Wednesday 8 June 2022

Tesco Requesting ‘Back Margin’ Payments As Part Of Price Negotiations

Tesco has reportedly been using cost price inflation (CPI) negotiations with suppliers to make requests for fixed fees to support promotions.

According to trade magazine The Grocer, the development marks the return of the so-called ‘back margin’ practice that had largely disappeared under Tesco’s previous CEO Dave Lewis, who had moved the business towards front margin and an EDLP model.

The change comes as supermarkets face CPI requests from suppliers looking to offset surging commodity and energy costs.

A source is quoted by The Grocer as saying: “Before Dave Lewis came in, Tesco had an extraordinary number of ways of charging suppliers. But that completely changed and has been minimal ever since.

“However, they’ve obviously got a tsunami of suppliers coming to them looking to increase prices and so they have brought back margin into discussions.

“It’s actually quite a clever thing to do because, with the desperation of suppliers to get CPI through, many are going to accept this.”

It is believed that Tesco is offering a sliding scale of charges on promotions, such as positioning on gondola ends or in-aisle shelf markers.

Ged Futter, founder of consultancy The Retail Mind, told The Grocer that Tesco’s move was “legitimate” but urged suppliers to stand firm in negotiations and not allow a retailer to couple CPI negotiations with requests for fees for promotions.

Meanwhile, Tesco stated that it currently only operates five forms of back margin, compared with 24 in 2015. Its Chief Product Officer Ashwin Prasad is quoted by The Grocer as saying: “We’re working with our supplier partners to navigate the pressures of inflation and deliver the best possible value for our customers.”

NamNews Implications:
  • A reminder:
    • Front Margin: the margin that you get from the party to whom you sell the product, i.e. sell side.
    • Back Margin: the margin that you get from the party from whom you purchase the product i.e. Buy side
  • A reminder:
    • Avoid this return to the ‘old days’.
    • It is the precedent that counts…
    • …and should be counted.
  • i.e. ‘Eyes wide open’ even with trade partners…
#BackMargin #FrontMargin #TradeInvestment #TradeFunding

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