently the suppliers are pondering on countermeasures, like writing an angry letter to AH, in which this unilateral measure is rejected. However, frankly I’m not very optimistic on their chances. What Albert Heijn wants, happens in general. The company is just too big and powerful to have an argument with it as a supplier. Most suppliers of AH understand this very well, unfortunately.

The straight, non-italic text reflects my personal opinion.

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