Any business that has done business with the supermarkets knows that they are not there to do you any favours. They have shareholders to keep happy, customers to sell to at the lowest prices possible consistent with their margin objectives , competitors to beat, and shelf space for sale to their suppliers.
In order to survive and prosper selling via supermarket distribution takes a business model that is tailored to the demands that the retailers make.
Following are 10 strategies that have worked in the past, the more of them you cover off the better, and the first few are mandatory.
- Understand the supermarket business model. The supermarket business model is based on three factors: high volumes, lowest possible supply chain and transaction costs, and low prices. With some minor category exceptions for some retailers, they do not vary from this model, in Australia or overseas. Given the scale of their operations, they get to set the rules, and there is little room for negotiation, even for major suppliers.
- Be savvy with data. Mass market retailing is a data intensive game. The retailers have mountains of data at their disposal, and plenty of suppliers willing and able to interpret it for them, with the obvious disadvantage to those who do not interpret. Scan data, combined with the loyalty card data increasingly being used is a goldmine of demographic, behavioural, and promotional information. Being in a position to present data with your interpretation, and having the credibility to interpret the retailers and your competitors data is a price of success.
- Aggressively execute on Category Management. Category management disciplines are the foundation of the retailers ranging, promotional and in store product placement strategies. It is data intensive, and an integral part of he business model, and as such sufficiently important to be treated as a separate “to do” for those to whom success with supermarkets is essential. Allowing your products to be “category managed” by your competitors is simply not sufficiently competitive , or aggressive. You need to execute on category management in partnership with the retailers, even if you are not in the “category captain” role.
- Build a brand that has relevance and connection to consumers. The alternative to having a brand that has at least a small but demonstrable group of consumers your brand has no effective substitute, and who will perhaps change their choice of retailer for, is essential. To be a price taker with no leverage at all, is to be an irrelevant supplier who is absolutely dispensable.
- Recognise you have two customers. The supermarkets may be your direct customers, but the consumer is also your customer, indirectly. As a part of brand building, you need to open communication channels with consumers, so that they are predisposed to buy your products. This may seem like brand building, and it is, but it is more short term direct, and actionable than building a brand which is a long term investment. Direct promotional and communication activity can now be a part of your tactical marketing plans in a far more directed manner than has ever been possible before.
- Remove transaction costs. Transaction costs have two basic causes, the first is not getting “it right first time” requiring rework to correct, and the second is the penalty of small scale. It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. To the extent that technology can be applied to process the invoices, the costs will not be material, but if people are involved, the costs of the $1,000 invoice is 100 times as much as the $100,000 invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focussing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices.
- Collaborate for scale. Small suppliers to supermarkets have to find ways to apply leverage to their opportunities. Collaborating to reduce various forms of transaction and supply chain costs , as well as pooling data and data capabilities are logical if challenging tasks. Many produce suppliers have found ways to collaborate, but their produce is unbranded, and commoditised by retailers, so it is harder for branded FMCG but nevertheless possible.
- Constantly innovate. It is almost a cliché, but nevertheless true, that to stay still is to be left behind. Innovation is a part of the necessary armoury of success. Not just innovation in the product supplied by the means of its production and supply require constant innovation.
- Build agile value chains. Commercial agility is the ability to alter processes in the face of changed circumstances without resorting to non value adding discussion and debate, and without losing sight of the objective. Agility is not flexibility, which implies that things “bend” then go back to normal. By contrast, agile value chains have the characteristic of being able to evolve rapidly, and improve in the process.
- Do not play. The last and most obvious strategy is to ignore the supermarkets, and play in channels they do not control where the value in the product is able to be recognised in some way that is impossible in the high volume low margin supermarket game. Depending on how you measure, and what category we are talking about, supermarkets control between 50 and 80% of FMCG sales, which leaves some 30 billion of Australian FMCG sales left over, not an insignificant sum.
That is an awful lot to do, and the best time to start was a while ago. However, the second best time is now, so go to it. If you need a bit of assistance, just get in touch, and I will bring along my 35 years of experience with this stuff and put it at your disposal.