Photo: Wikimedia Commons/Raysonho
Retailers are using newfound clout to put the squeeze on suppliers
With inventories elevated in many categories and the economy slowing amid inflationary pressures, larger retailers are using reclaimed leverage to cancel orders, fight price increases and seek out concessions from suppliers.
Vendors had enjoyed an extended period of pricing power amid inventory shortages caused by supply chain disruption.
“It is the fastest boomerang in giving power back to retailers that I’ve ever seen,” Archie Black, CEO of SPS Commerce, told The Wall Street Journal.
As reported by Yahoo Finance Canada, Loblaw and Metro are among the grocers pushing back against continued price increases.
“We have seen unprecedented cost increases from our suppliers this year and we continue to receive new cost increases,” stated Loblaw’s CFO Richard Dufresne recently on his company’s call. “Part of our job is to evaluate these and push back where they do not make sense. We have done that vigorously over the last two years and will continue to do so going forward. Our objective is to make sure that our [prices] on the shelf do not rise faster than supplier costs.”
Metro’s CEO Eric La Flèche said on the grocer’s recent quarterly call, “If the vendors want to keep their volumes, the cost increases will have to moderate.”
According to the Journal article, the squeeze is particularly being felt by suppliers of non-food general merchandise items that don’t have to be regularly restocked. With less pricing leverage, suppliers have to push back on factories or seek internal cost savings to offset rising raw material, labor and other costs.
“We need our operating profit and margin, they need their operating profit and margin as well,” Mike Hsu, CEO of Kimberly-Clark Corp., told the Journal, referring to retailers. “They don’t like all of the pricing that’s gone in. These discussions never get easier. They know that we’ve got to recover those margins or we’re not going to be able to invest in the brands in the right way.”
A McKinsey & Company survey of CPG vendors also found more than half reporting retailers have tightened their on-time and in-full requirements by narrowing delivery windows and increasing fines for noncompliance in a return to pre-pandemic performance expectations.
- Walmart Is Flexing Its Muscle Again – The Wall Street Journal
- Loblaw, Metro pressuring food suppliers as profit soars – Yahoo Finance Canada
- Loblaw Delivers Adjusted EBITDA growth of 10.3% in the Third Quarter – Loblaw
- Great service — but who’s paying? – McKinsey & Company
- Inflation? Recession? Starting Black Friday, holiday shoppers are planning to spend – CNBC
Discussion Questions
DISCUSSION QUESTIONS: Do you see indications that retailers regained leverage against their supplier base amid excess inventories and inflationary pressures? What advice would you have for retailers about capitalizing on but not exploiting any newfound negotiation advantage?
Poll
Loading …BrainTrust
Jeff Sward
Founding Partner, Merchandising Metrics
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Retailers are managing the clout that is actually held by the customer. They have the job of managing the ebb and flow of supply and demand. Retailers will always have clout as they deal with the supply chain on behalf of the customer. The power of the purse has a domino effect.
It’s easy to “push back” on price increases but brands have employees and families too. A retailer shouldn’t be recording record breaking profits while brands continue to swallow increasing costs. Right now, retailers are not only pushing back on cost increases, but they’re introducing their own brands to undercut pricing and eliminate market share for brands.
To be clear – brands and retailers need to work together to get better pricing and offer the consumer the right value. This needs to be a cooperative effort.
And brands themselves – especially the small and midsize ones who do not hold significant buying power – are at the mercy of their suppliers of components and services and do not have any more flex remaining on internal costs. The paper and packaging oligopoly, the UPS/FedEx dyad, health insurance, rising interest rates, and persistent labor shortages all create hard backstops against price rollbacks.
It’s easy for retailers to squeeze the little suppliers, but when they go out of business the new generation of product vendors, as we’ve discussed at length here, will start from a D2C base and hold off going into retail until they have market strength. Retailers are seeding future failure by knee-jerk rejections to vendors’ legitimate pricing needs.
I smile when I see a retailer comment about working for the consumer on pricing. When it comes to pricing they are working for themselves and, in my 50 years of experience, it has always been the case. Most of all, inflationary times have been the retailers’ friend.
The retailer is constantly pushing back against price increases to ensure the increase they pay is less than the price point increase they will give the shopper.
Some retailers are back to a one-way relationship, however the more successful ones are leaning into their loyalty and have a refined awareness of the importance of partnership having navigated the past few years together. This pressure can be short sighted.
Retailers have had and will always have the power to push back on their suppliers, but the fact remains: everyone on the supply chain needs to make money. Push back too hard and the suppliers will not longer choose to do business with you.
I don’t know that I’d call it “newfound”: the relationship between retailers and manufacturers — and for smaller retailers add wholesalers into the mix — has always been a dynamic one. The pandemic, and the related chaos of the recovery from it, has exaggerated the factors at play, but I don’t see any of them as permanent changes (how different this scene looked a year ago!). Translation: few will need to worry about exploiting an advantage, they won’t have much opportunity to do so.
During the covid outbreak, many vendors and suppliers faced inventory shortages due to the mass shutdown of factories. The outcome? In light of limited availability, they effectively charged retailers way higher prices for the goods. Similarly, if now the ball is in the retailers’ court, they are simply playing the same moves. The bottom line is, the ultimate motive for both retailers and vendors is “profit-making”. If the circumstances allow, why wouldn’t they try and leverage the opportunity? Also, as long as no one is breaking the contract or violating the terms, it’s just a fair game of “demand and supply.”
Retailers are the consumer’s last defense against inflation. Keeping prices down as wallets tighten is a potentially huge differentiator for retailers. Focus on purchasing power has been on the cards for some years — with retailers creating buying groups to pool purchasing power.
At the same time, retailers need to increase productivity and technology has to be a key resource to enable this.