The value of suppliers in creating a competitive advantage is often underplayed in today’s retail market. Whilst retailers hold valuable industry expertise and consumer insight, suppliers also have considerable power to increase market share through new product innovation and cost reduction. Both parties hold essential data and expertise to facilitate improvements that, if shared, can drive initiatives to rapidly meet consumer demand.
The food retail industry is highly competitive, being driven by increased competition, aggressive pricing initiated by the discounters and lack of customer loyalty. The big four grocery retailers have lost 4% of their market share since 2017.1 In the same period, Aldi and Lidl have grown considerably, with Aldi’s like for like yearly growth currently sitting at 7%.2 As a result, there is a battle to maintain and then increase market share in an intensely crowded space with traditional, discounter and online retailers in the mix.
As such, a strong working relationship between a retailer and its supplier is table stakes in this market. Retailers need to go further, engaging collaboratively with suppliers to promote transparency, innovation and sustainable growth.
This enables retailers to sell quality products, expand their product range and have oversight of the end to end process to drive operational cost savings from factory to shop floor. Equally, it ensures suppliers can protect their order volume, product range and margin from increasing competitor activity, whilst avoiding excessive buying pressure. If executed effectively, retailers can produce higher quality products at lower prices, creating a compelling customer proposition that will lead to increasing customer loyalty. So what are the key things to focus on?
Retailers and suppliers need to share insight and data to drive process improvements and cost savings. For too long, suppliers have eschewed transparency to protect their margin and retailers have used a hard approach to squeeze costs out of suppliers without effective engagement. By being transparent, a mutual understanding of the shared supply chain can lead to identification of process improvements and cost savings.
Figure 1: Shared supply chain and opportunities to create a competitive advantage
Once cost reductions are realised, a joint decision can be taken to pass the savings through to the customer to drive increased sales or alternatively, to share the savings between the supplier and retailer. Regardless of the tangible benefits, the most important result is a well-managed, collaborative relationship that promotes sustainable buying practices.
Focus on New Product Development
The competitive market means that performance improvement and cost saving initiatives are not enough to maintain customer loyalty. Suppliers and retailers need to invest in new product development (NPD). The most common method is to introduce brand new products that are trending, such as the extensive vegan ranges currently launching across all retailers, or innovative ideas such as the edible bug that Sainsburys has released.3
However, innovative and reactive NPD can be short term and only one way to change a product range. Incremental NPD to existing own brand can reinvigorate existing ranges to attract new customers and promote sustainable growth. It can offer cheaper, higher quality alternatives to brands or older own label ranges that customers no longer recognise as new or exciting. For example, Tesco has recognised the importance and potential of own-brand by introducing new concept stores under Jacks to rival the discounters.
Whilst this can be costly, it shows that NPD is crucial to promote continuous improvement to respond to customer demand. Retailers must collect expansive data on customer need, and it is then the responsibility of the supplier to translate data into attractive products to meet customer needs. Both parties have a shared responsibility to reduce the speed to market for NPD through streamlining processes and rapid testing of concepts with customers.
Distancing Buyers from one-way, uncompromising negotiations will be challenging. However, it will increasingly become a necessity in order to obtain the insight required to meet the ever-changing customer needs of today and tomorrow. To be successful and drive distinct competitive advantage, suppliers and retailers need to:
- Share data sources to facilitate customer centric decisions
- Be open and transparent with their processes, technology and people to drive operational improvements
- Focus on shared NPD goals
- Build a dedicated team to create and manage collaborative relationships
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