Given the issue of who will fund the cost of the VAT increase due in January, the expectation that suppliers will underwrite the inevitable losses associated with increasing use of Buy One Get Two Free offers, and the growing tendency for major retailers to supplement their working capital via increased trade credit from suppliers, it is perhaps useful to try to establish what constitutes fair play in current trade partnerships.
Essentially, because many suppliers have been distracted by other priorities such as maintaining their solvency throughout the global financial crisis, and have not been costing out every move by their trade partners and assessing its effect on joint-profitability, we have now arrived at a point where the current status quo in terms and conditions will not be reversed by a retailer simply acceding to a request to revert to the terms and conditions of even a year ago.
In other words, in business it is essential to instantly challenge any attempt by the other party to ‘take extra’ without reciprocation in a business relationship, before the new condition becomes part of the status quo by default. However, a simple refusal or a threat to walk away cannot be a solution, if the supplier wishes to maintain the trade partnership.
Systematic use of basic finance can help. First it is important to place all retailer moves in a financial context by calculating the size of the partnership in terms of sales revenue and ideally net profit to the supplier. By being able to ‘instantly’ calculate the cost of any retailer request such as additional credit or funding of promotions, the supplier can check the impact upon net profit and also determine the incremental sales required to recover any loss. It is obviously important that the supplier’s willingness to calculate the financial impact should not be taken as a sign of agreement, but is merely a means of establishing a basis for seeking a reciprocal move of equal value from the retailer.
In other words, the supplier has to make it clear that any demand without reciprocation constitutes a breach of the current status quo, both in the spirit and the finances of the trade partnership.
Again, retailer acceptance of this level of assertion needs to be earned. This means that a supplier has to be able to calculate and demonstrate the financial impact of their total offering upon the retailer’s profitability, taking into account the brand’s margin, trade funding, terms and especially its appeal to the retailer’s shopper-profile, vs. available competition. By having a realistic view of relative competitiveness, the supplier is in a better position to calculate and demonstrate the financial impact of the brand, making it marginally less easy for the retailer to simply delist both brand and supplier.
It is obviously essential that the supplier also calculates the value of the retailer to their business in terms of share of sales and net profit, category penetration, consumer-shopper match within the retailer’s traffic flow, and in helping to reflect the supplier’s risk-profile in terms of being risk-neutral, or risk-seeking. Incidentally, the other alternative, risk-averse suppliers, obviously have no role in the current business climate…
Above all, it is important to keep in mind that in business, suppliers are essentially loners and on their own, in that a government focused upon consumer protection is in no position to defend ‘underdog’ suppliers, and any collaboration on these matters with other suppliers is obviously illegal.
Fair play in trade partnership is really about being able to calculate the demonstrable value of your company and brands to the retailer, and having the skill and courage to establish and demand your status quo rights in an equal trade partnership.
Fair play is not about fairness and honour in a trade partnership, it is about a delicate balance of power between partners that acknowledge mutual need and dependency, measured and demonstrated financially, in a real world struggle for survival…in other words, finance-based negotiation is not for wimps, and any approach that is less than assertive does not deserve a place at the negotiating table…
