If the Budget is the sum of all fears, how can retailers manage duty hikes?
Industry experts Angela Mount and Mike Paul combine their experience of buying and
supplying wine to offer insights into the annual furore of duty increases
As a retail buyer, the approach
to the annual duty debacle
was one I viewed
as an inevitable irritant . It is an issue which
results in administrative hassle, reworking of budgets
and the influx of formal supplier letters
- yet more stress
on the beleaguered buyer .
The inevitable retailer/supplier discussion begins like two adversaries circling each other in the ring. The gloves are off
- key price points cannot be exceeded without an impact on sales, yet a drop in margin is not acceptable . But strategically, both parties subconsciously realise
that working together
is the way forward, and in time, a compromise
is reached. Like sulky children, each makes the odd concession
In the current maelstrom over punitive duty, this attitude has to change. From my experience, far more vision is required from the majority of suppliers.
how many suppliers and distributors are really thinking that far ahead
and how many are putting their heads in the sand
Retailers build budget hikes into their annual plans, be it turnover growth or decline (depending on the mood of the consumer), or margin impact. This is done months
in advance. Suppliers should
do the same. I'm sure many do, but far too little of this is
translated to the buyer via the account manager . These big issues are discussed at senior level, but the account manager invariably tiptoes around the subject in the months leading up to the event
to avoid confrontation . What happens? One of the most farcical scenarios of the year.
Several forward-thinking suppliers will have taken the initiative and started discussions with retailers
about managing the duty increase. Far too many issue a standard letter, from the sales director, advising of cost price increases due to budget rises - get real guys, no decent buyer is going to accept these without discussion and negotiation.
On the other hand more buyers are sending letters to the trade refusing to accept cost increases.
I have never condoned this method of communication.
The winners will be those who work proactively .
Suppliers can be very vocal in branding retailers as an evil force that is destroying margins. Sorry, but there are two words that are sadly lacking in the vocabulary of far too many account managers: forward planning. You know it's going to happen, why not face up to it?
Suppliers need to build it into both budget, and from a retail perspective, category plans. The days of evaluating the profitability of wine on a SKU by SKU basis are long gone.
Success here is
all about the mix and category management.
three-year business plan, and building the potential hurdles into the equation. It's about reassessing your brands and evaluating where they can stand commercially. Benchmark and be realistic.
Come up with compelling arguments to convey to the consumer and work with your key accounts to make the end user aware of the impact that these ferocious duty hits are having.
And in the current climate, we need to balance the volume/value equation like never before.
Buyers are under enormous time pressure and don't want to change suppliers lightly. This takes time and effort. Make sure it doesn't happen to you by understanding the vast wheel of retail commerce within which they work, and by working with them to manage the trading relationship in all its guises.
As a supplier to high street retailers, there was always something depressing about the impending prospect of a duty increase.
On one level such increases were a hassle which served only to
disrupt the ongoing flow of discussions with customers, and on another level they tended to reinforce where the balance of power lay.
Such issues are exacerbated this year by the current economic crisis, with the resulting focus on trading down in the high street - a trend that
implies that it will be more difficult than ever to pass on any increase in duty.
Yet if feedback is correct, and the average margin to a supplier is only £1 per dozen on wine retailing at £4.50, then the consequences of not doing so could be dire.
So what does a supplier do to takle this?
Well, for a start it makes sense to
unite in putting more
pressure on the government, as the level of duty is now crippling.
However, the fact that duty increases too rarely get passed on to the consumer is an entirely separate issue.
High street retailers usually get the blame for this, but ultimately all they are doing is exercising their power - created by a fragmented supplier base, low brand equity and oversupply - just as suppliers do when they have the opportunity.
Suppliers should therefore focus on assessing and developing their own strengths rather than become obsessed by the competition or retailer power.
Brand equity may be scarce, but it does exist and may be underestimated by suppliers lacking confidence in their ability to add value (and perhaps more generally in their importance to their customers).
There are many wines with strong rates of sale which retailers would really prefer not to have to replace, while there are always opportunities for competitive gain in a crowded market.
Wines should be rigorously benchmarked against the competition at the same price point, and the
one above, to determine their competitive strength.
And if the conclusion is that a supplier is underselling its wine (and it's surprising in my experience how often this is the case) then, at least in principle, the way forward is very clear.
And as for new product development, how many suppliers actually develop three-year plans?
Building a successful wine business is in part about securing a balance between volume and value drivers - but the tendency is to focus planning on the latter, as the propositions tend to be more complex and the return is longer term.
Good planning is essential for both of these elements in the equation, particularly given that they should work in harmony.
And as part of this process regular duty increases must be built into the pricing model, which will help to ensure discussions with customers are much less reactive than tends to be the case.
Finally, supplier sales tactics should be focused on utilising every ounce of power they have, on exercising every degree of influence, and this implies not only developing plans which are realistic and relevant to one's customers, but ensuring that they are communicated professionally and, crucially, with confidence.