Retail 101: Part Three with Mike Mauti, page 2
This is part three, page two of a conversation between The Packer’s Tom Karst and Mike Mauti about Retail 101 principles.
THE PACKER/PMG: So that’s the caution against running out of product. You don’t want to have to deal with unsatisfied customers who come to your store looking for something you promised. You mentioned the ad. Ads are special, right? Do you identify those in negotiations as well?
MAUTI: Definitely, and it can be tricky. The big difference between negotiating for an ad compared to regular business is you begin to negotiate well in advance. Where I come from, we would negotiate at least eight weeks prior to the break of the promotion. Some organizations might be able to play it a little bit closer to the break, and others might need even more than the eight weeks I needed. For a supplier, they need to be sharp on their projections and must know when volumes are coming on if they want to get the ad business, which can be many multiples more than regular business. For a retailer not only do they want a commitment on the volume, they also need a commitment on cost. Since they have promised their customers a product at a price, they don’t want to let them down. Remember the piece about not being able to replace customers? So, to get these commitments, a retail buyer would go to market looking for a lid. A lid is a guarantee from a supplier that the agreed upon cost will not go up for a specified volume and time period. The market may come down during that period, in that case, if the lid cost is no longer competitive, the agreed upon cost comes down to match the market. If the market goes up, the lid cost stays intact. It’s the lid that gives a retail buyer the comfort level to run the ad. When you’re simply negotiating for weekly needs, there isn’t that sense of urgency. For the retailer, they haven’t made a committed to their customer at that point. If the market cost increases, they still have time to purchase reduced volumes and set a retail price accordingly. A perfect example is what happened in the celery market earlier this year. In a normal market, a consumer can expect to pay something like $1.99 for a stock of celery. Suddenly, almost without notice, costs shot up and celery began selling for $5.99, $6.99 and even $7.99 in some areas. It left a lot of celery customers scratching their heads. Of course, we know that demand went through the roof and supply was off a little bit, and so, the market compensated. I would not have wanted to be a retailer on a celery ad without a lid when the market took off like that.
THE PACKER/PMG: When the market is really high and there is a spike in prices, can the supplier call ‘Act of God’, and modify the agreement? And if so, will it cause them an issue next time they negotiate something?
MAUTI: It all depends on the reason for the spike and the agreement that’s in place. If the market tightens up, and the supplier has opportunities to sell the same product for more money, that would not be well received by the buyer. But, if there is a legitimate reason, or like you said a true ‘Act of God’, then oftentimes, whether it’s an ad negotiation or wording right in the contract, there is usually an escape clause in the agreement. One of the topics discussed in the Retail 101 seminar is the concept of ‘Force Majeure’, which is French for ‘Superior Force’. A Force Majeure clause in a contract is a statement outlining how the obligations of the agreement change during unforeseen, problematic circumstances that place a strain on one party’s ability to fulfil the terms of the contract. Generally, the unforeseen forces include things like extreme weather, but could even include more dire situations like war, labor strife, insurrection or other big circumstances. In the world of produce it’s usually a weather thing, but in other areas of the economy, it could be for other reasons too.
THE PACKER/PMG: Sometimes suppliers have an idea that they want to cultivate a faithful relationship with their buyer, Is that true on the retail side? Do they value stable relationships? Is there value of keeping the same set of suppliers?
MAUTI: My sense is partnering with key suppliers is the best way operate. The stronger the partnership, the harder the other side works to make the partnership work. The more important the retailer is to a grower, the harder that grower is going to work to provide the right costing, the best pick of quality, priority loadings at their shed, plus all those sorts of incidentals that add up to a lot of value. If your priority as a buyer is to shop around for the best price you risk losing those other benefits. Take priority loading as an example, if your trucks are often forced to wait at a shed for sometimes a day or more, it could miss other pick up appointments and arrive late to your facility. There are ways to mitigate against late trucks but none of them, such as increasing safety inventory or buying on the local market, are very good. Both solutions have negative impacts on product quality and/or cost. The best solution to preserve quality and cost is to have your trucks arrive on time. Priority loading, a perk that comes with partnerships, can be an important part of that solution.
I should note that it takes a lot of work and attention to foster these types of relationships. Even still, with consolidation at both ends of the supply chain, relationships can become strained. Consider a situation where a big customer merges with another retailer. It could mean that potentially two companies will be vying for the business of the new larger company. Sometimes it works in your favor, and sometimes it doesn’t. If that was a big customer, it might be very difficult to replace those sales. This age of consolidation puts a heightened importance on maintaining supplier/retailer relationships. When I sat on a desk, we put an enormous amount of effort to strengthen relationships with suppliers. At one point we made a concerted effort to shrink our supplier base so that we were more important to the ones that remained. For example, if we had ten citrus suppliers that we rationalized down to five, straight math says that each one of those five is going to get a bigger chunk of the business than they had before. If a bigger piece of the pie equates to being a more important customer, then benefits such as better costing, better quality and priority loading should follow.
THE PACKER/PMG: How often is a product so unique or special that you really need to get it on your shelves?
MAUTI: It happens, in fact, it doesn’t just happen with specialty or new items. Sometimes a shipper produces a staple item that is so far above the rest of the market on quality, price or availability that you just must have it. There are some examples today of these market leaders and if you want to buy their exemplary product, sometimes as a buyer you must dig a little deeper when negotiating, in other words you may need to sweeten the pot a little. This creates a situation where the shoe is on the other foot and the negotiating power transfers to the grower. The growers in these situations could make it very difficult for the buyers, if they wanted. But in my experience, these market leading growers value relationships as much as anyone and want to partner with good customers, it just so happens they have a great product to use as leverage.
THE PACKER/PMG: The element of who holds the leverage is the tension, is that right?
MAUTI: It really is, I would say by and large, the buyer has the leverage, but every once in a while, circumstances dictate a grower to have the leverage. I’ve seen it happen with small growers too, those who might even be growing as a hobby, who don’t urgently need anybody’s business, yet has everybody knocking on their door. I remember a company in Washington State who planted small plots of berries, including varieties of which I had never heard. I was a berry buyer that took pride in having the best offer in my market, and they had these berries that I’d never heard of, I just had to have them. Unfortunately, the grower had little interest in selling because he already had enough business and he didn’t need to sell to some guy on the other end of the continent requiring complicated logistics. And so began a multi-year courtship for his berries. Eventually I convinced him to sell some product to me, and it became a pretty good arrangement for a while.
THE PACKER/PMG: Is win-win the kind of feeling you want after a negotiation?
MAUTI: I think it is, as a buyer, it does feel good to scoop the market on a negotiation, but at the end of the day if you value the relationship, you’ll realize that your suppliers need to be successful. If I wanted to continue to buy exotic berries from a supplier at the other end of the continent, then I had to ensure that I was paying him enough to keep his business viable. And he knew if he wanted to continue selling to my customers, he needed to ensure he was giving the best quality at a price that’s going to sell, and not be here today and gone tomorrow. The idea that we are all stops along the value chain, moving product towards the end consumer is very important. It can level the playing field. That might sound counter-intuitive coming from someone with a retail background. After all, why would I ever I want to level the playing field, why wouldn’t I want to keep all my power. By understanding that you are only as strong as your partners on the value chain you also understand the importance of partnerships.
One seminar topic that generates attention during an interactive game we play called ‘Negotiating for Win/Win’ is the idea that not everybody is looking for the same thing. Suppliers and retailers aren’t always just looking for the lowest cost or the highest cost. Often there are other elements that is important to achieve for one party that is easy to provide by the other. If you can find those nuggets, it could enrich the whole negotiation and really move you towards win/win. Without spoiling the game too much, a quick example might be a supplier’s need to establish distribution of a new item and a retailer’s need to fund a new demo program. Neither objective jeopardizes the core needs of the other party. Both elements could be included in the final solution. Both sides get a win and neither side gave up much to get it, that’s win/win.
THE PACKER/PMG: You hear a lot about social responsibility and sustainability. How much would you say those issues enter the negotiation process?
MAUTI: From my perspective, we are still in the early stages. Some of these issues find their way to the negotiating table as a response to consumer demand. An example would be the proliferation of fairly traded products, which is still not widespread in produce. We are also starting to see movement on things like plastic packaging and carbon footprints. Growers are now competing on energy usage, carbon capture and net zero carbon operations. These sorts of initiatives have the potential to create credibility in the eyes of the consumer if they can ever get in front of them, which is not always easy for a produce supplier. Its effect on the actual buyers, however, is somewhat muted. What I am seeing is this burgeoning anti-plastic movement, which is having an impact now and I would expect that to grow in the future. The industry response to the overuse of plastic packaging has been swift. I’ve heard lots of press from the PMA and CPMA and very recently a major Canadian retailer announced that by next year they will eliminate plastic bags completely from their stores. With this much focus, it’s only a matter of time before these issues become front and center during negotiations between suppliers and retailers. Of course, these issues are already there. For example, the move to top seal products in place of plastic clamshells was born out of the desire to use less plastic, so it has become more prominent, but I suspect it to become an even larger issue in the years to come.
THE PACKER/PMG: That can be at a higher cost sometimes, too, right?
MAUTI: Certainly a higher product cost, but we are trending towards a more fulsome view of the economic equation, adding social costs into the mix. Taking this fulsome view might yield a lower total cost when adding things like more expensive packaging and renewable energy sources. This view still seems to be in the scopes of specialty players, but I suspect that mainstream companies planning to be in business for years to come will adopt similar views. It all starts at the consumer level, moves to the customer facing businesses and finally to the companies servicing customer facing businesses. In today’s economy the first two phases are upon us and phase three is gaining steam.