Tesco’s overstated profit number was caused to a large degree by how they account for supplier investment and how reliant they have become on this revenue stream to support their top and bottom line growth.
This is not a new story for suppliers – the ever deepening promotional discounts, retail price wars, growth incentives, listing fees, gondola end payments etc. have been squeezing their margins for decades. But with pressure mounting on retailers in a flat market with growing competition, is Tesco’s profit warning the 1st outward sign of a wider malaise that is becoming malignant? And if it is, is there anything that suppliers can do to protect themselves from its impact?
I should say at this point that it isn’t as black and white as it might seem – Tesco being painted as the villains while suppliers are the bullied victims being forced to transfer 6 figure sums to retailers’ coffers. Most suppliers gain from their investments and many have proactively increased their investments year on year in attempts to grow faster than their competition. However, it remains true that the intense pressure from retailers on their suppliers to increase their investments every year is starting to have some unwelcome consequences:
- Suppliers are having to pass the cost pressure down the supply chain to protect margin
- Suppliers may choose to compromise on value for money to reduce costs (Mars bars aren’t smaller just for health reasons!)
- The bigger suppliers with deeper pockets will become ever more indispensable to retailers pushing smaller suppliers out
- The cost of entry to get a product established on the shelf will become so great that new products won’t make it to market
- The shopping experience may suffer as more of the suppliers’ investment goes into propping up the retailers’ bottom line rather than supporting their brands.
It could be said that this is all part of good competitive market dynamics and that the Competition Commission will sort out any wrong doing or undue pressure being exerted. By the time it gets to that stage, it may be too late – how many suppliers will blow the whistle or their customers? The unwritten rule in most suppliers that I’ve worked for and with is that ‘You don’t bite the hand that feeds you’ – we will find a compromise to that ridiculous investment request that gives us an acceptable return and keeps our business intact.
So, is there a way forward?
I’m afraid there’s no miracle cure here but there are many things that suppliers can do to ensure that the investments that they make are working as hard as possible:
1) ‘Pay for performance’ not ‘Pay to Play’
It’s a mantra that’s been part of the Sales negotiation manual for many years – never give unless you get something in return. However, I still see many agreements with customers where large sums of money aren’t conditional on performance – the retailer doesn’t have to do anything to receive this investment. Suppliers should review all of their agreements with their customers and build a plan to make them conditional on them doing something for them.
2) Ensure agreements are watertight
Make sure that customer agreements are watertight when agreeing them. Understanding how they read from a retailer’s perspective will ensure that there is little room for interpretation. Check them from a legal and financial perspective. Any lack of clarity in the conditions will be interpreted in the retailer’s favour when it comes to payment time so a little extra work up front may save a lot of work and money later.
3) Don’t copy and paste last year’s promotion plan
Retailers like to have the same promotional plan as the previous year with a few additional deals thrown in. This is because it is easier to manage ‘like for like’ year on year comparisons that are a key performance indicator for retailers. It also suppresses inflation. However, suppressing inflation costs money. The £1 offer last year was a 50p discount from the normal price of £1.50. Now that the normal price has gone up to £1.60 – assuming the price increase was to offset cost inflation, a large proportion of the extra 10p discount (and the original 50p!) will be coming from the supplier, impacting their margin. Suppliers should innovate their promotional offering to optimise their return on investment. For more on this, see Are you putting lipstick on the promotional pig?
4) If a retailer doesn't deliver, don’t pay
What you agree isn’t necessarily what you get. For example, if a supplier agrees with their retailer to display their products on the best gondola end in 400 stores, this may not be what actually happens. This is not through any malice on the part of the buyers agreeing the deal, it is purely down to store level decision making or administration errors – they may decide that their products don’t sell as well as others in their store; they may have a lot of short-dated stock to clear; or they simply may not have received the display materials. Whatever the reason, the supplier should not have to pay for what they don’t get (especially when it’s potentially costing them hundreds of thousands of pounds!). Suppliers should use field marketing agencies or EPOS data to check compliance and use this proof to reduce the cost of the investment.
5) Collaborate with retailers
Spread the risk and grow the benefit. If a supplier-retailer relationship is one dimensional (selling and buying) then all of the investment is through this channel and all of the benefits are trading ones. Over time, as the potential benefits diminish, this can spiral into tough negotiating positions based on both parties wanting more for less. If suppliers collaborate with their retailers on non-trading initiatives such as reducing the length of the supply chain, improving customer service, improving shopper experience and new product development then the investment ‘portfolio’ with a retailer is much broader and the potential for benefit on both sides is greater.
The chronic malaise that has taken decades to reach this point will not be solved by a quick shot in the arm of a miracle vaccine. This will require a change in lifestyle from both retailers and their suppliers. Both parties will need to be more open rather than confrontational, and there needs to be a new definition of fair where structured and governed performance related investment is the standard. Without this, the malaise will continue and there will be casualties, with it we can move towards a brighter future of retailing in the UK.