‘When negotiating, understand any movement in material costs’

Brian Clarke, director at European Food Consultants, looks at the relationship between suppliers and retailers.

If my 49 years in the retail and baking industry have taught me anything, it is that the major retailers continue to squeeze manufacturers, with little desire to have a long-term loyal relationship with suppliers.

The disconnect between the retail and manufacturing industry is that manufacturers build for the future, while the retail industry has short-term objectives to meet individual KPIs.

I understand the challenges the supermarkets have with Amazon and discounters, but the majority of food and groceries sold in their operations are from the same suppliers. This sends a clear message from my perspective: look inward at the cost of overheads and sales before further squeezing the manufacturing base.

The capital employed for manufacturing equipment is high and return on capital can be  significantly lower than in retail.

Major retailers have a significant proportion of small to medium food manufacturers supplying them, with a number struggling to meet their demands and achieve similar margins to the larger manufacturing groups.

The risk to the manufacturer when a retailer shifts supply are compounded, with staff having to be made redundant and equipment potentially sold at less than book price. In addition, increases in raw material costs have to be absorbed immediately by the manufacturer; if you are favoured, you may get your increase accepted by the retailer sometime in the future.

A fairer relationship is not likely. Therefore, when negotiating with the retailers, understand any market movement in raw material costs you may have over the next 12 months. Ensure at the initial negotiation stage you get the price you need, as you will be very unlikely to get a price increase in the immediate future. Price accordingly for each individual item and understand all the retailer’s auditing costs, hidden charges and promotional costs.

Most major suppliers also produce brands as well as own-label goods, and hence achieve greater margins. The most successful have a greater proportion of brands and this is reflected in their profits. So, the moral is to produce for a number of retailers, and never more than 40% for one retailer. Build a brand and view foodservice as an opportunity.

In addition, never cost for overhead recovery alone. Goods priced for overhead recovery alone reduce your margins, and these may be the only goods you produce at the end of the day.

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