Congratulations to Laura Kuenssberg at the BBC for a powerful report on how Premier Foods treats its small suppliers: effectively making them pay protection money if they want to carry on working with them. This is important stuff, and deserves to be widely known about.
None of this comes as a surprise to me. Until recently I used to have a small business of my own, which I'd run for 15 years. It went bust this summer. There are many reasons for that of course, and one of them is no doubt that I wasn't very good at running a business, but another is definitely the attitude to small businesses that I'd found from some of our larger customers. We didn't come across anything quite so blatant as the Premier Foods example, but we did nonetheless find many of our larger customers insisting that we reduce our prices substantially if we wanted to work with them.
We couldn't afford to reduce our prices as much as was being demanded, so we lost the business. Eventually, I lost the whole business. There goes my retirement plan. Mind you, at least I found another job fairly quickly. I'd sleep a lot easier at night if everyone who used to work for me had also been so lucky.
Some may argue that what Premier Foods is doing is simply competition at work, and it benefits the consumer. They may argue that the businesses that can't compete on these terms will be the less efficient ones, and the ones that survive will be the good ones, so everyone wins.
I really don't think it's as simple as that.
Competition is a healthy thing in principle, but the problem is that when suppliers are under such relentless price pressure, it's going to be the quality that suffers. We've already seen what happens when people prioritise price over quality in the food industry: you end up with horse meat in your lasagne. So the businesses that survive may be the efficient ones, or they may just be the really dodgy ones that are prepared to cut a few corners to keep their costs down.
My own business was not in the food industry: we were in clinical research. Parts of the clinical research industry are very highly regulated, and our business held up pretty well in those parts. Clients can't afford to cut corners on quality, as they would fall foul of the regulators if they did, so mainly they were willing to pay a fair price to get the job done properly.
However, there is one large part of clinical research, which used to be a big part of my business, which is largely unregulated, namely the publication of clinical trial results in the medical literature. We took a huge battering there as clients took their business to cheaper companies in places like India. No doubt the quality was dreadful, but if it's unregulated, who cares? This stuff matters: doctors rely on the medical literature to make decisions about how to treat patients, and if research has been badly reported, maybe those decisions won't be the best ones. I don't know of any direct evidence that that is actually happening yet, though it seems plausible. I do, however, know of evidence which shows that clinical research published in low income countries is more likely to be fraudulent.
I'm not suggesting that tighter regulation is necessarily the answer. There are good reasons why clinical research is highly regulated, but those reasons don't apply to every industry. Regulation brings its own costs and inefficiencies.
It has been suggested that big businesses charging small businesses an "investment" (aka protection money) to do business with them should be outlawed. I don't think that's workable. Big businesses will simply find another way to screw small businesses, for example by demanding ever larger discounts. Unless you want to go down the road of full-blown communism, there's nothing you can do about that with legislation.
So what can we do about it?
Situations like we see with Premier Foods can arise, I think, for 2 reasons. First, there is a huge imbalance in economic power between big businesses and small businesses. I'm not sure how that can be fixed, but it really needs to be. Exempting small businesses from many of the taxes that large businesses have to pay (national insurance, business rates, corporation tax etc) would be something that government could very easily do, and I expect it would help. Though I doubt it would be enough.
The second reason is that we as consumers have become too fixated on price. If we demand the cheapest goods, then prices will come down, but we will get crap. I'm quite sure there is nothing government can do about that. It is up to consumers to think a bit more about whether they really want the cheapest things they can buy.
In the meantime, we will see good small businesses go bust, as mine did. The ones that survive may do so because they are more efficient, but I suspect that in many cases they will be the ones that are prepared to take a chance on passing off horse meat as beef, or whatever the equivalent of that is in other industries.
Big businesses screwing their small suppliers
Congratulations to Laura Kuenssberg at the BBC for a powerful report on how Premier Foods treats its small suppliers: effectively making them pay protection money if they want to carry on working with them. This is important stuff, and deserves to be widely known about.
None of this comes as a surprise to me. Until recently I used to have a small business of my own, which I'd run for 15 years. It went bust this summer. There are many reasons for that of course, and one of them is no doubt that I wasn't very good at running a business, but another is definitely the attitude to small businesses that I'd found from some of our larger customers. We didn't come across anything quite so blatant as the Premier Foods example, but we did nonetheless find many of our larger customers insisting that we reduce our prices substantially if we wanted to work with them.
We couldn't afford to reduce our prices as much as was being demanded, so we lost the business. Eventually, I lost the whole business. There goes my retirement plan. Mind you, at least I found another job fairly quickly. I'd sleep a lot easier at night if everyone who used to work for me had also been so lucky.
Some may argue that what Premier Foods is doing is simply competition at work, and it benefits the consumer. They may argue that the businesses that can't compete on these terms will be the less efficient ones, and the ones that survive will be the good ones, so everyone wins.
I really don't think it's as simple as that.
Competition is a healthy thing in principle, but the problem is that when suppliers are under such relentless price pressure, it's going to be the quality that suffers. We've already seen what happens when people prioritise price over quality in the food industry: you end up with horse meat in your lasagne. So the businesses that survive may be the efficient ones, or they may just be the really dodgy ones that are prepared to cut a few corners to keep their costs down.
My own business was not in the food industry: we were in clinical research. Parts of the clinical research industry are very highly regulated, and our business held up pretty well in those parts. Clients can't afford to cut corners on quality, as they would fall foul of the regulators if they did, so mainly they were willing to pay a fair price to get the job done properly.
However, there is one large part of clinical research, which used to be a big part of my business, which is largely unregulated, namely the publication of clinical trial results in the medical literature. We took a huge battering there as clients took their business to cheaper companies in places like India. No doubt the quality was dreadful, but if it's unregulated, who cares? This stuff matters: doctors rely on the medical literature to make decisions about how to treat patients, and if research has been badly reported, maybe those decisions won't be the best ones. I don't know of any direct evidence that that is actually happening yet, though it seems plausible. I do, however, know of evidence which shows that clinical research published in low income countries is more likely to be fraudulent.
I'm not suggesting that tighter regulation is necessarily the answer. There are good reasons why clinical research is highly regulated, but those reasons don't apply to every industry. Regulation brings its own costs and inefficiencies.
It has been suggested that big businesses charging small businesses an "investment" (aka protection money) to do business with them should be outlawed. I don't think that's workable. Big businesses will simply find another way to screw small businesses, for example by demanding ever larger discounts. Unless you want to go down the road of full-blown communism, there's nothing you can do about that with legislation.
So what can we do about it?
Situations like we see with Premier Foods can arise, I think, for 2 reasons. First, there is a huge imbalance in economic power between big businesses and small businesses. I'm not sure how that can be fixed, but it really needs to be. Exempting small businesses from many of the taxes that large businesses have to pay (national insurance, business rates, corporation tax etc) would be something that government could very easily do, and I expect it would help. Though I doubt it would be enough.
The second reason is that we as consumers have become too fixated on price. If we demand the cheapest goods, then prices will come down, but we will get crap. I'm quite sure there is nothing government can do about that. It is up to consumers to think a bit more about whether they really want the cheapest things they can buy.
In the meantime, we will see good small businesses go bust, as mine did. The ones that survive may do so because they are more efficient, but I suspect that in many cases they will be the ones that are prepared to take a chance on passing off horse meat as beef, or whatever the equivalent of that is in other industries.
Is that really what we want?