Tuesday 6 January 2015

Tesco Supplier Contracts - a ‘back to front’ move in trade relationships?

On Thursday, Tesco is expected to announce that it is making major changes in supplier contracts by shifting its emphasis from back-margin to front-margin.

In practice, this has to mean that commercial income (trade investment) will be translated into sales-based reward, and presumably negotiated into trade margin and volume discounts. Given the sums involved, with trade investment running at 20% of their sales for many suppliers, and average trade margins at 25% of a retailer’s net sales, it is imperative that suppliers enter these re-negotiations, well prepared.

In effect, this means that a supplier has to be very clear about the actual cost to the business of each element of the supplier trade investment package, the purpose, the KPIs and the terms of compliance. Converting these sums into the incremental retail sales (ex VAT) that they represent, based on the retailer’s current net margin, will help in adding value in negotiation.

More importantly, it will remind the NAM that any transfer into front-margin has to be linked with appropriate levels of incremental sales.

In other words, as front-margin currently consists of a mix of the retailer’s trade margin and unconditional volume discounts (!) it is vital that any additional volume-based discounts should be made conditional upon specific initiatives hitting pre-agreed KPI targets, and paid in arrears – a reward for additional effort by the retail-partner, the original purpose of trade investment.

If Tesco manages to make this fundamental change in their supplier relationships, and unless suppliers are able to tie the incentives to specific in-store initiatives, it is probable that much of the monies will transfer into price support.

This means that other multiples will have to follow suit, or risk loss of market share.

Time for a fundamental re-assessment of the TOTAL support package your brand needs in making itself available to the consumer?

1 comment:

Mike Anthony said...

Hi Brian,

Thanks for this... Did the expected change happen? Any news?

A quick aside: I remember Tesco pushing for Net net pricing, everything at the front way back in around 1991 - a promise that they would never charge anything over that, ever, etc.

One additional worry for NAMs to keep in mind, therefore, is how to defend against back margin creep. It happened once, it could happen again!

All the best,