“If you want to make peace with your enemy, you have to work with your enemy. Then he becomes your partner”, a famous quote by Nelson Mandela. The idea of working together towards a common goal is very important. Without constant challenges from an opposing side, progress can be made much more speedily and effectively.
Celebrating the life of Mandela, 100 years after his birth, Barack Obama addressed 15 000 people in Johannesburg this week. The importance of democracy and the rights of everyone, central to the sentiment of working together, were recurring themes in his speech. (Read the full speech here)
Working together is a fine sentiment, but expensive lessons from the past taught us that just following the group, without independent thought and individual responsibility, can have dangerous results. Obama says: “… we have to insist that our schools teach critical thinking to our young people, not just blind obedience.”
There has to be a balance between cooperation and competition – it is true in politics and in business. How do these concepts play out in the business of wine?
I can’t think of a better case study than the UK retail. The UK is still the biggest export market for South African wine and the country’s major grocers, to a large degree, determine the wine category. Their aggressive pricing has largely eliminated traditional off-licence shops and the only real competition comes from leaner European retailers, Lidl and Aldi.
Competitive pressure in this market leads to consolidation – working together both between and within market levels.
The main retail consolidations include:
- Tesco (major grocer) acquire Booker (wholesale). (Read more)
- Co-operative (major grocer) acquire Nisa (convenience) and also supply Costcutter. (Read more)
- Morrisons (major grocer) supply Martin McColl (convenience). (Read more)
- Sainsbury’s (major grocer) to merge with ASDA (major grocer). (Read more)
According to the Independent.co.uk mergers and acquisitions in the retail sector have grown by 15% in the last year. The main reason seems to be that companies have to find new and innovative ways to ensure economies of scale to deal with the slump in sales growth.
What is the result of these consolidations?
- Shrinking and simplifying of the supplier base.
- More direct control at the source.
- Centralisation of buying and manufacturing.
- Reluctance to stock brands visible in other outlets. Protect margins and avoid obvious price-matching.
- Inward investment and development of own labels and tertiary pseudo-brands for flexible, price-based sourcing.
- Shrinking shelf-space for branded and aspirational products.
- Increased competition from lower-cost nations (Eastern Europe, Spain, Chile).
Tesco currently accounts for around 27% market share within the UK retail. If the Sainsbury’s/ Asda merger is approved, this new cooperation will account for approximately 35% of the UK retail market share.
While consolidation in many of these instances makes sense, what is the effect on healthy competition? A consolidated retailer’s competitiveness can be great for the consumer, but not necessarily for the supplier or the industry as a whole.
These are interesting times. Consolidation and working together surely have their benefits, but they come with a great responsibility – both in society and the world of business.