Forget the old school, adversarial relationships between grocers and suppliers. To thrive in a highly competitive world, the focus needs to be on supplier relationship management, argue Oliver Rowson and James McDonnell.
Intense competition from discount stores and on-going channel shifts are putting grocery retailers and suppliers under significant margin pressure. To stay competitive and access new sources of value, they must change the nature of the retailer-supplier relationship, moving away from the traditional, adversarial model to more transparent and collaborative partnerships.
A tough climate for retailers
The success of discounters like Aldi and Lidl has pressured traditional grocers to be fast followers on price. The resultant margin squeeze is felt across the value chain.
Smaller, premium retailers have led an arms race in innovation, pushing suppliers to offer more new and varied foods. This product proliferation has led to increased complexity and cost.
New technologies enable new channels such as deliverers (e.g. Deliveroo) or recipe box suppliers (e.g. Hello Fresh) to attack high margin categories such as ready meals and convenience.
To cap it all, the industry has been hit by a wave of cost price inflation from Brexit and is facing significant increases in the Living Wage.
Retailers need a ruthless focus on what customers value
Neither the cost squeeze nor the scattergun product proliferation has been effective. Retailers need deeper consumer insight and behaviour data to drive a ruthless review of ranges and product features and tailor products to better meet consumer needs.
Understanding the “true” cost of range and products requires transparency through the value chain to quantify the costs of delivering what consumers want. This is where suppliers need to get involved.
The solution: Supplier relationship management
The answer lies in a different approach, with retailers and suppliers committing to a more transparent, collaborative relationship with a focus on the consumer at its core and a shared objective of growing the overall size of the pie, rather than fighting over crumbs.
To change the old mind-set, retailers and suppliers need to:
- Break with the traditional, adversarial approach and focus on creating benefits for both retailers and suppliers.
- Forge deeper relationships and develop greater trust and transparency, rather than competing against each other.
- Adopt a systemic, rather than a functional focus, looking at the overall value chain to unlock value.
Think big. Incremental change will not solve the structural problem. This is the time for big bets and radical change to supplier relationships and value chains.
Oliver Rowson and James McDonnell are partners at OC&C Strategy