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collaboration

Want to be competitive … collaborate

Background

Disruption is the new normal for the supermarket industry. Increasing sales of hard discounters, P/L (private label), small brands and online have already changed the structure of the industry. Competition from new channels such as online marketplaces (e.g. Amazon) and direct to consumer (D2C) continue to change the industry. The increasing power of shoppers, including new demands such as personalised offers and ESG ranges will continue to change how the industry operates.  More recently Coronavirus, the war in Europe, adverse weather conditions and inflationary price pressures have disrupted the supply chain.

The obvious challenge for manufacturers and supermarkets is how can they be competitive in such a challenging market that is constantly changing? Collaboration.

Price negotiations

Due to the increasing CODB (cost of doing business) many manufacturers, in Australia and overseas, have been requesting price increases recently. Unfortunately, this has led to adversarial negotiations between manufacturers and supermarkets in some cases. For example, in the UK Heinz stopped supply to TESCO on many major brands, such as Heinz Tomato Ketchup and Heinz Beanz, due to a price increase not being accepted (BBC). TESCO eventually accepted a price increase and supply resumed. Mars (pet food category) have stopped supply of Whiskas pet food due to a similar negotiation with TESCO (BBC).

The outcome of these adversarial negotiations is lower shopper satisfaction due to O/O/S (out of stocks) of shoppers’ favourite brand / SKU. From a modern shopper ESG perspective it is also a fail. Supermarkets should be able to build positive relationships (social) with their suppliers. My blog, ESG in FMCG , provides more details. The relationship between the manufacturer and supermarket has deteriorated. As outlined in my blog, There is no perfect category relationship, to maximise long-term financial results manufacturers and supermarkets should work collaboratively towards common goals. Another consideration is how will other stakeholders interpret this situation? Will the UK government now want another inquiry to investigate supermarket power?

My blog, Who has the power? , also highlights the increasing power of shoppers. So do major manufacturers, e.g. Heinz, and supermarkets, e.g. TESCO, actually have the power to engage in adversarial relationships and still deliver strong long-term financial results? Will TESCO potentially devalue a category, lose shoppers by supporting P/L (private label) and decrease ranging of major brands like Heinz in the future? Will Heinz then support other retailers and channels such as D2C (direct to consumer) that could decrease TESCO sales? If yes then how will this outcome maximise the long-term financial results of either the manufacturer or supermarket? Another approach (collaboration) could deliver different results.

Shopper Led

‘The perspective of marketing has changed from regarding marketing as a series of independent transactions to a dynamic process of establishing, maintaining and enhancing relationships’

Selnes

Antecedents and consequences of trust and satisfaction in buyer-seller relationships, Fred Selnes, European Journal of Marketing, Vol 32 No ¾, pp 305 – 22, 1998

Much has already been written about the increasing power of shoppers and consumers. For example, Jim Blasingame, in his book The Age of the Customer, highlights customers now control the relationship with sellers’, and they also control the product information. Similarly in my book, Category Management 2020, I argue that the internet has further increased the power of shoppers. My blog, Who has the power? , provides more information.

Due to the increasing power of shoppers many manufacturers and supermarkets now have customer centric / customer obsessed strategies to meet shopper demands. For example, Coles have customer obsessed as part of their ‘inspire customers’ strategic pillar plus customer obsession as a company value.

Some may suggest supermarkets rejecting manufacturers price increases is being ‘shopper led’ i.e. offering shoppers the best retail price possible. This is debateable. Firstly, the market sets the retail price. In this example TESCO would match other supermarkets retail price for Heinz Tomato Ketchup. So, if TESCO achieved a cheaper cost price, vs other supermarkets, it would not necessarily mean a cheaper retail price for shoppers. According to The Grocer Heinz have achieved price increases on over 230 SKUs, with other supermarkets, that have led to increased retail prices recently. Secondly modern shoppers expect more than ‘the best product at the best price’. For example, modern shoppers expect supermarket to embrace ESG. In this example shoppers expect TESCO to act ethically and build positive relationships with suppliers (social).

For manufacturers and supermarkets to be customer centric they need to put the demands of shoppers first. Manufacturers and supermarkets demands / KPIs are then secondary. In this situation did TESCO shoppers want Heinz to cease supply of major brands like Heinz Tomato Ketchup? So how can manufacturers and supermarkets deliver these customer centric strategies … collaboration.

Category Management Mindset

As outlined in my blog, Category management is a way of thinking , a category management mindset is more important than the resources available. This blog highlights the sales growth of hard discounters and P/L (private label) is due to a category management mindset, not greater resources (people, data, research). TESCO and Heinz have the resources to successful implement a category plan but obviously in this example it has not occurred.

The TESCO / Heinz situation is another example of practitioners completing a process label category management with a trading mindset. The thinking has been short term, internal financial results driven. This has led to an adversarial relationship that did not best serve the shopper. The long-term outcome is probably a decreased level of trust in the relationship between the manufacturer and supermarket. My blog, Category Management vs Trading, a comparison, provides more information.

To achieve better long-term relationships with shoppers requires manufacturers and supermarkets to adopt a category management mindset. Once practitioners adopt this mindset then creating long-term mutually beneficial relationships, based on trust, becomes a KPI. This change in thinking will lead to a change in behaviours and a collaborative relationship.

Collaboration

Exploiting power may work in the short run, but it is self-defeating in the long run.’

Kumar

The Power of Trust in Manufacturer – Retailer Relationships, Nirmalya Kumar, Harvard Business Review, November – December 1996 Issue

A great deal has already been written about trust and power in relationships. The research highlights that collaborative relationships create better financial results. For example, Kumar stated ‘By working together as partners, retailers and manufacturers can provide the greatest value to customers at the lowest possible cost.’

In the current high inflation environment manufacturers and supermarkets need to discuss how best to manage price increases. There are numerous options available to manage pricing. Some possible discussions points could include:

              Research – has either the manufacturer or supermarket completed research highlighting what retail price shoppers believe to be acceptable? Maybe shoppers are not concerned with a price increase for certain ranges. For example, fresh produce retails fluctuate weekly and shoppers keep buying fresh produce.

              Transport – who has the cheaper supply chain? If it is the supermarket has a cheaper supply chain then maybe FOB (imports) or ex-factory (local) pricing is the best option.

              MOQ (minimum order quantity) – would increasing MOQ to pallet (small volume SKUs) or full truck (high volume SKUs) decrease overall transport costs?

              Promotions – do promotions actually increase overall category sales? If not, then decrease the number or depth of promotions to reduce the CODB (cost of doing business). Manufacturers should not be penalised at the next review for declining unit sales / UPSPW due to less promotions.

              Packaging – would a change in retail packsize / weight or number of retail units in a shipper decrease CODB (cost of doing business)? Is shelf friendly packaging actually used in store? If not, maybe a cheaper shipper could be used.

There are numerous other topics that could be discussed in a collaborative relationship.

Summation

Manufacturers and supermarkets understand the increasing power of shoppers. To meet these demands requires a collaborative relationship between the manufacturer and supermarket. It could even be argued that the modern ESG shopper demands that manufacturers and supermarkets have collaborative relationships (social).

Research highlights the long-term financial results from manufacturers and supermarkets having collaborative relationships. In the current high price inflation environment these collaborative relationships are important to best manage price increases, whilst still meeting shopper expectations.   

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.