How suppliers can navigate the thorny issue of cost price increases with demanding retailers

Date: August 23, 2021
Author: David Sables - CEO of Sentinel Management Consultants
Source - The Grocer

Nothing brings out the nervousness of suppliers like taking a cost price increase (CPI) to large customers. Buyers have always demanded to see a justification for CPIs, and suppliers have always mumbled responses about foreign exchange, transport costs or the global price of raw materials. Until now. Recently buyers have made demands for line-by-line, component-by-component breakdown of input costs on spreadsheet forms.

These new forms demand access to some of a supplier’s most commercially sensitive information, and they come from customers who run competitive own-label products or may be interested in gaining leverage via another branded supplier. It’s one thing to assist a retailer by providing publicly available data conveniently in one place, but entirely another to share the intimate financial details of the business model detailing commercials through the supply chain.

To navigate the thorny issue of CPI, suppliers should start by ensuring the move is realistic and appropriate, then be clear and specific in its communication, especially the applicable date. Make a clear choice on what data can support the justification of price increase. These new forms create a challenge, as inevitably the information will later get used against the supplier – yet suppliers have been told “you have to share all the cost details before I’ll consider your cost increase request”.

I now advise them to complete the ‘cost price increase request’ template, but only include publicly available market information. Just enter ‘commercially confidential’ in the delicate parts and wait for the call. In the end, it’s the same battle of wills it always was – the cost price is effective from the first of next month, and if you don’t confirm agreement, deliveries will stop.

Interestingly in Australia, where two big retailers dominate, their Grocery Code of Conduct (the equivalent of our GSCOP) was updated in 2020 to include: “The retailer or wholesaler must not require the supplier to disclose commercially sensitive information in relation to the following: (a) the price increase; (b) negotiations about an increase in the price for the groceries. Nothing in this clause affects the rights of a supplier to determine the price of groceries that the supplier supplies.”

The retailers have 30 days to respond to the notification, to accept or enter negotiation, at which point the code insists: “A retailer or wholesaler that enters into such negotiations must engage in the negotiations in good faith and take all reasonable steps to conclude its position on the negotiations without delay.”

This last piece contrasts greatly with our UK panto, where the typically reverent 12-week notice is met with a flat refusal followed by hiding under a rock for 11 weeks. I’m rarely a fan of intervention in our business world, but maybe it’s time to consider such inclusions in GSCOP to clear up this key area of tension once and for all.