Guardian (Business Sense supplement), March 2006

Taking stock

Just how easy is it to get on the supermarket shelves as a small supplier? And once you’re there, how long before you’re cleared to make way for a newer brand? Sue Norris finds out

Since high-quality tea specialist The London Cuppa was withdrawn from Sainsbury’s shelves a few weeks ago, the company has received customer protests by the mailbag. "Thanks for your kind offer to send me a packet of tea but I am pleased to advise you that Asda in Basildon do stock The London Cuppa," writes one loyal supper. "I did get in contact with Sainsbury’s customer care department and ascertained that they have withdrawn The London Cuppa from all of their stores due, they said, to low sales.

"My late father was a tea taster and passed down an appreciation for a good blend, so when I came across The London Cuppa a few years ago, it stood out," the customer adds, wistfully. "I hope you continue to find demand for the product and that it will be on the shelves for some time to come."

The story is a common one. A small supplier with a great product, and a thirsty customer base ready to consume it. The only hurdle standing in the way is the mighty supermarket, which can seemingly make or break a new business with the snap of its fingers.

In the case of The London Cuppa, MD Philip Philippou was told by his buyer that his product had been de-listed by Sainsbury’s to clear shelf space for a new flavour of tea being launched by a better-known brand.

While he is the first to accept that supermarkets have their targets, Philippou is puzzled at the decision, as demand had appeared to be high, and the margins strong, since the London Cuppa is priced at the top end of its sector, typically costing 10-15p more than Twinings. "We have a high-quality product that’s in demand from customers across the world," says Philippou, noting that The London Cuppa, whose products are blended and packed in England, now produces a range of teas for Royal Doulton, sold under the Royal Albert brand. "The only problem we’ve ever had has been the distribution."

The company, which has been around for five years, made a conscious decision not to sell the products directly, via the Web, believing the additional cost for postage and packaging would be prohibitive. Ironically, now that the product has been removed from more than 150 Sainsbury’s stores, customers have tracked down The London Cuppa and are ordering the product by the case.

While its products are still enthusiastically stocked by Tesco, Asda and Waitrose, The London Cuppa’s story highlights just how vulnerable suppliers are to the whims of the large supermarkets.

Supermarkets are under great scrutiny at the moment, as the UK tries to come to terms with the negative impact an almost unanimous love of supermarket convenience is having on smaller retailers and national manufacturers - not to mention the environment each time another out-of-town monstrosity is constructed on green land.

As a small supplier, however, it’s hard to ignore the lure of these retail giants, given the percentage of sales they represent. By volume, the supermarkets represent some 70-75% of the UK’s food and drink business, while Tesco alone accounts for £1 in every £8 spent in Britain.

"We have to be in these stores as a mass manufacturer," says Claire Clare, founder and director of Steadyco, which is currently enjoying much success with its anti-spill, open-top infant beaker, the Steadycup. "They have fantastic national coverage and sell good volumes across all demographics, making for good numbers."

Steadyco is one of the lucky ones. Its products are now stocked by most branches of most supermarkets, and are selling in the high volumes Clare had always hoped for. She attributes this to the product’s uniqueness, the gap it addresses in the market, and its low price. This, in turn, was down to extensive research.

"This is where many small or new suppliers fall down," comments Karen Carlyle, executive director of the Regional Food Group for Yorkshire and Humber. In previous roles, Carlyle has headed up chilled food marketing and merchandising at Asda, and been a senior buyer at Marks & Spencer. Now, she acts as a go-between for small regional food producers and supermarket buyers.

"Suppliers sometimes assume that, because they are passionate about their product, the supermarket should stock it," she says. "But they may not have done enough research about the market they are in, what the supermarket is currently selling, what their competitors are offering and therefore what the opportunity really is. Above all, they underestimate the pressures that the buyer is under."

These include aggressive category-based sales targets. If the buyer isn’t hitting their quota for revenue by shelf space, they have to take tough decisions.

John Gee, now a food and drink industry consultant at recruitment company Nigel Wright, was a buyer at Tesco for four years. During his last year, he was tasked with buying continental cheeses for the company, with a sales target of £260 million. "Managing more than a certain number of suppliers is very difficult with that kind of workload," he notes. "It’s sometimes easier to source additional products from an existing supplier than it is to take on a new one. If customers are demanding lower prices, which are achieved via volumes and supply chain efficiencies, and if one supplier can make two products instead of one, this policy makes business sense."

So how does a new supplier get a look-in? A good person to ask is Adam Pritchard, founder and managing director of the fast-selling pomegranate-based health drink Pomegreat, which some supermarkets have now mimicked with their own brands.

Three years ago, the product was first stocked by Waitrose, followed by Sainsbury’s almost a year later, then Morrisons and Tesco in 2005. At the end of 2004, Pritchard was selling 20,000 litres of the juice each month; today that’s soared to 1.5 million litres per month.

"Britain has fallen so in love with pomegranate juice that in the last six months it has become the UK’s fastest growing fruit drink," reads a recent press release from Tesco, signalling an intention to take the product into the European market, and claiming that sales of the product at Tesco alone have soared by 300% over the last six months.

So how did Pritchard do it? Apart from being a man to spot an opportunity (he left school at 16, travelled for eight years before training to become a stock broker, which he did until a friend insisted he come to Pakistan to see a new pomegranate drink), Pritchard was blessed with excellent timing which he exploited to his great advantage.

"Waitrose took Pomegreat early on, as it has a slightly different consumer base that lended itself more to the product at the time," he says. "The other supermarkets were a bit sceptical, but became more interested as the product proved itself at Waitrose.

"It comes down to points of differentiation and innovation," he notes. "Pomegreat offered something different in a market category that was losing value – that of ambient [non-refrigerated] juice drinks. We put a brand on the shelf that enabled the retailer to make money. It was as simple as that."

And so it seems. When Pritchard founded his company and did his first round of the supermarkets, he was on his own and had no backing other than a modest £150,000 he had borrowed from friends.

The biggest part of the job was building the brand, so he enlisted the help of a PR agency. "I worked on that from day one, as I knew that I needed to be in every supermarket in the country," he says.

"My aim was volume, so right from the start we worked with big companies," he explains. "Pomegreat is packed at the former Coca-Cola factory, for example, so it’s all very professional. I think a lot of our success has been down to thinking big from the outset."

This was a crucial decision, since many small suppliers come unstuck when demand picks up, leaving them unable to deliver. Or they can run into ‘traceability’ issues if they have used small manufacturers (supermarkets are under pressure to be able to trace every product to its source and its individual ingredients, which requires sophisticated labelling and tracking).

Yet this same big thinking almost cost Pritchard the business when his original investment fund ran out. "I almost went bankrupt and had to refinance the business," he admits. "When you’re dealing with supermarkets, constant, on-time supply is vital, yet we were financing the manufacturing ourselves, and had some terrible problems meeting demand. I was experiencing 50% failure with Sainsbury’s. I joined forces with a commercial partner which gave us a vital working capital injection, so we were able to turn that around to 98-99% success. It’s a real endorsement of the product that the supermarkets stuck with us throughout."

The importance of getting early backing from Waitrose cannot be underestimated either. Considered a higher end retailer, biased towards ABC1 consumers, and currently commanding just 3.8% of the market, the company is in a position to take more risks than the ‘big four’ supermarkets. For example, it has a specialist buyer whose brief is to seek out local produce from around the country, and it typically introduces 150 new local and regional products onto its shelves every year.

Yet, with a growing national presence (it now has almost 180 branches, with recent acquisitions giving it its first stores in Scotland), Waitrose also provides a high-profile means of showcasing success to the other, bigger supermarkets, as Pritchard has found.

"Our product sells at £1.29, when other similar drinks are in the 75-79p range, which was potentially a major hurdle for us, but the average Waitrose customer won’t quibble over 30p."

And such is the public interest in ‘health’ products currently, that the higher pricing is now palatable by even Morrisons customers. "Our drinks use fruit extracts, rather than sugar," Pritchard notes. "Supermarket buyers appreciate the added value we represent. We are giving them an opportunity to make more money from the same shelf space, and breathe life into a tired food and drink category."

Pritchard isn’t complacent, though. Although he doesn’t see supermarket own-brand products as a threat, he realises that every product has its day and that long-term success depends on broadening the portfolio and continuing to innovate. His second product, which builds on the success of the original Pomegreat drink, is a juice for the chiller cabinet. "Waitrose also has its own version, but ours is twice the price and our rate of sale is tremendous, so we’re both very happy," he says.

A final piece of advice is never to neglect the supermarket buyer relationship. "It’s true they can be challenging to manage, but they are worth managing," Pritchard notes. "Supermarkets do carry a lot of power, but a lot of business is about relationships and if you work at them, it does pay off. They have targets but so do we, and it’s important we don’t bend too much. That’s why I stay closely involved, and don’t send regional account managers to meetings."