In September last year I wrote a Soapbox about fairness being a source of competitive advantage here. My focus was on the increasing price transparency in business-to-consumer (B2C) relationships and the risks to those companies that have historically abused their customers’ lack of price visibility. But what about abusing suppliers? Can companies still get away with this? Do consumers really care? The dominant business in any value chain usually has pricing power, but we believe there is a difference between pricing power and abuse of power. A business with a high return on capital that is built on the abuse of suppliers is every bit as frail as one built on the abuse of its customers.
As discussed in our recent Soapbox about Hotel Chocolat, the Fairtrade movement is an excellent example of society responding to supplier abuse. This ultimately resulted in companies changing their behaviour because real (or perceived) abuse of third world farmers was damaging their brands.
As part of the sustainability analysis of potential investments, we take great care to assess the supply chain of our investments, particularly when they involve low wage labour or the use of finite and polluting resources. Interestingly, we are regularly drawn to vertically integrated businesses that appreciate the value of controlling their entire supply chain, something that went out of fashion during the ‘outsourcing’ trend. These are often the most disruptive companies and we also find they are usually the most sustainable as well. Why? In my experience it’s because vertical integration means that these companies have a deep understanding of where their products come from, whilst also having a close relationship with their customers.
“It’s a bold move growing our own cocoa and it’s one that goes against the overall trend in the chocolate industry – to specialise more and more in a particular part of the chocolate making process. But Rabot Estate allows us to create a direct connection between our customers and the very origin of chocolate, cocoa. We’re one of the very few in the world able to do this.”
Angus Thirlwell, Co-Founder, Hotel Chocolat
Organisations that excel in managing their supply chain tend to see the benefits of this as self-evident. Quite simply, it creates a competitive advantage that helps improve the rate and sustainability of their returns on capital.