Relationships are in the spotlight again, as Julian Hunt reports
Our story on page four of this week’s issue about Sainsbury’s controversial efforts to extend its payments terms has, once again, thrown the thorny issues surrounding trading relationships between manufacturers and their key customers into the spotlight. Coincidentally, just as Sainsbury started to send out its letters to suppliers, we started to quiz the executives of grocery supply companies who sit on our manufacturers’ reader panel about their relationships with customers.
The results were fascinating. Only 18% said their trading relationships had improved, while 27% thought things had deteriorated. On the upside, the majority of suppliers told us that things were pretty much the same as this time last year. On the downside, most agreed that meant simply that life would continue to be tough - with the downward pressure on margins set to be the key issue for the coming year.
“Our overall trading relationship is about the same,” says one supplier. “However, we are now faced with relentless demands for improved margins and cash lump sums.”
He adds: “The biggest issue for suppliers in 2005 will be pricing. Promotional activity is also being used to drive an improvement in cash and margin. And business plans seem to be a thing of the past, with the goalposts moving week by week in the pursuit of increased margin.”
We also asked our reader panel to identify the trading issues they felt would have the most impact on suppliers this year. Interestingly, moves by customers to change trading terms and the impact of management changes at some of the big retailers all made it into the top five (see box, above) - sparked, perhaps, as much by the efforts of M&S to cut invoice prices as Sainsbury’s recent initiatives.
One supplier says: “With the arrival of Justin King, the pressure is on at Sainsbury to be seen to be doing a good job. We’ve been told they want to lower prices and that they’re extending payment terms. There is so much panic and so little rational thought.”
As well as the five issues outlined in our box, our panel identified a broad range of other factors that they felt would impact suppliers in the coming year. These included initiatives such as online auctions and factory gate pricing, as well as a general concern about how best to manage the margin gap that now exists for suppliers facing higher input costs and lower selling prices. For those that have done all their cost cutting, the only way to manage this gap is to start rationalising production, or shifting manufacturing overseas.
Many of our panel members are also concerned that consolidation has created an imbalance of power between retailers and suppliers - not eased by the OFT’s code of practice, which has been branded ‘useless’ by our suppliers.
One says: “The concentrated nature of our customer base means a listing with each one is key to achieving a successful product launch. They are fully aware of this fact!”
Others point out that the dominance of Tesco is equally unhealthy: “The lack of a viable, volume competitor to Tesco increases our dependence on them - something they leverage at every opportunity.”
It is clear many of our reader panel executives are worried that they are now faced with transactional relationships based on price - despite the public pledges of many retailer bosses that they work in partnership with their suppliers.
“The general climate of the trade is such that margins for suppliers are being squeezed without any effort to work together. Aggressive buying is now the norm and relationships are more and more difficult to cultivate,” says one. Another adds: “There is less interest in building long-term relationships or thinking strategically. It’s all about the buyer’s figures. Senior managers talk a good game, but it’s the buyers who call the shots, and they are just about driving down their costs, our margins and quality.”
Our story on page four of this week’s issue about Sainsbury’s controversial efforts to extend its payments terms has, once again, thrown the thorny issues surrounding trading relationships between manufacturers and their key customers into the spotlight. Coincidentally, just as Sainsbury started to send out its letters to suppliers, we started to quiz the executives of grocery supply companies who sit on our manufacturers’ reader panel about their relationships with customers.
The results were fascinating. Only 18% said their trading relationships had improved, while 27% thought things had deteriorated. On the upside, the majority of suppliers told us that things were pretty much the same as this time last year. On the downside, most agreed that meant simply that life would continue to be tough - with the downward pressure on margins set to be the key issue for the coming year.
“Our overall trading relationship is about the same,” says one supplier. “However, we are now faced with relentless demands for improved margins and cash lump sums.”
He adds: “The biggest issue for suppliers in 2005 will be pricing. Promotional activity is also being used to drive an improvement in cash and margin. And business plans seem to be a thing of the past, with the goalposts moving week by week in the pursuit of increased margin.”
We also asked our reader panel to identify the trading issues they felt would have the most impact on suppliers this year. Interestingly, moves by customers to change trading terms and the impact of management changes at some of the big retailers all made it into the top five (see box, above) - sparked, perhaps, as much by the efforts of M&S to cut invoice prices as Sainsbury’s recent initiatives.
One supplier says: “With the arrival of Justin King, the pressure is on at Sainsbury to be seen to be doing a good job. We’ve been told they want to lower prices and that they’re extending payment terms. There is so much panic and so little rational thought.”
As well as the five issues outlined in our box, our panel identified a broad range of other factors that they felt would impact suppliers in the coming year. These included initiatives such as online auctions and factory gate pricing, as well as a general concern about how best to manage the margin gap that now exists for suppliers facing higher input costs and lower selling prices. For those that have done all their cost cutting, the only way to manage this gap is to start rationalising production, or shifting manufacturing overseas.
Many of our panel members are also concerned that consolidation has created an imbalance of power between retailers and suppliers - not eased by the OFT’s code of practice, which has been branded ‘useless’ by our suppliers.
One says: “The concentrated nature of our customer base means a listing with each one is key to achieving a successful product launch. They are fully aware of this fact!”
Others point out that the dominance of Tesco is equally unhealthy: “The lack of a viable, volume competitor to Tesco increases our dependence on them - something they leverage at every opportunity.”
It is clear many of our reader panel executives are worried that they are now faced with transactional relationships based on price - despite the public pledges of many retailer bosses that they work in partnership with their suppliers.
“The general climate of the trade is such that margins for suppliers are being squeezed without any effort to work together. Aggressive buying is now the norm and relationships are more and more difficult to cultivate,” says one. Another adds: “There is less interest in building long-term relationships or thinking strategically. It’s all about the buyer’s figures. Senior managers talk a good game, but it’s the buyers who call the shots, and they are just about driving down their costs, our margins and quality.”
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