Supply Chain: How To Avoid Price Rows In Inflationary Times

• Published date: 19 December 2022
• Subject Matter: Consumer Protection, International Law, Strategy, Consumer Law, International Trade & Investment, Economic Analysis
• Law Firm: Vendigital
• Author: Julie Neal and Alex Copeland

Julie Neal is a Director and Alex Copeland is a Senior Consultant at Vendigital. They recently shared their insights with Retail Sector.

Managing price negotiations with key suppliers can be challenging at the best of times, but with inflation at a record high and a cost of living crisis affecting households across the country, there is an increased risk of disputes arising. By working collaboratively however, both sides of the negotiating table can avoid clashes and, potentially, generate value too.

A price row between Tesco and one of the world's largest food retail brands, Kraft Heinz, spilled over into the media recently, when deliveries of some popular food items including ketchup and baked beans were paused. The disagreement has since been resolved, but not without highlighting the cost pressures that many large retailers and their key suppliers are facing in the current climate.

During its recent negotiations with Kraft Heinz, Tesco was most likely resisting the supplier's price increase to avoid passing it on to customers. As the largest of the Big 4 supermarkets, it knew that in the midst of a cost-of-living crisis, hiking prices on popular branded goods could lead customers to shop elsewhere. There is already some evidence that consumers have been voting with their feet, with sales at Aldi and Lidl increasing by 13.9% and 11.3% respectively in the 12 weeks to 10 July.

Price negotiations in the retail sector have become more sensitive across the board. Suppliers are facing pressure to push price increases through the supply chain to protect margins and at the other end of the chain, consumers are shopping more carefully. The problem is particularly acute for smaller suppliers with lower volume orders. They are finding it much harder to leverage their agreements and, in some cases, this is already impacting revenues.

Instead of taking an adversarial approach to price negotiations, retailers and their suppliers are finding that it is increasingly important to work together. This involves being open and honest about their cost base and operating margin, so that decisions can be taken to introduce efficiencies or alter the terms of the supply agreements where necessary.

In some cases, adjusting payment terms or the structure of supply agreements could alleviate cost pressure for a key supplier in the short term, while both parties share information and look for ways to remove cost from the value chain. For example, shorter payment terms...