Another week, and another set of bad financial reports from retailers. Big supermarket chains have been under pressure for some time as e-commerce, discounters and convenience stores and specialists all vie for share. Then inflation hits both store operation costs as well as cash-strapped shoppers. And all this at a time when there is a desire and a need to update and renovate stores, as well as investing in new channels. It’s a tough time for many retailers, and by extension, for the companies that supply them. And if we have learnt anything from the past, retailers will look to reduce their costs by attacking inventory. And the threat of a delist is a no-lose strategy for retailers. So if retailers are likely to dust off this tactic, how can brands prepare and pre-empt the delist threat from a retailer?
When a retailer hurts, it’s the supplier that bleeds
When retailers are under profit pressure, they inevitably turn to their suppliers. And this is natural: inventory, for most retailers, is the single biggest controllable short-term cost. Reducing inventory cost is therefore a tempting lever to pull.
Retailers can reduce the cost of inventory in broadly three ways. They can ask for a reduction in supply price (as seen just recently from Tesco in the UK). They can extend their payment terms, so that in effect the supplier owns more (often all!) of the inventory. And they can reduce their ranges.
The threat of delist – the no-lose tactic for a retailer
Retailers can roll any of these dice at any time, but it is important to understand that they are all connected to one goal: reducing the biggest controllable cost on the balance sheet – inventory. And that means that whichever tactic a retailer leads with, they all come together in one.
Using the threat of payment terms to get better prices and reduce range
A good friend of mine was once the CEO of a large retailer. In his first month in charge he wrote to all his suppliers, telling them that he was extending their payment terms massively. But his goal wasn’t to increase payment terms. It was to reduce the cost of inventory.
His logic (and indeed how it played out), was this. Some suppliers just accepted the new terms. That helped reduce the amount of cash tied up in inventory. Some suppliers refused of course (although many just acquiesced). Of these, my friend delisted those that he wasn’t interested in, and negotiated with the others, often reaching a lower supply price. Whatever the outcome (extended terms, reduced price or delist) the retailer wins. And if 5% of suppliers persuaded him to not change prices, and not extend terms? That’s OK. Because he had improved the finances across 95% of the portfolio. Job done.
Using the threat of a delist to get better prices, reduce range, and reduce inventory costs
While the use of payment terms as the lead ‘attack’ is less common, I include it because it illustrates well that these three ‘tactics’ are all intertwined. Range, supply price, and payment terms all impact one big number on the balance sheet. Reducing that turns inventory into cash. It’s a simple as that.
But by far the more common attack is the threat of a delist. Why? Because its softer and easier to legitimize than merely asking for more money or better payment terms! Don’t believe me? We’re currently working with several clients who have been threatened with a delist in the last couple of months, helping them defend and prepare for the negotiation. So if it hasn’t happened to you yet, it could well be just around the corner!
The threat of a delist: the no-lose strategy for retail
As I’ve just said, retailers like to use delist threat as it is defensible. And they also like to use it because it is a no-lose strategy. And that’s because, as with my example above, there are three possible outcomes from a delist threat strategy, and none of them are detrimental to a retailer.
Outcome one: The supplier acquiesces. The product is delisted. As long as the retailer has chosen their delist candidates well, then there will be a minimal reduction in sales. Inventory costs go down. Retail win.
Outcome two: The supplier negotiates. The product stays on the shelf, but terms will be improved. Inventory costs will go down. Retail still wins!
Outcome three: The supplier negotiates successfully and gives NO CONCESSIONS to the retailer. The retailer doesn’t gain but doesn’t lose either. Note. This outcome rarely happens.
So the worse that can happen is a very small chance that the retailer won’t gain, but won’t lose either. Tempting eh?
Be ready for the threat of a delist!
How to defend the threat of a delist
Defend the threat of a delist: know your retailer – Like a lot of things in life, doing the homework, being prepared, is half of the battle. Don’t be surprised by a delist threat. Know your retailers, stay close to their numbers, look for the signs. What does their financial data look like? Are they reducing inventory in general? Are they under pressure? Have they mentioned delists, or slow sellers, recently? Is the delist threat a strategy they’ve employed before?
Defend the threat of a delist: know your risks – Range analysis isn’t just something we do when we engage in a Category Management project. It’s a an ongoing part of managing a customer. Which of your products are at risk of a delist? Do you know how to identify them (beyond looking at the slowest selling products?) Which competitor products are at risk? If you were the retailer, what would you do to reduce inventory?
Defend the threat of a delist: pre-empt – Sometimes attack is the best form of defence. Pre-emptively offering a range review, and sacrificing some of your own products can be enough to help the retailer achieve their goals, keep the relationship good, and ensure that your most valuable SKUs are safe (as are margins). Wait. I know! Some of you are thinking – did Mike really just suggest proactively delisting my own products? Crazy right?
Not crazy. If it is a delist threat you have two choices. Fix it, or kill it. And before you try and fix it (by over promoting to drive sales up artificially) take a moment to think about how important this really slow selling SKU is to you.
Consider the true cost of the delist (and the cost of defending it) –
If it is a genuine delist threat, then it doesn’t sell well. That should tell you something! So unless there are major plans to turn this SKU into a hero, now might be the time to sacrifice it for the greater good.
Consider how many sales will you actually lose? Some shoppers will switch to another product in your portfolio. Some will still buy you but from a different retailer. So before panicking about losing a sale: make sure you are clear about the true cost of the delist.
Now consider the cost of defending this SKU. Not just on this SKU, but the precedent you might be setting. A margin enhancement on one product can pave the way for a request on another product in just a few months, for example.
Plan for the negotiation
If it is clear that you’ll want to defend your threatened products, then we’re going to have to negotiate. But before we start haggling, there are two important steps:
Show the value you bring –
Always a good practice for any negotiation is to begin by reminding the retailer about why you are important. Why you bring value. And given that the retailer is apparently happy to delist you, then this needs to go beyond just sales. Always start your negotiation with a powerful value proposition.
Yes, talk about your plans. Talk about how you can contribute to future category growth. But also talk about any other value you bring. Uniqueness? Value to shoppers? Other investment? Whatever you have – before you start the negotiation proper, we want to remind the retailer that we do bring quite a lot of value. That by delisting, they have more to lose than they might have thought.
Consider what do you want in return –
This article isn’t about negotiation skills (we have a training program for that!). But one thing that often gets forgotten in many negotiations is to prepare a list of what you want in return.
In a negotiation of this type, we know we will need to make some concessions. So we often tend to focus on how we can reduce the concessions. That’s great. But at the same time, if we DO have to make concessions, then let’s make sure we get something valuable in return. Anything! More space on shelf. Free advertising or features. Data. Anything that will make the concession at least a little less painful (or even valuable!)
Get ready for tough talks on price, range and terms
The bottom line is, get ready for tough conversations on price, range and possibly payment terms. Retailers are under pressure and reducing inventory cost is the fastest path to relieving at least some of that pressure. Without preparation, these challenges can seriously disrupt your plans leading to increased costs and delayed implementation of your plans. These conversations are never easy, but with pragmatism and preparation they can be navigated with minimum pain and disruption. If you’d like to know how we can support your team in planning, preparing and executing these challenging negotiations and keeping your business moving smoothly and profitably with your biggest customers, please get in touch now.
