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Business Ethics in Action | UWL ID – 21361781 | 1

Business Ethics in Action – Assignment 01

Ethical Issues Faced in the Sri Lankan

Supermarket Industry

Tehan Paul R. Samarasinha

UWL ID - 21361781

Lecturer – Mr. Dehan Seneviratne

Total Word Count - 1993

(Excluding: Table of Contents, Table of Figures,

Headings, Figures & References)

Acknowledgement

I would like to thank Mr. Dehan Seneviratne for his unwavering guidance and support.
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Table of Contents

Introduction 4

Stakeholder Analysis 5

Ethical Perspective of Abuse of Buying Power 7

Egoism 7

Utilitarianism 8

Ethics of Duties 8

Ethics of Rights and Justice 9

Ethics of Virtue 9

Recommendations 10

References 11
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Table of Figures

Figure 1 – Rodent infestation in Keells Super meat counters 4

Figure 2 – How buyer power and retailer power support each other 5

Figure 3 – Buyer power abuse and the effects on suppliers 6

Figure 4 – Effects of abuse on suppliers and the subsequent effects on consumers 6

Figure 5 – Application of the Triple Font Theory 10


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Introduction

Regardless of the significantly bigger consumer base in neighboring India, the retail sector in Sri Lanka
has seen explosive growth in the recent years. Strong macro-economic fundamentals, increasing levels of
household expenditures, rising income and more sophisticated and brand conscious consumers all
contribute to the vast protentional and expansion of this industry. Sri Lanka’s modern trade (supermarket/
hypermarket) segment is amongst the fastest growing industries with supermarket penetration increasing
from 5% in 2005 to around 12% in 2016 (Nielsen Sri Lanka, 2016).

The dominant players in this sector include Cargills Food City, Keells Super, Arpico Supercenter &
Superstores, Laugfs Supermarkets and Lanka Sathosa. Along with the industry’s expansion; enterprises
such as Cargills who have dominant market share are evaluated not only by their commercial profits but
also by their performance of social responsibilities and ethical business practices. Just as in many parts of
the world, supermarkets in Sri Lanka have played the leading function in the food supply chain.

In cannot be denied that supermarkets play a pivotal role in the convenience of many lives of consumers
across markets both locally and internationally. With the expansion of this sector, the ethical issues that
surround it are heavily criticized and the adverse impacts are widely contested.

Firstly, supermarkets are accused of polluting the environment – issues such as over consumption of
energy, wastage of water, packaging issues such as
overuse of plastic bags etc. Second, Food safety in
supermarkets has been another ethical issue which
has gained the public eye. The adjoining image is an
example of unhygienic storage, where the leading
supermarket chain such as Keells Super who boast
freshness in all their produce has been caught on
camera with a rodent (Rat) being present amongst the
fresh seafood & meat counters. Figure 1: Rodent infestation in Keells Super meat
counters
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Thirdly, larger supermarkets like Cargills Food City that hold majority share of the modern retail space
with their 345+ outlets are accused of devaluing the economy in rural areas through their strong buying
power and bargaining for lower prices of food products. In turn, the towns/ neighborhoods “mom & pop”
establishments are run out of business as they cannot compete with the wider range and prices of such
larger supermarkets. Forth and perhaps most importantly is the misuse of strong bargaining power to
manipulate the market of certain products/ strong hold suppliers to maximize their profits whilst
sacrificing the interest of suppliers and in turn affecting the purchasing of the end consumer.

Stakeholder Analysis

Consumers are the final link in the supermarket food supply chain where the processes and operations
along the way can and will affect the consumer in both negative and positive ways. Over the past decade,
supermarkets in both developed economies as well as Sri Lanka have acquired an increasing share of the
grocery market and therefore have increased their influence over suppliers – what food is grown, how it
is administered and packaged and even impacting the lives of the local farmer and workers across the
market.

As suggested by Carroll and Buchholtz in their book Business and Society, “when combining with
business – business ethics, guiding decision-
makings and policies, is concerned with good and
bad or right and wrong behaviors and practices
within business context”. Therefore, with regards
to buying power; the common understanding is,
bigger buying volumes command better buying
prices, yet (Illustrated in Figure 2) what
constitutes supermarkets to continue to extract
better terms and benefits from suppliers after
economies of scale have been achieved? The
explanation is abuse of buyer power.
Figure 2: How buyer power and retailer power
support each other
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The following is a critical analysis of how the abuse of buyer power can be considered not only ethically
questionable due to their effects on the supplier but also on the affects it leaves on the consumer though
impacts on innovation and reduction of choice and higher prices.

Firstly, depicted in the below table are examples of abusing of buyer power and their adverse effects on
the suppliers:

Figure 3: Buyer power abuse and the effects on suppliers

ABUSES EFFECTS ON SUPPLIERS


Listing Fees Additional costs to supplier
Risk of stocking new products passed to Supplier
Threat of de-listing create uncertainty, weaken suppliers
De-listing/ threat of de-listing bargaining position and inhabit their ability to plan.
Actual de-listing can mean substantial loss in volumes
Demanding extra or unforeseen discounts or
payments
for marketing, store openings/remodeling and
retailer initiated promotions Unexpected costs, below expected income and increased
Demanding additional payments, extra uncertainty born by the supplier
discounts and after-sales rebates
demanding compensation increase chains profit
margin
Late payments/ requesting unreasonable credit
periods Adversely effects the cash flow of the supplier and
for products delivered and sold increases financial costs

The subsequent effects on consumers of the above mentioned are summarized and shown below:

Figure 4: Effects of abuse on suppliers and the subsequent effects on consumers

EFFECTS OF ABUSE ON SUPPLIERS EFFECTS ON CONSUMERS


Threat to supplier's prices may affect supply and in time push
prices up and reduce choice
Overall pressure on supply prices
Supplier forced to cut down production costs may sometimes
result in squeezing ingredient quality
May result in higher consumer prices in the long term
Additional cost to supplier May result in higher prices in non-supermarket outlets in the
short term
Loss of choice and possibly quality/ replacement of branded
De-listing goods with retailer brands
Adversely affecting supplier cash flow Price, range and quality are all risked due to reduced funds
Increased financial costs/ burden available to supplier for investments and promotions
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Ethical Perspectives of Abuse of Buying Power

Consumers are increasingly concerned about ethical issues related to the super market sector - whether it
be health, environmental pollution, animal welfare, working conditions and sustainability. The effects of
buyer power abuse are now so abundant in the supply chain that they may well impact all these areas that
concern consumers – and today’s consumers are angrier and more willing to take action against corporate
behavior if they observe the behavior as intentional, unfair and motivated by greed (Stucke, 2012).

The following section will critically analyze the abuse of buying power through the ethical frameworks
of Normative theories - an in-depth critique of this subject will be brought forward through the
perspectives of Egoism, Ethics of Duty, Utilitarianism, Ethics of rights and Justice and Virtue ethics.

Egoism

As opposed to Adam smith’s pioneering work on economics – The wealth of Nations; that suggests
Egoism or rather the notion that individuals single-mindedly pursue their own self-interests and desires
will benefit society unintentionally as if “led by an invisible hand”; there are many arguments against
such notions that justify one’s self should be the motivation and goal of one’s action. When applying this
theory of one’s self interest being the key driver behind Supermarket business decisions – one cannot
overlook the consequences of the abuse of buying power can make on suppliers and consumers alike.
Cargills Food City, being the dominant supermarket chain in Sri Lanka, believes in aggressive expansion
of their stores across the Island in order to gain market share and growth over its competition. Whilst they
keep this strategy as at the helm of their decisions, they have imposed an outlet opening fee across
suppliers, where suppliers are charged up to LKR 50,000/- per store opening as an unconditional fee to
ensure availability of products in these newly opened outlets. While this could be looked as a very egoistic/
self-interest driven decision on Cargills behalf and a method to cover the exorbitant costs of such
investments – many suppliers could not bear this cost and in turn, had their products de-listed in these
outlets which meant they lost out on sales volumes and market share to competitors who did accommodate
the fee. One can even argue the impact on consumers through this decision as - due to the de-listing of
products, consumer choice too was affected and reduced.
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Utilitarianism

As this theory suggests; the best action is the one that maximizes “utility” or as the classical Utilitarians
Jeremy Bentham and John Stuart Mill suggest “the greatest amount of good for the greatest amount of
people. When critically analyzing how Supermarket chains such as Cargills Food City, Keells Super and
Arpico stronghold their suppliers of food essentials such as rice, sugar, onions etc to offer them better
margins and discounts – it is in turn passed down to the consumer with the “lowest” prices (in hopes of
attractive more footfall into stores/ sales uplift) who in majority will enjoy the low prices and will provide
them relief in terms of their monthly expenditures. However, the other side of the coin is that these benefits
may only accrue in the short run as the detriment of suppliers (as explained in figure 4, 6pg) will in the
long run negative impact consumers as well as they are both connected.

Ethics of Duties

As opposed to Utilitarianism; Ethics of Duties brought forward by German philosopher Immanuel Kant
held that certain types of actions (Murder, theft and lying) are absolutely prohibited even if it would bring
about more happiness than the alternative. For Kantians, there are two questions one must ask before
deciding to act: (1) Can I rationally will that everyone act as I propose to act? (2) Do my actions respect
the goals of human beings rather than using them for my own purposes?

In many countries such as UK and Australia; a grocery code of conduct is in affect (voluntary) that governs
Supermarkets/ retailers in their dealings with suppliers. It covers aspects of supply agreements, payment
terms, termination of agreements, dispute resolution and a wide range of matters that avoid abuse of buyer
power. Whilst such rules are imposed in overseas markets, it is still yet to be present in the Sri Lankan
arena. A lack of such governing forces gives rise to the instances where chains such as Cargills use their
strong bargaining power to negotiate credit/payment terms, supply agreements and investment
requirements that are detrimental to the supplier’s business as there is no current duty to not exact that
power over suppliers.
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Ethics of Rights and Justice

Based on the belief and principle of John Locke – he stated that every person has a set of fundamental
rights that they are entitled to by simply existing. He brought forward that these rights should not be
infringed by any other person, action or choice. When considering such rights - Cargills with their strategy
to be present in every part of the country often overlook the effect their new locations have on the
neighborhood “mom & pop” store which has been operating for years. Whilst their new locations might
run small time family own establishments out of business with their greater buying power. Yet, under the
perspective of Ethics of rights and justice there is no moral ambiguity in their decision to expand their
reach.

Ethics of Virtue

Virtue ethics is a broad term that identifies that morally correct actions are those that are undertaken by
individuals with virtuous characters. Aristotle whom ethics of virtue is largely identified, categorized
virtues as – Honesty, Courage, Justice and Temperance. In the Sri Lankan context, it might be perhaps
farfetched to consider any of the supermarket chains as completely virtuous. Most chains do not divulge
the balance stock of the respective suppliers to have control over monthly purchase requirements and
additional demands; which can be attributed towards dishonesty. Furthermore, with demanding of
unforeseen discounts and marketing investments with the threat of de-listing products and impacting on-
shelf visibility one could also conclude that chains rarely operate with Justice as a forefront practice. Just
as mentioned above, along with unreasonable charges from suppliers to better the retailers profit margin
it is also arguable that temperance is not a virtue practiced by the supermarket chains such as Cargills. On
the other hand, chains like Arpico whilst are no. 3 in the market continue to build stronger partnerships
and strategies with suppliers than succumb to strong holding them. This is a good example of virtue of
courage in the face of adversity.
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Recommendations

As throughout this paper it has been identified that perhaps too often than not, supermarket chains in Sri
Lanka do not tend to follow an ethical framework when conducting business with suppliers. Therefore,
the first and foremost recommendation which is brought forward is the introduction and use of the ‘Triple
Font Theory’ (TFT) into the organizations culture. The TFT identifies three constituents of morality when
making a decision – (1) Action (2) Intention and (3) Circumstances including consequences. In other
words, a morally good action must be chosen that is motivated by a good intention which results in an
attendant circumstance or consequence that is also good. Supermarkets can adopt the utilization of TFT
to better their business practices.

An example of TFT being effectively utilized in decision making is shown below. For this instance, the
abuse on power to redeem new outlet opening fees (refer Egoism, 7pg) is chosen.

Figure 5: Application of the Tripe Font Theory (TFT)

Our further recommendation to overcome the abuse of buying power in the supermarket industry of Sri
Lanka is to enforce a code of conduct (as mentioned in ethics of duties, 8pg) as is enforced in countries
like UK and Australia. Through the support of the government authorities and independent establishments,
regulations/ governance should be based on a fundamental belief of fair dealing and should be enforceable
and binding. All suppliers should then have effective choice to protection from such unethical practices
highlighted throughout this paper. Consumer organizations too will have an important role to play in
mitigating the negative effects of buyer power.
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References

Stucke, Maurice E. (2012) Buyer Power: Should the Seller Beware?, Paper presented at Conference on
Buyer Power in Competition

Zuckert, M. (1996). The Natural Rights Republic. Notre Dame University Press. 73–85

Strattion, Philip. (2005) Kant, Duty and Moral Worth

Tehan Samarasinha, Head of Modern Trade, Reckitt Benckiser (Lanka Ltd)

Nishadhi Weerasinghe, Research Executive (Retail), Nielsen Sri Lanka

Food and Grocery Code of Conduct : Australian competition and consumer commission [Online]
Available at: https://www.accc.gov.au/about-us/tools-resources/social-media/transcripts/food-and-
grocery-code-of-conduct
[Accessed 22 11 2017]