Top 10 strategies for suppliers to manage supermarket relationships
The challenges of selling through the supermarket channels are daunting, particularly for the small supplier. In my 35 years of experience in this field, I have seen viable businesses fail because they did not take advantage of strategies that deliver traction in the retail distribution channel.
Supermarkets don’t do favours
The big retailers are driven by margin objectives, competitor analysis and shareholders. Their goal is to keep customers buying and to fill shelf-space. Your enterprise will prosper if your business model is tailored to the demands that the retailers make, while actively engaging your customers. Work to avoid the trading-terms-driven price deals that will eventually destroy all the good branding work being done.
If you want to prosper in a playground dominated by the big supermarkets, here are ten strategies that will move your SME out of the survival zone and into prosperity.
- Understand the supermarket business model
The three key factors for supermarket operation are: high volumes, lowest possible supply chain and transaction costs, and low prices. With some minor category exceptions for some retailers, they do not vary from this model, in Australia or overseas. Given the scale of their operations, supermarkets get to set the rules and there is little room for negotiation, even for major suppliers. A failure to recognise these key factors and how they drive the negotiation, is to finish before you’ve started.
- Be data savvy
Mass market retailing is a data intensive game. The retailers have mountains of data at their disposal, and plenty of suppliers willing and able to interpret it for them. Those who do not, or cannot, interpret supermarket data are not only disadvantaged but unlikely to get a seat at the table.
Scan data, combined with the loyalty card data, is a goldmine of demographic, behavioural, and promotional information. Being in a position to credibly present your interpretation, is a price of success.
- Aggressive category management
Category management is integral to the supermarket business model and is the foundation of retail promotion and in-store product placement strategies. A category management partnership with the retailer is essential to successfully utilising the supermarket channel.
Category management is a daunting prospect for many small businesses, but lately there has been a beneficial shift in the retail distribution landscape. The choke-hold imposed on medium-sized domestic businesses through the internationalisation of supply chains is gradually loosening as retailers (belatedly) recognise the value of local suppliers.
- Brand relevance
Avoid death-by-margin-strangulation by pro-actively building a demonstrable group of loyal consumers. Having even a small number of consumers who will change their choice of retailer in order to get your product is THE most powerful argument you have for continued ranging and competitive positioning. Without a relevant brand, your business becomes a price-taker without leverage – an easily dispensable supplier.
- Embrace digital marketing
It’s all very well to push your products through the retail channel but someone has to be pre-disposed to pull it out the other end. Brand engagement means interacting with your consumers through the tools delivered to us by the digital revolution. While building the brand itself is a long-term strategy, opening communication channels with consumers will deliver the relevance and influence behind points 1-4 above.
- Remove transaction costs
Transaction costs have two basic causes: not ‘getting it right first time’, thereby requiring a rework to correct, and as a penalty of small scale.
This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. The source of Woolworth’s superior performance over the last decade compared to Coles has been the impact of their reduction in transaction costs that have dropped straight to the profit line.
- Collaborate for scale
Small suppliers to supermarkets have to find ways to leverage their opportunities.
Collaborating to reduce transaction and supply chain costs, as well as pooling data and data capabilities, are logical if challenging tasks. Many produce suppliers have found ways to collaborate, but their product is often unbranded and commoditised by retailers. It is harder for the branded FMCG, but still possible.
To stay still, is to be left behind. Innovation is an essential part of the armoury of success. When things start looking routine and easy, it’s time to take a fresh look at the product and the operational and management processes necessary to delivering that product. Failure to do this means you’re in a rut and won’t see what’s coming until it hits you.
- Build agile value chains
Commercial agility is the ability to alter processes in the face of changed circumstances without losing sight of the objective. Agility is not flexibility, which implies that things ‘bend’ to pressure and resume their ‘normal’ shape. Agile value chains have the characteristic of evolving rapidly, and improving in the process. The recent slide in the $A is opening opportunities for those few domestic suppliers who have survived the turmoil of the last few years, and their primary attraction for the chains beyond their re-found ability to compete on price is their agility.
- Don’t play
It’s a strategy that I suggested to my kids. If the supermarket is behaving like a school-yard bully, refuse to play. Find a channel that they do not control and where your product’s value will be recognised in a way that is impossible in the high-volume, low-margin supermarket game.
Depending on how you measure, and what category we’re talking about, supermarkets control between 50 per cent and 80 per cent of FMCG sales. That leaves something like $30 billion
Australian FMCG sales left over – which is not insignificant – and is a field where innovative suppliers have room to grow.
Moving out of the survival mode and into prosperity is possible, even in a highly competitive environment. It’s also true to say that a year from now, you’ll wish you started today – even if it’s at number 10.
Allen Roberts is a Guest Contributor to Australian Food News and will be writing a monthly article. He is the Director of Strategy Audit www.strategyaudit.com.au and has worked in the food sector for more than 35 years. To read his full biography click HERE.
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