FMCG suppliers under pressure to pass on the benefit of falling input costs

We are all familiar with the idea that fundamental changes to the retail landscape have been driven by technological innovations which, in turn, have driven a shift in consumer behaviour. Current estimates suggest that online purchases account for £1 in every £5 spent on a credit or debit cards in the UK and that total online spending will top £100bn over the next year. Innovations such as supermarket loyalty schemes gather huge amounts of consumer data allowing retailers to develop complex algorithms, anticipating how their offering should be targeted and adjusted to meet demand but also forecasting how consumer behaviour can be “nudged” based upon what people seem to want, need and desire without even knowing it. However, there have also been fundamental changes on the supply side and, in particular, to the way in which retailers interact and transact with their suppliers. 

Major retailers have recently hit the headlines, accused of bullying suppliers into offering rebates, retro’s, marketing support payments, payment to stay on approved supplier lists and payments to secure prime shelf positions. Suppliers are often expected to comply with “take it or leave it” commercial and contractual terms and to adjust operations to suit the retailer, for instance, by delivering goods in a certain type of vehicle at a very specific time of day. Most recently, retailers are looking to their suppliers to reduce prices to reflect falling input costs, particularly in response to falling oil prices.

This less familiar side to the changing retail landscape – the use of aggressive tactics by increasingly sophisticated commercial buyers - has the potential to benefit the consumer by ensuring prices remain competitive. However, for the suppliers it is a less happy experience and the jury remains out as to whether these savings will be passed on to consumers or simply used to increase retailer profit margins. 

As their own margins are squeezed, some suppliers – and especially those for whom a large retailer might represent a significant proportion of turnover –will struggle and it is inevitable that some will fail. We have been working with retailers and suppliers to identify potential problems before they become critical and to agree a strategy that works for all concerned.

Author
Paul Zalkin
Tel: +44 (0) 20 7186 1152
Email: pzalkin@moorfieldscr.com

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