Back to front – is complexity the enemy of value?
In essence, there are two key scenarios at play: a change in the price, and promotional landscape:
Price. The shift from back to front margin and the reduction of complicated back margin payments, giving the retailer clarity on the margin they will earn.
Promotional activity. An attempt to reduce dependency on the ‘drug’ of extreme high low promotional activity, towards one of EDLP.
As a result, the conditional proposal built around ‘if you, then we’ is different. Taking the analogy of a card game, the rules have changed. In the old world a supplier would say to the retailer, you put your card on the table and then I’ll put my card on the table. You put another card on the table and then I will put another card down – and so on, each taking turns. This gave protection and certainty in the form of back margin or retro payments – I’m not going to put my card down unless they put their card down and I like it.
In essence, in the old world you turned up with a long list of things you wanted and an amount to invest, and then you linked the investment to the various things.
But the card game is changing.
Now it’s put all your cards down on the table at the beginning of the year, and we’ll start from there. This is difficult and scary for suppliers. They feel naked. It’s uncertain. There is an unknown. The genuine fear, of course, is what happens if I put all my cards down on the table and I don’t like their cards? Or, they don’t put their cards down?
It’s all very uncomfortable and riddled with uncertainty, the natural reaction is to resist.
Conditionality exists as part of the process of building to an agreement, but when it comes to ‘contracting the deal’ the condition can no longer be guaranteed. We have reached this stage as a result of the fact that we have moved to a world of flat volume in which the old model based on a volume performance doesn’t work. A world in which all the risk lay with the retailer where often, at best the contract was complex to manage and at worst, the conditions that were agreed could not be delivered.
As a negotiator it is important to manage risk and to motivate the other party, so the challenge now is not to be defensive about the loss of retrospective volume agreements but to be proactive in finding variables that can drive the business and build these into agreements. In essence conditions that can be delivered – the number of SKUs, amount of space, percentage share of category, commitment to undertaking a joint initiative etc. These are arguably now more important and will play a part in protecting competitive positions for the medium and long term. Perhaps we should call it conditionality with a selected number of key variables – where the risk is future proofed for the retailer and the supplier.
Where do we go from here?
The reality is that the industry is not growing – and everyone wants growth. The maths simply doesn’t add up. As a result, talking of partnerships becomes difficult in the short term where it is likely to be more of a share game – someone loses and someone wins. This is more of a checkerboard approach, where there are supplier partnerships with strategic decisions about where you will grow share (and where you won’t) – to make the maths work for you. It’s difficult and there are short term risks. How do you deliver the business plan in year one but still do the right things for years five and 10?
Five things to focus on
- The shopper. Have a product that is relevant and the shopper wants to buy. The shelves are full of products with high margins, but not necessarily products the shopper wants to buy. If you have a product that only survives on half price promotions, you will not survive. If the product satisfies shopper needs then you are in a strong position, especially when it comes to range rationalisation.
- Innovation. Raising the bar with innovation remains key, with a focus on delivering what the shopper wants rather than being a simple flavour extension and a proliferation of SKUs. It is imperative to understand shoppers and to be relevant.
- Help me to help you. Listen to each other. Retailers and suppliers will need to help each other down this road. Better communication, with open and honest discussions about the situation they each face, combined with consistent messaging and personnel are required.
- JBP conversations. If you are only thinking about your JBP [joint business plan] conversation in November you are already too late, these conversations should be taking place 365 days a year as you ensure this years is met while shaping next years. There is a need to be honest about what is important to both parties. Focus on what is genuinely important and build a mutually beneficial JBP that satisfies both. We often get brought in when conversations have broken down, our focus then has to be on repair before we can shift it where it should be – maximising value for both parties.
- Longer term planning. In our experience one of the key reasons why negotiations and relationships break down is due to a lack of planning. Extending the planning horizon beyond a rolling three-four month window will help to bring greater certainty. If the time horizon can move towards 12 months and beyond this allows for longer term investment decisions to be made that can benefit both parties.
How do we build trust in the long term? It is scary for suppliers to take the leap of faith that is required. To engender the trust required the focus needs to be more on mutuality and on how both parties can help each other to achieve their commercial objectives. This requires a greater level of understanding of each other and a pragmatic approach to sharing risk.
Seven things to help achieve shared understanding
- Joint agendas: Working on joint agendas for mutual gain will be essential. Maintain a focus on a core three-five priorities and get them right.
- Regular reviews: It won’t go right first time all of the time, particularly as shoppers have proven themselves to be unpredictable. So regular, formal, senior level reviews will help alignment and understanding across a broader level. Be prepared to test and learn together in an open and collaborative way, to take steps along the road together.
- Small leaps of faith. To take mini leaps of faith, building trust over time, rather than one big leap of faith. If you can ‘course correct’ along the way then suppliers might be prepared to take another leap of faith, and then another… because they think it is worth it.
- EQ. People work with people and everyone is doing the best they can with the resources available. Do your teams have the skills and resources required to navigate this new way of working? In such challenging times you need persuaders with high EQ[emotional intelligence], people who will communicate a vision and get things done through relationships. Banging the table and making threats while easier, won’t get the job done long term. A High IQ, low EQ approach that is a transactional, fact based approach will struggle. Retailers will want suppliers to put their best people on their account.
- Consistency and reliability. A supplier is only as good as last week’s delivery, product consistency and quality. Work with the retailers to be top of the heroes’ board – getting the basics right and hitting orders every day.
- Focus on the medium and long term. This allows suppliers to focus on and invest in the future. So understand the real drivers, what drives cost and what drives value.
Suppliers and retailers cannot spend enough time working together on this. As a supplier there is no point going back to the board with an investment that has a three year payback with a six month deal – it requires long term working together. Suppliers will be happy to invest, but it has to make economic sense for the long term. Working in this way builds trust and relationships. Retailers need to be aware of the impact of promiscuous behaviour in their buying decisions, simply moving business from one supplier to another and seeing this as an easy option. There are benefits in taking a long term perspective and finding sustainable solutions. This is going to be hard but a long term view is essential to build trust and create value for both. Suppliers also need to understand retailer buyers are time poor, if they can save them time and make the contract easier to manage it will put them in good stead.
- Understand the supply chain. Look at the value chain in its entirety, working together to pull the value chain to bits. Suppliers (own label suppliers in particular) will have no problem with finding a way for a retailer to save a penny… so long as it doesn’t cost the supplier money. With retailers trying to squeeze costs out of their business there is a danger that it’s a bit like squeezing a balloon – many of those costs end with the supplier. This simply transfers the problem from one party to another. It needs a joint approach, collaboration and working in a long term partnership.
The industry has reached a crossroads and the old rules of working can no longer be relied upon. It is important to embrace the changes, as difficult as they may be. Suppliers need to consider the first mover advantage. Those that are proactive and change the way they operate to the new rules are likely to be rewarded. Those that try to play the old rules are in danger of being left behind – the market will move on. One thing is for certain, there are going to be some winners and losers in this new world. Whichever strategy one decides on, the skill of the people implementing the deal is more important than ever and the outcomes of these imminent conversations will shape the market for the next five years.
In the Australian retail landscape where the big two supermarket retailers are under immense pressure; where the negotiations have been very transactional and suppliers weary of further profit transfer…..many suppliers will feel like they are standing on the edge of the abyss…not sure what is ahead..
Suppliers and retailers need to have honest conversations to help each other down this road, and if they can do this effectively and approach it with a long term mind-set, then both can prosper.
Lloyd Barrett is the head of retail – ANZ, The Gap Partnership, a global negotiation consultancy working with over 500 of the world’s largest and most influential companies.
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