Big M&S supplier gets tough over price cuts

Northern Foods demands retailer rethinks its ranges and terms of business

Key suppliers to Marks & Spencer have laid down new conditions before agreeing to the £100m-a-year price cuts and margin improvements that the retail giant is demanding.

Key suppliers to Marks & Spencer have laid down new conditions before agreeing to the £100m-a-year price cuts and margin improvements that the retail giant is demanding.

Northern Foods, one of M&S's biggest suppliers, has been asked to cut prices by a relatively modest 1.25 per cent from September but a much bigger cut of 2 per cent is being imposed on the company from next April.

However, Northern Foods, led by its chief executive Patricia O'Driscoll, has told M&S it wants to see the retailer make changes to the way it operates its food retailing business as a condition of accepting the price cuts. The two companies are said to be "collaborating" on the savings but Northern is insisting M&S helps it achieve the cuts.

Separately, the M&S pension trustees are set to meet tomorrow to discuss a request for a meeting from Philip Green, the Bhs and Topshop entrepreneur, who is trying to mount an £8.4bn bid for the retailer.

A positive response to Mr Green's request looked increasingly likely yesterday as it emerged that David Norgrove, the trustees' chairman, has commissioned new studies by advisers, including Watson Wyatt, the actuaries, and Linklaters, the fund's legal advisers. Mr Green wants more details of the pension fund deficit and change of ownership clauses that he says are crucial before he can be in a position to raise his 370p-a-share bid to the 400p level thought likely to interest shareholders.

Some investors were taking profits in M&S yesterday, with Scottish Widows selling 4.08 million shares, raising £14.7m.

If Mr Green wins control of M&S, its suppliers, such as Northern Foods, will face a new buying regime at the retailer, but in the meantime, larger suppliers are not taking M&S's most recent changes lying down. Northern wants to see a simplification of its agreed terms of doing business with M&S as well as a radical simplification of M&S food ranges, which have been expanding rapidly over the past few years.

Northern Foods' M&S products account for about 20 per cent of the retailer's £3.49bn food sales and about 30 per cent of Northern Foods' profits, which were £75.4m last year.

Stuart Rose, the new M&S chief executive, has said he intends to reduce the number of food lines sold in the group's stores by about 500. Northern Foods wants to see an end to so-called "range proliferation" where M&S had asked for multiple variants of a range which have not added to total sales. This will reduce the number of stock keeping units (SKUs) the retailer maintains.

One person familiar with Northern Foods' stance said: "Northern is being a bit more robust than most of the other suppliers."

Another problem has been the cost of servicing M&S in terms of meeting the detailed requirements of doing business with the retailer. M&S has in the past insisted on minute details down to the number of tomato slices on an individual piece of quiche, which has meant factory lines producing M&S products have remained less automated than for other retailers.

Richard Workman, an analyst at Oriel Securities, said: "It is clearly a complex negotiation. It's very easy [for M&S] to say we are taking prices down but it's really what follows on from that in terms of range rationalisation and terms of business which will determine what the impact on [Northern Foods] profits will be."

Northern Foods has already embarked on cost-cutting initiatives to save £15m a year.