12 MINS READ
The inflation paradox
There is a paradox that retailers face when cost pressure is high, and margins are continually challenged during inflation.
When the supply base feels the impact of rising raw material costs, it raises prices for retailers. But higher cost poses a challenge to retailers against the backdrop of consumers with less money to spend amid inflationary pressures. For suppliers, buyers, and merchandising teams, this creates significant challenges.
It often leads to a protracted negotiation, with the supplier demanding higher costs, and retailers fending off the requests with counter arguments around the intrinsic value of an item versus the cost being levied. This is especially true when the item is not just a simple commodity, with the value of the raw material for all to see, but also has brand equity baked into the cost of goods, hidden within the proverbial ‘black box’ of suppliers’ recommended retail price.
The retail price—legally only for the retailer to set—is an enormous driver of margins. Accepting a cost increase and raising the price for the consumer balances the books, but no retailer wants to lead that charge. Although with the current disparity on price, some appear to have been forced to do so, negatively impacting their price positions.
With these challenges in mind, all too often, the standoff can result in the supply stopping—either through the retailer delisting swathes of a brand’s products as leverage, or the brand stopping the supply to the retailer to the same end. Neither of these scenarios has a positive outcome for retailers, suppliers, or customers, except perhaps getting to the lowest possible price increase.
The impact of ‘if you, then we’ negotiation
Changing dynamics in negotiations can lead to a product range being used as a strategic lever.
The other dynamic that has replaced this type of protracted negotiation is a twist in the traditional ‘if you, then we’ kind of tactic. This, in practice, manifests itself as a supplier using the available breadth of range as leverage. Buying teams are presented with the option of taking additional range and distribution points in exchange for better cost prices. Post GSCOP (Grocery Supply Code of Practice) in the UK, listing fees are no longer an option to generate revenue, but range proliferation continues.
On the surface, this can seem straightforward and avoid what could be an awkward negotiation, making everyone happy, right? Well, possibly, but it really depends on how aggressive this approach is, how important the new products are, and how they offer differentiation and value for the consumer.
The dark side of product proliferation
The pressure of growing assortments has been addressed by some retailers but remains a significant challenge for others.
A few retailers have made significant efforts in recent years to reduce assortments to a great extent in some areas. Others have not begun to address the challenge and perpetually rotate a tail of range and maintain a bloated assortment without any overall optimization. This creates continuous work and adds to the cost overall. The 80/20 rule applies well here with 20% of the range often driving 80% of sales and margin revenue.
The skill required is not just in simply identifying the cash and margin drivers, but also products that are most important to customers. This, in turn, will help identify the true tail of the range to confidently remove it. The space thus freed up can be used for true differentiation and uniqueness.
A shop’s walls and fixtures are not ’elastic’ and an increase in range over time has significant downstream impact on multiple business KPIs, negating any margin savings and often making things worse in the long run.
Availability of key lines, which hovers over 95% at best retailers but can be as low as 70% at others, can suffer as products receive less space. Distribution centers struggle to accommodate the additional picking slots, slowing down operations and increasing costs. Inventory levels can rise, consuming working capital. Replenishment costs increase through handling of additional products. Crucially, customer perception of range is negatively impacted, with too many variants of similar products, making it hard to determine value and make informed choices.