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Collaborating Our Way Out Of A Crisis

IPLC, a specialist consultancy supporting manufacturers and retailers on private label strategies, hosted its first online webinar on cost inflation in June, which was attended by 160 professionals from across the private label supply chain. For its second webinar on the topic, which took place on 3 December, over 300 industry professionals from 23 countries tuned in, an indication of the seriousness of the situation, with some suppliers having already gone into a second or third round of price increases. Maev Martin reports.

The webinar, which was moderated by IPLC’s Koen de Jong in Holland, heard 15-minute presentations from IPLC partners Malachy O’Connor in Ireland, Paul Stainton in the UK and Remy Medina in France.

Malachy O’Connor presented the findings of IPLC’s most recent research into where and why costs are rising and looked at the impact on suppliers. “Everything that costs retailers a lot of money is increasing and increasing significantly and there are a number of reasons for this,” he said.

“Examples of reduced harvest matched with increasing demand as society reopens, weather events damaging harvest quality, rising energy costs, labour shortages, animal health challenges around swine flu, avian flu and Mad Cow disease, local supply chain disruption around Brexit, and globally around port closures and container prices, geo-political wrangling, currency instability, and the fertiliser challenge.”

Hidden Costs

There are also hidden costs.

Of the 71 suppliers from 13 countries who responded to the IPLC survey on rising costs, 63% said that the sustainability initiatives demanded by retailers are costing more money for these companies, while 89% are carrying the additional cost of COVID-19 hygiene protocols, as well as coping with the stop-start nature of the foodservice sector, which is making demand planning very unpredictable.

“Food commodities spiked in 2007 and in 2011, and again in 2020 and 2021 as a result of the pandemic, but this time around there are factors that are making it more difficult,” he said. “

For example, in most markets, discounter penetration has increased significantly since 2007.

Back then, if your were negotiating a cost increase with a mainstream multiple supermarket they were more rebate focused and worried less about passing cost increases through to the shoppers.

But discounters have increased their presence in the market and have forced all retailers to gain better visibility and control over cost prices, so it is more difficult to negotiate a cost increase.

Also, we have had three cost spikes since 2007, but ten years of cost deflation since 2011 has fed into continuous reductions in retail prices and consumer’s expectations of cheap food.

“However, when suppliers are negotiating with buyers, they are typically negotiating with someone who is 30 years old or younger. They are millennials who have no memory of previous price spikes, so there is a corporate memory loss around price increases and a lack of knowledge as to the tool and tactics that can be deployed to manage these situations, so the new generation of buyers needs to learn how to navigate cost inflation.”

Three Major Risks

Malachy told the webinar that from March 2020 to March 2021, global food commodity prices increased by 25%, and between March and October of this year they continued to inflate by a further 12%.

“If the supply chain doesn’t find solutions to pay the prices that are required, businesses could fail or be subject to takeover by competitors, or someone somewhere in the elongated supply chain could cut corners due to commercial pressures and we could see an increase in food contamination, food fraud and food safety incidents,” he said. “The third risk is around sustainability and the threat to essential projects.”

While acknowledging that all retailers have successfully integrated sustainability strategies into their operations and that most of these strategies save money in the supply chain, some of them are creating increased costs.

“These strategies could be dropped because the supplier or suppliers are not in a commercial position to support them, so decisive action is needed,” he said.

Survey Findings

Many of the 71 suppliers surveyed by IPLC have successfully negotiated price increases. “The average increase was 8.1% but the largest number of respondents had only negotiated increases of 5% or 6%,” said Malachy.

“However, they indicated that they would need to look for 10% or more in the near future.”

When the individual cost factors are broken down, the survey reveals that the cost of raw materials and ingredients is up 20%, packaging is up by 23.8%, transport and logistics is up by 21.8%, electricity is up 18%, labour is up 9.4%, and other cost inputs are up by 19.7%.

The IPLC survey revealed that 47% of suppliers said they were facing delay tactics from retailers, 59% said they were currently supplying products below cost, and 66% will need a second or third increase.

39% of respondents stated that they are under significant financial strain and 18% feared they would cease trading if they could not achieve the necessary cost increases.

But suppliers are also working hard to mitigate cost increases - 42% are working on reformulating products, 38% are reducing pack sizes, 49% have reduced investment in promotional activity, 42% are prioritising supply to more profitable accounts, and 50% are simplifying their ranges to achieve efficiencies.

Interestingly, 43% are considering collaborating with industry peers to find efficiencies, while 26% are investing in training their teams to cope with negotiating in the tough climate ahead.

“Only 12% of suppliers said they had more leverage than their retailer customers and only 53% were achieving their objectives, so this is not a good foundation for commercial success,” said Malachy.

“The increases that suppliers have negotiated so far are not enough to cover the costs that they are incurring to date. That is the challenge we are facing. Even if you have negotiated a cost increase, not all of them are flowing through to the consumer. Some suppliers are holding back for fear of damaging the relationship with retailers," he continued.

"Most retailers are pushing back against cost increase requests, but many are taking the increases from suppliers but not passing them onto consumers. In the US, packaged food inflation is up 5.3% year on year, up 4.4% in Germany and is up 1.2% in the UK, but we have less than 1% food inflation in Ireland, which suggests that even if retailers are taking some cost increases, they are holding back on passing them onto consumers and that is a risky strategy.”

Importance Of Preparation

UK partner in IPLC, Paul Stainton talked about the importance of preparation, sourcing data, and of ensuring an equal playing field in supplier/retailer negotiations.

“You must know your product or products, and within each product the cost of labour, packaging, raw materials, transport, energy and margin will vary, so you need to know all of that as well as the total cost,” he said.

“But where do you get the detail from? In all of our businesses we have colleagues we can turn to in production, logistics, procurement, finance, quality control, and environmental and social government. All suppliers have a costing model per product, which was set when the product was first created and launched. Have they been filed away or are they constantly monitored? Updating these once a quarter is key. During quieter times you should look at these models and then, when increases come, they aren’t such a surprise, and you are better prepared."

“Withholding the detail of cost makeups from your sales team is almost guaranteeing their failure in negotiations. We know it takes a long time for negotiations to take place and to be concluded. While it is very difficult to predict when a negotiation will end, try to do so, and try to understand where the costs will be at that time as opposed to right now," he added.

Understand contract durations and differences to spot market prices. You need to keep your customers informed about how you are committing to commodities within the contract. That will help their views when you have to go into them with a cost increase. Also, understand customers’ specific costs and the cost of serving that customer - some are easier to serve than others, so try and factor that into your costs,” he added.

Sourcing Data

Paul told the webinar that retailers will spend a lot of time sourcing data externally and he advised suppliers to do the same.

“You should be monitoring commodities data on a weekly basis as there is so much information available online and there are some good sites,” he said.

“Retailers invest in the likes of Mintec, one of the leading commodities players, and they can invest €40,000 a year.

You may not have that money to invest, but Mintec Analytics allows you to input all of your ingredients and cost elements by product.

This gives you a visible image as to what your cost is made up of and where you need to focus.

It gives you the ability to see the movement of cost prices across all of your ingredients on a quarterly and monthly basis, and it allows you to see what your cost should be across the week, month, last quarter and last year.

“These are powerful tools, and there are other great sites, such as the Food and Agricultural Organisation of the UN, Index Mundi, Comtell, and Kairos, which analyses commodities and currencies, and there are many more available, so try to use them.”

Retailers will also look at exchange rates and use them in their arguments in negotiations, so he told suppliers that they need to do this too, with XE.com being “a very useful site in this regard.” Customers will also look at the financial stability of your business.

“They will look at Dun and Bradstreet, and in the UK, at gov.uk, and they will use some of your financial results in negotiations,” he said.

“Dun and Bradstreet allows anyone to look at the financial stability of any company. One thing is for sure – your retail and wholesale customers will be looking at your financial stability, so you need to do so as well if you are to create an equal playing field in negotiating with retail buyers.”

He told the webinar that 38% of the suppliers surveyed by IPLC had no negotiation skills training, and only 25% had updated their skills training. “This needs to be addressed to ensure that you are on an equal playing field,” he said.

“Conduct a SWOT analysis on your company every three months, and on your competitors, customers and suppliers, to give yourself a full 360-degree view of where you are end to end. This will give you clarity when you are entering into negotiations.

“In addition, you should map your customers in accordance with their importance and risk to your business. The role of the national account manager and commercial sales director is no longer just about selling, but about really knowing the product you have, so you can go into negotiations with knowledge and confidence. This will give you the best chance of securing the cost prices you need in negotiations.”

'Embark On Real Collaboration'

Remy Medina told the webinar that the best solution to the current crisis is for retailers and suppliers to embark on real collaboration.

“Search jointly for savings on logistics (new palletisation, number of SKUs per box, delivery frequency, lead time, shelf-life guarantee), secondary packaging (printing/colours), primary packaging (material, printing, quality, coating etc) and specifications (extend origin of raw material, accept frozen instead of fresh, reduce weight etc.),” he said.

However, he cautioned that too much retro engineering could result in food safety and fraud incidents.

He advised suppliers to split the price increase in steps, which allows retailers to swallow the increase more easily, to provide proof of price increases when possible/allowed, and to arrange a follow up meeting at the end of the negotiation. He also suggested asking the retailer if they can help them source some of the raw materials that they require for their product.

“Decisive and firm action is needed to address this challenge and the balance of power is shifting from retailers to suppliers,” he said.

All companies that logged into the webinar were offered a free 45 minute consultation with an IPLC partner, as well as a link to a recording of the presentations.

© 2022 Checkout – your source for the latest Irish retail news. Article by Maev Martin. For more Technology news click here. Click sign up to subscribe to Checkout.

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