FMCG Negotiation strategy: stick or carrot?
Volumes are often in the millions so a slight change in terms of price can have a huge impact on the bottom line. Couple this with the almost duopoly situation in Australia and you have potentially one of the most volatile environments in the world to do business in.
Compared to almost everywhere else on the planet, the big retailers here enjoy some of the healthiest margins and most favourable terms of any of their global competitors.
It’s fairly remarkable that in one of the most remote, lowest populated regions, Wesfarmers and Woolworths are ranked so highly in Deloitte’s Top 250 Global Powers of Retailing at 21st and 23rd on the list respectively.
Looking closer at Australia’s two supermarket giants it would appear they have employed two very different strategies of late. From the outside, it would appear Coles have taken a harder, more short-term approach, whereas Woolworths have been very vocal about taking suppliers on a longer-term, more collaborative customer lead strategy.
At a recent debate we hosted focused on the future of the FMCG retail industry, Woolworths director of buying and merchandising Steve Donohue [now MD of its liquor arm, Endeavour Drinks] pointed out it had taken board changes and a large investment in developing their people, including senior management, to catalyse major changes across its buying group to fix the culture in order to work with, rather than against suppliers.
Go hard or go home?
With Donald Trump in power in the US, hard-line negotiation has been hitting the headlines a lot recently as people find the ‘shark-tank’ style of dealing more entertaining, though it is at times, in danger of being glamorised.
Even within the business community, when asked how a deal went, most people’s ego’s would prefer to say ‘we crushed them’ as opposed to ‘it was a very amicable and mutually beneficial outcome’.
We advocate being able to turn up the heat when necessary, to get a result, but would only advise the more hard-line style approach when there is low dependency and limited scope for repeat business.
If you adopt this style with a party that you intend on working with long term, while it may deliver a short-term result, it often leads to problems further down the line as they shift focus and investment to places that yield a better result (or just to extract revenge).
A case for collaboration
Supporting a collaborative strategy when it comes to negotiating deals behind closed doors is an approach noticed by some of the globe’s largest retail organisations. Walmart’s US chief executive, Greg Foran, has told the Wall Street Journal that all its buyers are now required to hone their negotiation skills.
Of all the skills required in business, negotiation is the one skill that transcends all the rest. It encompasses a vast range of core competencies – communication, influence, strategy, emotional intelligence, self-control and leadership. It is the basis of all business success.
Every time a contract is signed, a sale secured, deal agreed or a decision made, the effectiveness of those who negotiated it has a major influence on the bottom line of the business.
Tesco’s in the UK were renowned for their hard negotiation tactics and in a bad place in 2016, with profits going backwards and its share price at a 10-year low. Much like Woolworths they announced to the market they would be making a significant investment in their people and changing their strategy to be much more collaborative with suppliers.
In just over 12 months they increased share price by 33 per cent and greatly improved supplier relationships. More recently, Woolworths has reported a 37.6 per cent jump in first-half profit to $969m off the back of strong supermarket sales growth.
The evidence is strongly in favour of working with, rather than against your supply partners. So why do people choose to act so short term? Because, when the pressure is on, you have budgets to hit and shareholders to answer to, it is much easier to bang the table and demand what you want, rather than it is to remain calm and think long-term.
Lloyd Barrett is the head of retail – ANZ, The Gap Partnership, a global consultancy that works with over 500 of the world’s largest companies.