Heinz & Tesco. Is it really all about price?

News has broken about the first very visible spat between a supplier and retailer as they battle to deal with soaring inflation: Heinz and Tesco.

There may be many discussions about whether the cost price increase tabled by Heinz was justified, or if Tesco’s bold stance to refuse the price increase on such a huge consumer staple is indeed about championing the needs of the UK consumer in these difficult times.

But there is an alternative view. Maybe it wasn’t about price?

Relationships between large consumer goods companies and equally large retailers are huge. Even just in the UK, there are quite a few consumer goods companies whose turnover with Tesco exceeds £250m.

These relationships are incredibly complex. Yes, the most visible signs of what’s going on in the relationship tends to emerge in spats about price increases and delistings, but I would argue that these are often symptoms of something a lot less tangible.

Trust.

At the end of the day, a consumer goods company can sell its products to a retailer at whatever price it likes, and the retailer can sell these products to a consumer at whatever price it likes. Either side might not like it, but it is what it is. Ultimately, the consumer decides and there is simply a yin and yang between price and volume that determines profit. If the consumer wants enough of it, Tesco will sell it.

So, the real reason for the spat is more likely that Tesco doesn’t trust that the cost price increases proposed by Heinz are fair, given what they believe other retailers pay Heinz in the UK market.

For Tesco to make their perceived ‘fair’ margin, they are concerned that they will have to price Heinz’s products above the retail price that their competitors are selling at, because they believe their retail competitors are getting a better deal from Heinz on cost price.

To pre-emptively solve spats that harm both businesses (because they do) the key is to work together to build trust.

You don’t build trust through pricing negotiations. You build trust through great Trading Planning.

Trading Planning is the process by which a consumer goods company and retailer continuously negotiate over all possible variables to find the sweet spot between what they each want to do and how they are going to do it together. If the supplier gets its Trading Planning process right, there is a lot of trust in the relationship.

Negotiation variables that should be considered in Trading Planning go a long way beyond cost price and should include the following. How many of these have you agreed with the retailers you work with?

• Category Opportunity. Do we and the retailer agree on where current, emerging, and latent demand lies in the retailer’s category? Effective Trading Plans use the supplier’s brands and products to build value for the retailer’s category.
• Common Objectives. What are our objectives, what are the retailer’s objectives, and which do we have in common? Effective Trading Plans deliver as many as possible of the supplier’s and retailer’s objectives.
• Opportunity Assessment. What are the growth and efficiency opportunities for us, what are the growth and efficiency opportunities for the retailer and how have we prioritized these opportunities together? Effective Trading Plans deliver the priority growth and efficiency opportunities for the supplier and retailer.
• Joint Ambition. How do we and the retailer articulate what we are trying to achieve together over the longer term? Effective Trading Plans include a written statement to define and acknowledge the joint ambition that the supplier and retailer share.
• Guiding Principles. Do we understand our conflicting objectives, and our constraints and the retailer’s constraints, that could impact negatively on delivering our joint ambition, and have we agreed guiding principles that in advance determine what to do if we hit a problem e.g. inflation conflicting with a price promise? Effective Trading Plans capture guiding principles to go back to and help navigate conflicts when they inevitably arise.
• Terms Transparency. Do we calculate our cost prices from a standard price list with transparent terms to ensure the retailer understands how their cost price is calculated? Effective Trading Plans show how cost prices are calculated from terms applied to take away uncertainty and avoid ‘read-across’ issues when buyers move to another retailer.
• Investment Transparency. Do we capture all the investments we make in the retailer or just the ones we agree with buyers? Effective Trading Plans show how all investments add up to help the retailer understand the overall value in the relationship.
• External Factors. Do we agree on the different types of external factors that could affect the performance of the Trading Plan e.g., consumer trends, inflation, new store openings, regulatory changes? Effective Trading plans are built with an understanding of what could change that’s outside of the sales organization’s and buying team’s direct control.
• Ongoing Activities. Do we agree on the different types of ongoing activities that should be included in the future Trading Plan e.g., new products, pricing, fixturisation? Effective Trading Plans contain the right balance of different types of ongoing changes to create growth, manage risk and drive efficiency for the supplier and retailer.
• Promotions. Do we agree on the different types of promotional activities that should be included in the Trading Plan? Effective Trading Plans contain the right mix of promotions to drive desired consumer and shopper behaviour and manage competitive threat for the supplier and retailer.
• Valuation Impact. Do we agree on the size of the base business (i.e. last year actuals/projected minus last year’s Trading Plan), impact of external factors that could influence the base in this year’s trading Plan, and then the impact of the new Trading Plan i.e. ongoing changes and promotions? Effective Trading Plans use a consistent valuation waterfall to help visualize and agree the potential impact of the Trading Plan on the supplier’s brands and, crucially, the retailer’s category.
• Organizational Memory. What did we agree last year, and what about the years before that, and why did we agree those things? Effective Trading Plans are never forgotten.

In my experience, when big suppliers and retailers that are essential to each other’s future have a spat, it’s normally because many of these negotiation variables have been left wide open. Leaving big topics like these open means that the businesses aren’t aligned for the longer term and so can’t trust each other to act in each other’s interest.

In a very difficult inflationary environment, when too many negotiation variables beyond price have been left open for too long, can you really trust the proposed cost price increase?

Well, there’s one way to find out the truth of your ‘partner’s’ bottom line… show yours by delisting them.

In low trust environments, big businesses in the same value chain that should ideally be partners become adversarial. In doing so, it’s a lose:lose until the businesses re-establish a new ‘minimum’ level of trust.

My advice in this inflationary environment is to do everything possible to improve your Trading Planning process to build trust.

I am happy chat with you about any aspect of Trading Planning. So do please drop me a note back if you are interested to explore some new ways of doing things.

If you want to learn more about best practice Trading Planning, here’s one of my most important video tips for you:

Hope that’s useful.