Who really carries the risk in modern retail?

Who Really Carries the Risk in Modern Retail?

When consumers notice prices rising, inflation is often the first explanation. Higher fuel costs, raw material price increases, and supply chain disruptions are real contributors to higher prices. However, they don't fully explain why many products become significantly more expensive once they reach retail shelves.

This blog post aims to shed light on the often-overlooked factors that contribute to rising prices in modern retail. By examining the costs and risks associated with participating in retail systems, we'll explore how these dynamics affect smaller suppliers and ultimately influence consumer choices.

Inflation Raises Costs; Retail Participation Multiplies Them

As inflation increases baseline costs such as ingredients, packaging, logistics, and energy, suppliers must absorb these additional expenses to maintain product quality and competitiveness. However, once a product enters modern retail, a second layer of costs begins to accumulate. These are not production-related costs but participation costs associated with accessing and maintaining shelf presence.

Power Asymmetry in Retail Relationships

In theory, suppliers and retailers negotiate terms. In practice, many micro, small, and medium-sized enterprises (MSMEs) operate within a clear power imbalance. Large retail chains control access to shelf space, foot traffic, and consumer visibility. For smaller suppliers, the choice is often limited to accepting existing terms or foregoing access altogether.

Risk is Quietly Shifted Downstream

Another often overlooked factor is risk transfer. In consignment-based arrangements, MSMEs retain ownership of inventory while products sit on retail shelves. Spoilage, expiration, damage, and slow-moving stock frequently remain the supplier's responsibility. Payment cycles of 60 to 90 days are common, meaning MSMEs effectively finance a portion of retail operations without compensation for time or capital.

VAT Offset Assumption vs. Reality

Retail-related fees are often described as VAT-creditable expenses. On paper, this is correct. In practice, many MSMEs struggle to fully offset VAT due to timing mismatches between expenses and collections, uneven sales volumes, or prolonged payment delays.

Why MSMEs Exit Quietly

Many local brands do not fail publicly. They exit quietly. Maintaining relationships is critical in retail ecosystems. MSMEs are often reluctant to speak openly about challenges due to fear of blacklisting, reputational damage, or future exclusion.

What This Means for Consumers and the Market

When participation costs and risk structures shape who survives on shelves, consumers experience fewer choices and, over time, higher prices. Product diversity declines not because local brands lack competitiveness but because sustaining retail presence becomes financially unsustainable.

Rethinking Support Beyond Capability Building

Government programs have made meaningful progress in improving MSME capabilities through training, financing, and digitalization. These efforts are essential. However, preparing MSMEs to compete does not automatically address whether market structures allow sustainable participation.

Broader Conversation Worth Having

Rising prices are not solely the result of inflation. They reflect how costs, risks, and bargaining power are distributed across the value chain. Recognizing this does not assign blame; it enables a more informed discussion about how markets evolve and who they ultimately serve.

In conclusion, while inflation is a significant factor in rising prices, it's not the sole culprit. The dynamics of modern retail participation, including access costs, risk transfer, and power asymmetry, also play a crucial role in shaping the market. By acknowledging these factors, we can work towards creating a more resilient, competitive, and inclusive marketplace that benefits both consumers and suppliers alike.

Edward Lance Arellano Lorilla

CEO / Co-Founder

Enjoy the little things in life. For one day, you may look back and realize they were the big things. Many of life's failures are people who did not realize how close they were to success when they gave up.