Supply chain: How to avoid price rows in inflationary times

Julie Neal is a Director and Alex Copeland is a Senior Consultant at Vendigital. They recently shared their insights with Retail Sector.

Managing price negotiations with key suppliers can be challenging at the best of times, but with inflation at a record high and a cost of living crisis affecting households across the country, there is an increased risk of disputes arising. By working collaboratively however, both sides of the negotiating table can avoid clashes and, potentially, generate value too.

A price row between Tesco and one of the world’s largest food retail brands, Kraft Heinz, spilled over into the media recently, when deliveries of some popular food items including ketchup and baked beans were paused. The disagreement has since been resolved, but not without highlighting the cost pressures that many large retailers and their key suppliers are facing in the current climate.

During its recent negotiations with Kraft Heinz, Tesco was most likely resisting the supplier’s price increase to avoid passing it on to customers. As the largest of the Big 4 supermarkets, it knew that in the midst of a cost-of-living crisis, hiking prices on popular branded goods could lead customers to shop elsewhere. There is already some evidence that consumers have been voting with their feet, with sales at Aldi and Lidl increasing by 13.9% and 11.3% respectively in the 12 weeks to 10 July.

Price negotiations in the retail sector have become more sensitive across the board. Suppliers are facing pressure to push price increases through the supply chain to protect margins and at the other end of the chain, consumers are shopping more carefully. The problem is particularly acute for smaller suppliers with lower volume orders. They are finding it much harder to leverage their agreements and, in some cases, this is already impacting revenues.

Instead of taking an adversarial approach to price negotiations, retailers and their suppliers are finding that it is increasingly important to work together. This involves being open and honest about their cost base and operating margin, so that decisions can be taken to introduce efficiencies or alter the terms of the supply agreements where necessary.

In some cases, adjusting payment terms or the structure of supply agreements could alleviate cost pressure for a key supplier in the short term, while both parties share information and look for ways to remove cost from the value chain. For example, shorter payment terms could provide some temporary relief, although with inflation rising at a record rate, this may not last long. It may also be possible for retailers to negotiate an invoice finance arrangement with their bank, whereby the supplier is paid on 30-day terms at the lender’s risk.

In other situations, a more innovative, strategic solution might be possible. For example, a supplier might be willing to provide a core product at a reduced cost, if the retailer agrees to stock other added-value product lines, where the opportunity for margin is greater. Gaining exposure for new products in this way, is likely to be well received by shoppers too.

By working together in this way, supply chain partners can effectively buy themselves more time to analyse the supply chain and identify value-driving opportunities. For example, it may be possible to reduce pack size, allowing more product to be moved on a single pallet, and in each truck, and lowering transportation costs. While modifying the design of a product or its packaging is likely to take time and require some upfront investment, there could be scope for both the supplier and retailer to realise a margin uplift.

During the COVID-19 recession, some food retailers experimented by increasing their own brand ranges in response to the consumer focus on affordability and value. In some instances, these offerings have proved successful due to a shift in shopping habits. In a similar way today, as consumers look for ways to reduce their spending to offset rising energy and fuel costs, own brand ranges could provide a focus for further investment and promotional activity.

With the Bank of England warning that inflation is expected to hit 13.3% this autumn, cost pressures are mounting on all sides of the bargaining table. Retailers can no longer demand cost reductions from their suppliers and expect them to materialise. Those that have already established a more collaborative way of working with their key suppliers will be well-placed to leverage these relationships in the months ahead.