Is it time for retailers to demand cost decreases from their vendors?
Now that inflation is easing a bit, can/should retailers start demanding lower costs from their vendors? Or, should manufacturers be asking for cost increases?
The answer to both is yes, but it’s not quite as simple as a yes or no for either side. Both sides share many of the same cost issues tied to labor, the supply chain, climate, energy and raw materials. Many of these issues are industry/category-specific and need to be dealt with on a one-on-one basis. Both sides need to be aware that their customers have a red line when it comes to retails and will walk away if cost and retails go too high.
NO EASY ANSWERS
There are no easy answers. Of course, both sides can jump on the inflation bandwagon to justify increases. But just because some are raising costs/retails doesn’t mean everyone should follow suit. I find it interesting that many CPG companies and retailers had very good fourth quarter profit numbers. Perhaps first looking at those might help answer the question.
The issue of cost increases/decreases is hardly new. To my experience, the best way to address them is head-on. Call in the companies that are asking for the increase and listen to their reasoning. Have an open discussion on how much of an increase they’re seeking. Do they see the increase as permanent, or is it open to quarterly reviews? Then, both parties need to discuss how much the increase will affect their respective sales. Ask if the increase is the same for all their customers. Have they gone back to their suppliers for relief?
Both parties need to sit down and understand the impact of an increase to both of their P&Ls as well as the impact on their customers.
A big one for me is to dive into reasons for the increase. Many a time, I saw a 15% increase simply because a component of the item was going up by that percentage. So why was a 15% increase for the whole item being asked for? I recall a time when a cookie supplier wanted a 15% increase. But when we dissected everything, it turned out that the only cost increase he was facing was for butter. Yes, butter had gone up 15%, but it made up only 10% of the total ingredient mix. We finally agreed to a lower increase — and to review it in 90 days. If the cost of butter had gone down by then, the increase we’d agreed to would be rescinded. I wonder how often this common-sense procedure is actually followed.
Yes, there are times when the cost increase is permanent due to circumstances beyond the control of either party. So what then? Again, both parties need to sit down and understand the impact of an increase to both of their P&Ls as well as the impact on their customers. I found the best solution was to take the increase up in steps rather than all at once. This lessened the sticker shock at retail and allowed both parties to see how it was affecting their businesses. Would more increases be the right thing to do under the circumstances?
I also found the best time to take an increase was when the issue was in the news. If the nightly news is talking about how bad the orange crop was coming in, this gives the customer a heads-up that retails might be rising. And if the retails are going through the roof — as eggs have done recently — it’s a must to put a note on the shelf by the item explaining the reasons.
So how high is too high? Well, that depends again on the reasons for the increase. But the answer I hate to hear from a retailer is, “Well, I’m just going to have to discontinue the item.” This type of response makes no sense. Who are you punishing for not carrying the item besides the supplier? There’s an easy answer: “the customer.” Always be sure to look at your competition and see where your lowest competitor is for both national brands and private label. Obviously you can’t be the lowest price on everything you carry, but you sure can target the sweet spot by item and category. That softens the blow to your bottom line and keeps you from crossing your customer’s red line.
A wise grocery CEO told me one day that ‘If they’re not in business, we won’t be in business.’
One size — or size of increase — doesn’t fit all. That varies depending on simple supply and demand issues, commodity prices, weather or even war. But always keep in mind that what goes up, also comes down — but how quickly and how much is a different issue. Your customers have choices when buying food, whether it’s your competitor a few miles away, or trading from a national brand to a store brand or just walking by the item.
Knowing your category, your supplier and your customer is key to predicting how much price elasticity they all have. In the end, it’s you — the buyer — who will have the final say, but by doing your due diligence first, the odds of making the right decision go way up.
A BASIC TRUTH
Here’s the bottom line on pricing: where it’s up or down needs to be part of every quarterly meeting and annual business review. There should be no surprises by either side and especially nothing affecting your customers. Rarely have I seen price increases come out of the blue with no warning. Having timely, fair and open conversations is key to a successful outcome. A wise grocery CEO told me one day that “If they’re not in business, we won’t be in business.” I have found this to be true, for both sides. n
Bob Anderson is the retired VP/GMM at Walmart, where he worked for 17 years. He can be reached at bob.sue@sbcglobal.net.
