Coles boss Ian McLeod has claimed some of the suppliers to the supermarket chain are covering up their own failings by complaining about Coles’ buying behaviour, according to a report in The Australian. (Coles is a division of Wesfarmers, ASX:WES).
It’s an aggressive stance, signalling that the delicate balance between the retailer and its suppliers is out of whack.
Companies and suppliers need each other, but that is not enough to keep things sweet. Competition is cutthroat, especially in the fast-moving consumer goods (FMCG) sector; long-term suppliers can quickly find themselves ousted by hungry up-and-comers.
Nathan Gyaneshwar is a master of the supplier relationship. He is the co-founder and director of customer services for online procurement company, Marketboomer, which links 7,500 suppliers to buyers in the hospitality industry: hotels, restaurants and clubs. More than $500 million worth of goods and services a year is bought via Marketboomer in an average year across 55 countries.
“On the one hand you need to nurture the relationship with your suppliers through good times and bad, so there is a steady supply of quality goods that meet customers’ needs. And both sides have to make money,” he says.
“But how do you do that without making suppliers so comfortable that you end up paying too much?”
The answer is not simple. Small suppliers struggle to win any argument with big customers. Having little sway other than price, they end up with unsustainable margins.
Guyaneshwar’s buyers, who select the suppliers who can sell through Marketboomer, spend a lot of time negotiating. He says price benchmarks are key to these negotiations. Marketboomer buyers measure each supplier’s performance again a relevant benchmark. “That is the dial you have to turn,” he says. “If a buyer feels their supplier is not performing as well as or better than the market, they can turn up the heat, and say: ‘We need to renegotiate’.”
At its most brutal, the deal goes out to tender, but more often buyers start talking to suppliers.
Choosing the lowest price is not always the smartest move. Quality, consistency, delivery and service are part of the mix.
Ian Campbell is the chief executive of GUD Holdings (ASX:GUD), which makes and supplies pumps and water filters, security and garden products and electrical appliances. As a supplier, he says his relationships with retailers are good.
“The most important part of the relationship is making sure you have close to 100% order fill on every order, that your products are visible in store, on the shelf and merchandised, and they are getting a gross margin that is equivalent to everyone else’s. Then the relationship is good,” he says.
“If I was selling milk, I might have another view.”
Some suppliers will offer a “no-frills” price, and another one with all the trimmings, Gyaneshwar says. “A supplier can come back to a buyer and say, ‘OK, the rest of the market does not provide same-day delivery on Sundays direct to your door. I can give it to for, say, $10, but if you want the other stuff, it is $12.”
Alternatively, suppliers can stand firm prices, as GUD does. Campbell says: “We don’t drop prices; we try to negotiate a way for retailers to make more money from the product through promotion, or a special ‘pack up’ of say a coffee machine and grinder,” he says.
Campbell’s suppliers are mainly in China, but he says price is not the determining factor. “Price is important, but it is more about quality and consistency,” he says. “If you have a problem, because of the length of the supply chain, you could have four to six weeks without a product in the field.
“And retailers are not geared up for warranty returns [from quality problems],” he adds.
Campbell admits that small suppliers struggle. To get a better deal, they might need to get bigger, or focus on a unique feature or benefit that means the retailer can make their margin, he says.
But clever buyers will not drive small suppliers out of business, Gyaneshwar says: “I watched one of our customers in Fiji ordering cabbages. He got three prices and then picked up the phone and placed 70% of the order with the cheapest, and 15% with the other two. I said, ‘You’ve done your dough,’ but he pointed out that he needed all three suppliers to survive to keep the price competitive and to ensure supply in case one was out of action and he could not get any cabbage.”
This article first appeared on LeadingCompany.