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The year 2021 was a short-lived golden age for retailers. Consumer demand came roaring back from its pandemic lows with such ferocity that many were able to boost profits even as supply chain costs spiraled.
But with demand plummeting as consumers remain pressured, many retailers are caught between still-high product costs and falling or middling sales. As retailers watch costs fall for their suppliers, some see a path to holding down further price hikes — though few have been successful to date.
In a recent white paper, David Bassuk, a managing director with consultancy AlixPartners, wrote that despite “measurable declines” in input commodities, “pushing back on suppliers has proven to be harder than anticipated” because of high labor costs.
“Manufacturers have been steadfast: While prices went up like a rocket, they are coming down like a parachute," Bassuk added.
An analysis of Mintec Global data by AlixPartners found most commodity input costs fell last year from their previous peaks, with ocean freight, cotton, steel and lumber seeing some of the biggest drops.
In that environment, Bassuk advised retailers to negotiate savings of 15% to 25% with suppliers, which they could do largely by “clawing back most of the cost increases taken over the past two years.”
But retailers can’t just walk in demanding cost cuts from their suppliers. Their end of the negotiating table will likely need to be heavily informed to be successful, according to Amol Shah, a partner and managing director with AlixPartners' retail practice.
“There is much more of a mission control-type of environment, where you've got an internal commodities team at a retailer, or somebody that's actually evaluating and saying, ‘So let me look at what's actually happened,’” Shah said in an interview.
Those teams should evaluate data around the base costs that influence their suppliers’ products — such as labor, materials and freight — with the aim of determining if cost increases are justified and fair to both parties.
“Understanding all those factors, they can now go back and proactively challenge the CPG company on the cost increase that's coming through and say, ‘Look, based on our tracking, and our belief of what the what this product should continue to cost, we don't see the increase,’” Shah said.
Holding the line on price
Negotiations with suppliers can sometimes be tense, and some disputes over cost have spilled out into the public.
In a widely publicized spat in the U.K., Heinz and Mars briefly pulled their products from Tesco after the grocer refused to raise consumer prices.
John Allan, Tesco’s chairman, told the BBC in January the company was challenging price hikes it believed were unnecessary. “We have a team who can look at the composition of food, costs of commodities, and work out whether or not these cost increases are legitimate."
Tesco isn’t alone in struggling to lower prices. Lawrence Kurzius, the chairman, president and CEO of spice maker McCormick & Company, told Reuters that the company was seeing “pushback” on price increases from customers such as Walmart and Kroger. That comes after Kurzius told analysts in January the company was just beginning to recover from increases in its own costs, with price hikes "only now catching up to the pace of inflation.”
Rod Little, CEO of Schick razor brand owner Edgewell Personal Care, also told Reuters in February that Walmart “said to us, 'From here, our consumer is challenged, we're going to be looking out for consumers, so you're going to have to have really good reasons if you're going to price up from here.’”
Few retailers have anything approaching the leverage with suppliers that Walmart has, given its massive shelf space and sales base. But Shah noted that even smaller retailers have access to information that can help them understand whether cost increases are justified.
Smaller retailers can also pull levers in their assortment if they can’t negotiate costs down directly. Part of that is “being willing to change the mix of the brands they carry on the shelf, and carry things that you won't necessarily see as quickly in some of the Targets and Walmarts of the world,” Shah said.
Before taking any action, however, businesses need to make sure it's worth the risk of potentially alienating some suppliers for good.
"You can pass the cost increase to the next level in the supply chain ... but I think that what we have realized now is that it cannot be a one way street,” Pierre Laprée, chief product officer of spend intelligence software provider SpendHQ, said in an interview. “If one thing the past three years has taught us, you need your suppliers — because you cannot survive without your suppliers.”
via https://www.aiupnow.com
Ben Unglesbee, Khareem Sudlow
