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Has COVID-19 changed the manufacturer / supermarket relationship forever?

Background

COVID-19 did change the manufacturer / supermarket relationship in the short term. Traditional business practices, e.g. face to face meetings, were not physically possible during lockdown / restrictions. This quick blog suggests these changes are part of a long-term evolution of the manufacturer / supermarket relationship from personal to modern digital relationships. This evolution is occurring from store level to head-office category reviews.

Manufacturer / Supermarket relationships

For the relationship between a manufacturer and supermarket to be successful it should be mutually beneficial. There are numerous potential benefits for both parties, but the industry tends to focus on increasing and/or maximising sales for both parties.

There is no ‘ideal’ or ‘perfect’ manufacturer / supermarket relationship. There are a variety of different relationships based on the expertise and resources available at both businesses. As a general rule, the greater the retail sales the more formal and resource intensive the manufacturer / supermarket relationship.

Research suggests that the most successful category relationships rely on trust between both parties. Personally, I would also suggest a collaborative mindset is important. Others, such as Brady, use terms such as commitment to describe this mindset.

‘Trust and commitment are highly interrelated concepts, and if together managed effectively, are viewed as extremely beneficial as they are focused far more on a co-operative two way exchange, as opposed to power.’

Source: Brady

(The impact of the rise in private label brands on supplier-retailer relationships, Catherine Sutton Brady, IMP Conference 2014)

McKinsey suggests four principles for successful collaboration between CPG manufacturers and supermarkets:

1.           Codevelop long-term strategies

2.           Conduct advanced analytics at a detailed level to jointly determine where and how to place bets

3.           Set up an agile operating model

4.           Collaborate across the full value chain

Source: McKinsey

‘Power partnerships’: Manufacturer – retailer collaborations that work, Kari Alldredge, Brandon Brown, Lindsay Hirsch and Travis Reaves, McKinsey, 2019

McKinsey describe a successful manufacturer / supermarket relationship as:

‘transparency breeds trust. CPG companies that have chosen to be transparent in their retail partnerships – being open about their long-term strategies, sharing insights and opportunities, aligning on metrics, and seeking collaboration beyond the traditional commercial areas – have gained the trust of retailers and, consequently, have outperformed their peers.’

Source: McKinsey

‘Power partnerships’: Manufacturer – retailer collaborations that work, Kari Alldredge, Brandon Brown, Lindsay Hirsch and Travis Reaves, McKinsey, 2019

Manufacturers and supermarkets do have different processes / approaches which creates different relationship dynamics. It is common for manufacturers and supermarkets to have different relationships with different business partners. For example, Coca Cola may have formal monthly category reviews, with scorecards, with Walmart. Coca Cola may also have a team of people to manage the relationship with Walmart. Obviously, this is a resource intensive relationship with a formal structure. Coca Cola may also have sales representatives that may call on small independent supermarkets rarely, e.g. once every 3 months. In this example Coca Cola has different relationship dynamics with different supermarkets.  

Modern ‘digital’ relationships

Over time the traditional relationship between a buyer (supermarket) and seller (manufacturer) has already started to evolve into a modern digital relationship. Two major factors (technology, financial) are driving much of this change.

Today there are a variety of different relationships between manufacturers and supermarkets. For example, manufacturers could sell their products on Amazon without ever speaking to an Amazon employee. Category relationship dynamics have changed over the years, but the relationship should still be mutually beneficial.

Technology

Before scan data the industry used ex warehouse sales as a sales indicator. Once scan data (store-level) became available manufacturers and supermarkets were able to have a greater understanding of category sales in-store.

Initially the implementation of scan data evolved the manufacturer / supermarket head-office relationship to focus on ‘hard’ data such as category sales, ranking reports etc. This meant buyers and sellers were focused on making ‘fact-based decisions’ rather than relying on personal recommendations. The conversation moved from manufacturers having ‘a great product at a great price’ to highlighting how a SKU / brand was increasing category sales overall. Also, individual store performance could be analysed to ensure stores implemented the category plan (store discipline). This meant manufacturers’ merchandisers and sales representatives and store staff / managers had less discretion to change ranges / prices etc. Generally speaking, in-store decisions were limited to opportunities such as which SKU / brands were allocated discretionary floor space.  

More recently numerous other data sources have become available to ensure manufacturers and supermarkets can make ‘fact-based decisions’. Some of the data sources include panel data, loyalty card data, social media and apps.

Technology is also decreasing the need for personal relationships by automating once manual tasks. For example, online portals can share information including store demand forecasts. So, manufacturers don’t call a planner / replenisher to get a forecast they look at the portal. The increasing use of technology is obviously changing the relationship dynamics from personal to digital. The supermarket industry also uses other industry tools such as EDI (electronic data interchange) for orders through to industry portals, such as Range Me, that have digitised the manufacturer / supermarket relationship.     

So, technology has been a factor in the decreasing emphasis on personal relationships in the manufacturer / supermarket relationship. Technology has empowered practitioners to make fact-based decisions rather than relying on personal recommendations from trusted people. As practitioners often say, ‘the numbers never lie’. Also, technology has decreased the need for personal interaction between manufacturers and supermarkets by automating tasks and sharing information.

Please note that trust is still important in the manufacturer / supermarket relationship. Now the trust is between two businesses rather than two individuals (buyer and seller).

Industry financials

‘To put it bluntly, much of the $5.7 trillion global grocery industry is in trouble’

Source: McKinsey

Reviving grocery retail: Six Imperatives. McKinsey & Company. 2018

“For grocers in developed markets, both growth and profitability have been on a downward trajectory due to higher costs, falling productivity, and race-to-the-bottom pricing. One result: a massive decline in publicly listed grocers’ economic value.”

Source: McKinsey

Reviving grocery retail: Six Imperatives. McKinsey & Company. 2018

As outlined in my book (Category Management 2020) the supermarket industry is going through structural change. Firstly, the increasing demands of shoppers, such as improved product quality and lower retail prices, has decreased the industry profitability. The growth of hard discounters and new online supermarkets, e.g. Amazon, has increased competition for supermarkets. Also, the growth of P/L (private label), partly due to the growth of hard discounters, has increased competition for branded manufacturers. This structural change has led to decreased profitability for both manufacturers and supermarkets.

Due to the decreasing financial returns for the industry labour costs are being scrutinised. It is common for businesses to decrease the number of employees. For example, June 2019 Coles supermarkets Australia announced plans to restructure head office and make 450 roles redundant (AFR Coles sheds 450 head-office jobs as CEO Steve Cain cuts costs). Woolworths supermarkets Australia are moving to new automated warehouses that will require 700 less workers (ABC News Woolworths warehouse automation set to eliminate 700 jobs in Sydney and Melbourne). New entrants, such as Amazon Go, have stores without checkouts to minimise in-store labour costs. These examples highlight how the industry is trying to minimise CODB (cost of doing business) to meet shoppers demands for a better overall shopping experience at a lower retail price.

In this ‘cost cutting’ environment it is harder for practitioners to develop personal relationships. From store level to head office people simply do not have the time to develop personal relationships like they used to. So, relationship dynamics are changing to focus on what is the fastest way to achieve the business outcome rather than spending time with business partners to develop a personal relationship. Some will also argue that people change roles / businesses so often there is a limited return from trying to build long-term relationships in the supermarket industry (personally I disagree with this).

Summation

Much has already been written about how COVID-19 has changed how shoppers behave. COVID-19 has also changed how manufacturers and supermarkets behave. Due to lockdowns / restrictions relationships relied more on digital tools / communication than traditional face to face meetings. This is not a new development but rather an on-going evolution in the manufacturer / supermarket relationship dynamics. The relationship dynamic is moving from personal recommendation to a modern digital relationship. The focus in still on creating mutually beneficial relationships but the way how has changed. The focus is on fact-based decision making rather than personal preferences. Personally, I describe this change as moving from relying on personal recommendations to relying on information to make business decisions.

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.

Thank you,

Tim Bowen