Suppliers are still playing catch-up on price rises

What an excellent performance analysis of the top 150 food and drink suppliers, published recently by The Grocer.

There isn’t a positive side to this data for suppliers. The piece refers to £1.6bn input costs (think raw materials) last year to these manufacturers. They tried to pass it on and stay even but of course they didn’t get it all through. Now we know they only recouped about 60% of their input costs through increases. The retailers, meanwhile, took that £1bn and passed it all on to shoppers with a 70% mark-up. Suppliers’ operating margins are down 8% so it is a worse than zero-sum game for them.

It’s great to have numbers behind the reality. But now let’s start to call a spade a spade. Suppliers have many faults but lack of control of pricing is their greatest. Is it fear or lack of ability? Both – it’s fear because of lack of ability. So why is this and what are they up against?

Since a wave of cost price increases were triggered by the devalued pound after the June 2016 referendum, the pattern of price increases has become annual. The pound falling was the final straw for suppliers who had shied away from pricing discussions prior to that. While Unilever ploughed straight in with a blanket 10% at short notice, now called ‘Marmitegate’, most dithered then adhered to the 12-week notice rule-of-thumb. Avoiding Christmas, this meant October notice for a January implementation. Only their commodity hedges kept many going at that time. They tried for too little too late, then got half of it and have been playing catch-up ever since. October notices are going out again now.

Retailers play the ‘guardian of the consumer’ in public but it’s staying competitive versus the discounters that really matters to them. They use any excuse to delay and decline. It starts with ’no, it’s not justifiable’. This is not the 1980s – they are all justifiable. No supplier risks choking off demand in today’s market without reason. But when provided with the reams of justifying data, retailers slip into Br’er Rabbit mode: ‘Hmph, I ain’t sayin’ nuthin.’ The cold war of communication then lasts the full ridiculously courteous 12 weeks and culminates with fabulous brinkmanship. This year there is an additional stock response to contend with: ‘We’re not discussing pricing until after Brexit’. So, with uncertainty over staff and resource costs looming for cash-haemorrhaging suppliers, they are told to innovate! Yet they can’t use innovation to push through rises when they can’t afford to do it, having cut development, research and marketing budgets.

The retailers have competitive challenges of course, but their rises at the till don’t come with a refusal, 12-week stony silence, and delist or insolvency threat. With regards to the suppliers’ ability fear not, my formula for suppliers is this: approach the rise with intelligence, empathy and resolve. It’s not easy but it works.

Sentinel Management Consultants deliver sales, negotiation, planning and finance training courses for our clients worldwide.