As we face into what will be a recession of unprecedented proportions, business management consultant Brian Daly talks to Maev Martin about how the pandemic and Brexit are re-setting the relationship between suppliers and retailers
The Irish economy is facing into a major recession next year, brought about by the global pandemic that has been with us since March and Britain’s imminent withdrawal from the EU.
However, one of the few positives to have emerged from the ashes of 2020 is the strong relationship that has been forged between suppliers and retailers as they battled together to keep the supply chain moving and the shelves stocked over the past eight months.
“Relationships between suppliers and retailers are at an all-time high and that momentum should be maintained into 2021 if at all possible,” says Daly.
However, he acknowledges that Brexit-related tariffs will put the special relationship under pressure.
“We have had three false starts with Brexit, so both suppliers and retailers are well prepared and supply chain interruptions will be minimal and short term – any interruptions will impact more on fresh produce than they will on the ambient, alcohol or household products categories where the supply chain is more resilient and warehouses have on average three to four weeks of stock,” he says.
“They can adjust the stock holding if the product is going to be impacted. Also, retailers and brands have done a huge amount of work on how they can bring a product into Ireland, either as an ingredient or finished product.
They have been busy sourcing alternative routes and trying to mitigate costs so, while the supply chain is a concern, it will adjust to the Brexit scenario. The bigger issue is around managing the cost of goods between the supplier and the retailer.
“Suppliers will have to assess how their price profile will look against their competitor - and how they can work through this with the retailer. If you look back in history, when sterling weakened, suppliers were approached by retailers about the cost of goods, and suppliers passed on the foreign exchange benefit that they received as a result of being paid in euros when the product was produced in sterling. Suppliers were upfront back then and they have worked hard on the supply chain over the last eight months, so retailers and suppliers need to work together to deal with the cost impact of Brexit into 2021.”
If Irish suppliers are importing some of their ingredients, that inflation will be at the manufacturing stage, so it wouldn’t present itself as a big percentage increase on the RRP, but if an Irish supplier is importing the finished product, and there are tariffs, that will have a bigger impact on the RRP.
“That means that an Irish supplier competing against a UK brand won’t experience anything like the level of inflation that the UK brand has, so that creates a lot of opportunities for Irish suppliers during these recessionary times because their RRP on shelf will be more attractive,” he says.
“The other side of it is that retailers will push suppliers to try and absorb any tariffs, but suppliers have their own pressures in terms of managing this because the COVID-19 crisis has ushered in big changes in terms of a supplier’s mix of sales – more take home and less impulse product is being sold and the margin profile between those two can be very different for a supplier, with impulse generating a higher margin and take home a lower margin."
"If you are a supplier who has already seen a drop in your margin, and the retailer wants you to absorb any price increases around tariffs, that will place huge pressure on your operation.”
Retailing In A Recession
Daly points out that this recession won’t be like the last recession. “More people have money during this recession because there is more cash on deposit, but there are a huge amount of people out of work as a result of COVID-19, so there are two customer profiles - those that have money on deposit who are staying at home and want to make indulgent purchases, and those who are trying to make ends meet,” he says.
“However, despite these two profiles, retailers will need to look at value and ensure that they can still attract footfall into their stores, so it will still be all about price. There is going to be a lot of inflation because of Brexit but it won’t be normal inflation. Inflation is usually based on the cost of production, such as utilities and labour costs and, as they change, they change consistently across the market.
“Similarly, if there is a commodity price change, there is inflation on a consistent basis across that category. However, with Brexit, inflation will now will be based on the supply chain – the last point of distribution before the product hits Ireland. This is why so much work has been done to manage supply routes into Ireland. Retailers will want to manage the impact of inflation to maintain competitiveness and market share and suppliers will want to maintain their category share with retailers."
"Sales and margins go hand in hand and margin pressure will increase as we progress into the recession. Suppliers will have to decide whether they can absorb tariffs to maintain competitiveness and, if so, retailers may find that investment by suppliers in promotions is reduced. This conundrum will require detailed management and consideration. Other key considerations for both retailers and suppliers is the availability of Irish-produced product and their exposure to UK supply within the category.”
Private label penetration
Private label has evolved significantly since the last recession and now offers products at various price points to compete more effectively with brands. Given the evolution of private label, what role does he think it will play for retailers in 2021 and beyond? “The overarching reason for private label is to have that competitive value offering,” says Daly.
“The retailer is often reliant on want the supplier is doing in specific categories – they are a receiver of pricing and promotional activity from suppliers. So, as a retailer, if you own the brand you can take more control of it and of what is happening in the category.
“Also, retailers don’t like a dominant brand within a category unless they own the brand themselves and ready meals would be a good example of that, so sometimes private label allows them to create that balance in a category. If you have a dominant player they are less likely to invest with the retailer if they don’t need to, so retailers want good quality and competitiveness within the categories and that can be one of the key roles that private label plays in-store."
"Private label can also deliver a better margin in the category. From a supplier point of view, managing your price around promotions is very important in order to maintain brand equity while managing the development of private label by the retailers. Suppliers need to understand the value that their brand brings to the retailer. Are you creating a need for expedited development of private label within your category?”
According to Daly, there are a number of reasons why a retailer would develop private label in a category and a number of questions that retailers will ask themselves before they develop a private label range or product such as ‘can the A brand be replicated and at a good enough quality?’ ‘can it give you enough margin?’ and ‘can you get a better margin on a product by introducing private label?’.
“For example, in the Baby category, in order to sell baby accessories, there is an investment required by the retailer,” he says. “On average, they are probably losing money selling key products, but mum is a big spender in the store so they are prepared to invest to get those extra sales. With private label they can buy the accessories in, put their brand on it, and retail it at a low positive margin rather than a potentially negative margin.
“The quality of the product has to be right, but you introduce a substantial price gap between the private label product and the brand and as the sales increase you test the price elasticity. Private label has achieved greater penetration in a number of categories in recent years. For example, fresh pasta and ready meals are very quickly being dominated by private label because the product is easier to develop and you can get the price and margin mix right as a retailer. Private label will continue to dominate those categories and will continue to be developed in categories where the commercials warrant it for the retailer!”
Working With Big Brands
Brian Daly has gained a wealth of experience working for both suppliers and retailers during his 27-year career in buying, sales and project management roles.
In January of this year, he established his management consultancy business and set about bringing data-driven insights and his wealth of experience to both grocery retail and FMCG clients.
“I decided to establish my own business to work with companies to improve their revenue management and coaching of negotiation skills and strategies,” he says. “While companies may be data-rich, I identified an opportunity to work with businesses to develop this data into valuable insights that enable improved decision making.”
Daly’s career began in 1993 when he joined Kerry Foods where he initially worked on developing sales for the new Kerry Spring Water brand. After working on other brands over a period of 18 months, he was promoted to regional manager. He then moved to another blue-chip FMCG, Dairygold where he became regional manager for their foodservice business.
In 2001, Daly got the opportunity to work with Boyne Valley Foods where he managed national sales for their symbol business.
“At that time their business was focused around larger format stores and they felt they were under trading with symbols so I managed to double their trade with symbols in about 18 months and was then promoted to sales manager for Boyne Valley Foods,” he says.
In 2004, Daly moved to BWG Foods who had just bought Tolan Foodservice in the west of Ireland.
“BWG Foodservice had always been an ambient operation but they were moving into multi-temperature food service at that stage and my remit was to develop that business as part of the BWG foodservice offering,” he says. After a five-year stint in that role, trading responsibility for foodservice was added to his remit early in 2009 and he became head of ambient trading for BWG in 2010, a role that he remained in until the end of January this year.
“As head of ambient trading, I was dealing with all the major blue chip suppliers across grocery retail such as Unilever, Valeo Foods, Coca-Cola, Britvic, Pepsico, Richmond Marketing, Mondelez, Nestle, Mars and Largo Foods. I was responsible for the cost of goods and the negotiations with all of those suppliers in terms of promotional activity and investment. I was also responsible for the supply chain out to their retail stores and wholesale branch network.”
Structural Separation And MUP
The structural separation measure in the Public Health Alcohol Act comes into effect this month and retailers are all too aware of the opportunities that this creates for associated products to be placed adjacent to the alcohol section, products such as soft drinks, sharing crisps and snacks, and confectionery.
“Structural separation creates further opportunities for brands in those categories,” says Daly.
Effective from mid-January, the Act also states that retailers can't promote alcohol on a tactical basis and tie it into bonus card or Club Card points. “From a retail point of view, this levels the playing pitch in the sale of alcohol for supermarkets and convenience stores,” he says.
“Alcohol was always used as a head turner to attract the shopper, and this will curtail the dominance of multiples in the off-trade as they won’t be able to deeply discount the offer. Supermarkets and off licences have seen a surge in sales of alcohol, but after MUP the pitch will become level. More of the alcohol sales will go through convenience stores and off licences because the major retailers won’t be able to use alcohol as a tactical offer to attract shoppers."
"Retailers will, of course, need other expandable categories to fill that void – categories such as confectionery, soft drinks and staples like meat and fruit and vegetables – so there will be more opportunities for suppliers in those categories to engage with retailers and support those tactical opportunities.”
Daly points out that what the market has gone through in the last eight months reinforces the important role that the convenience sector plays in the Irish grocery retail industry.
“We know that online has become important during this period, but community retailing and the value that convenience stores bring to communities has been reinforced with the shopper over the last eight months,” he says.
“A good example of this is my local Eurospar in Kinnegad. While they didn’t develop an online presence during the lockdown period and beyond, because of the store owner, Willie Forde’s relationships in the community in terms of sponsorships and engagement, the local football club arranged to deliver shopping to the elderly and those with underlying health conditions during the lockdown and that continues to happen to this day.
“Those types of activities are very important in terms of community retailing and it is what the likes of BWG, Musgraves, Stonehouse and Barry’s are great at and the impact of the Covid-19 pandemic has really highlighted that over the last eight months. Through necessity, people have seen that there is value available on essential products in convenience and in small supermarket formats that is on a par with the offering available in the larger supermarkets.”
© 2020 Checkout – your source for the latest Irish retail news. Article by Maev Martin. Click sign-up to subscribe to Checkout.