Supply chain saga acts as wake-up call

“We thought they were too big to fail – we’ll never make that mistake again.”

The dramatic collapse of Conviviality, closely following other supply dilemmas for KFC and customers of Russell Hume, has shone the spotlight on the relationship between operators and their key suppliers. MCA spoke to leading figures across the eating and drinking-out sector, including some of the biggest customers of Conviviality’s Matthew Clark drinks wholesaler arm, to find out how the saga is likely to impact the sector going forward.

The picture that emerges is a mixed one. There seems little appetite among operators to relinquish the economies of scale that come with dealing with one key supplier – but there is a clear sense that nothing should be taken for granted in the current climate.

The CEO of one national chain described how tense the situation became between the suspension of Conviviality’s shares and the eventual sale of Matthew Clark and Bibendum to C&C Group.

He said: “It started with disbelief and then slowly it dawned on all of us that the business might actually go under. The speed of the collapse was astonishing.

“We kept in contact with some of the other key customers and we all agreed that we didn’t want to cause a run on it so we would stay in. Meanwhile, you had other suppliers trying to force you into deals and there came a point where the stakes were very high. There was a genuine possibility that we would run out of stock by the next week.”

The sense of incredulity at the mistakes behind the Conviviality collapse was shared by other key players in the sector. One said: “This is a business that had just completed a fundraising – you have to question how closely it was being scrutinised. There are certain checks and balances that you take for granted are happening with a supplier.”

Another added: “In the cases of both KFC and Conviviality, management took huge decisions without the appropriate risk management assessment or competence to handle what they proposed. Both crashed.”

So, where does this leave the dynamic between supplier and customer? One major client of Matthew Clark said: “Cost of goods dependant, I think we would certainly look in the future at the exposure of having all goods on one supplier network. For example, a possible split could be beer and soft drinks on one supply chain, with wine and spirits on another.”

Another national restaurant brand operator said: “I would like to carry on having one supplier, but I will be keeping a closer eye on them. What I think you will see is the tables turning in terms of credit checks – it’s quite normal for suppliers to ask us, well now we will be asking them.”

Consumers will be even more knowledgeable and, therefore, will exercise this power in more radical and punishing ways.

A growing multi-site operator told MCA: “Without doubt if you want economies of scale you need to deal with the larger suppliers and it does make you vulnerable. That said we have always maintained a minimum of two suppliers for all key products and I have always refused to sign an exclusive agreement because of the risk it can pose.

“I think it helps to always have that option and suppliers know if their quality or service drops then they will lose out financially through reduced trade.”

However, the chief executive of another fledgling chain said: “It’s absolutely key when you’re growing to be able to manage costs, and supply is a huge part of that. Each of these cases (Conviviality, Russell Hume and KFC) was a freak incident – to create a whole new business model based on them just wouldn’t make sense.”

A multiple pub operator said: “In the near term, there will be the same spectrum of behaviours that will broadly mirror the current state of things. I think that in three or four years’ time though – due to the rise of (digital) transparency – businesses will have fewer places to hide any dubious procurement practices. Consumers will be even more knowledgeable and, therefore, will exercise this power in more radical and punishing ways.”

David Read, chairman of Prestige Purchasing, told MCA: “These different cases have very distinct root causes. However, we are reading every day about flat trading and in those situations it will always feed back into the supply chain. Foodservice suppliers are feeling the pinch in the same way as operators. These kind of issues are more likely in a market that is stuttering, rather than one that is flourishing.”

On how operators can best protect themselves from future issues with suppliers, he said: “The Conviviality collapse was a surprise to pretty much everyone, but just because it’s a surprise doesn’t mean that you shouldn’t be prepared. You have to be aware of what else is in the market and know where the capacity lies.

“When agreeing a deal it’s easy to look at a bunch of spreadsheets and pick off the lowest number, but good procurement is about finding the most suitable solution and constantly keeping an eye on the market.

“I think this has been a wake-up call to a lot of people.”