The Tesco-Booker merger: Keep calm and cash and carry on
It was announced in the news last week that the UK’s biggest supermarket group, Tesco, has decided to buy the UK’s biggest wholesaler group, Booker Group. So what does this mean for suppliers? As is always the case with customers merging, Tesco will soon have visibility of pricing across both businesses and will start to pick and choose the best prices from their suppliers.
This could represent a huge financial risk for your business. Historically, wholesale customers often received significant unconditional rebates, which are much less prevalent in grocery. Suppliers who have not yet extracted themselves from these will be in for an interesting conversation…
So, what can you do as a supplier to get prepared?
Step 1 - Get absolute clarity of what you are dealing with
First you need to quantify the risk to your business that this merger represents. The starting point is to compare invoice pricing between customers for your entire portfolio, then you will be able to quantify the risk. If invoice pricing is defensible then you will still need to look further down the pricing waterfall and assess risk down to net-net level. You may find that the risk is small, in which case you may need to do nothing, reassured that you understand the situation. Or, you may find that the merger represents a significant risk to your business, in which case you need to act.
Step 2 - Understand the pricing differences
So, you’ve established the merger could represent a significant risk to your business. Next step is to understand what is driving those differences. You need to review and compare your trade terms structures across both customers and ask yourself the following questions:
How does the way that we do business with these 2 channels differ, and is this reflected in the structure of our trade terms?
What elements of trade terms are consistent; which are different?
What conditions are linked to performance?
Are conditions being applied consistently in both cases?
Ultimately you are trying to establish whether you can defend the differences which exist.
If you can defend your position, then you can stop here. You have established that price differences do exist, but they exist for a reason.
Or you might find, through your analysis, that the price differences which exist are indefensible, and you need to make changes to your customer agreements to put yourself in a more defensible position.
Step 3 - Build your defence
You have acted early, so you have time to make some changes to your agreements to put you on a strong footing with the customer. You have a number of options here. Here are a few to consider:
Hold your customer to the agreement. Suppliers may have the right counterparts in place, but they do not hold their customers to what was agreed. And more importantly, when customers do not stand by what was agreed, payment may still be made. Now is the time to start enforcing your agreements, and when customers do not stick to what was agreed, don’t pay.
Renegotiate legacy agreements. When we ask our clients why certain discounts are applied we often get the response “I don’t really know, we have always paid that”. Terms inherited from previous account managers have gone unchallenged. Don’t accept the status quo, look to renegotiate these terms. Identify conditions which will drive a return for your business and build these into your agreement.
Realign rebates across customers. By looking across customers, you may find that some terms, e.g. logistics, are not being consistently applied. Take the opportunity to remove any further risk in your terms structures and make them consistent between channels and customers.
So, hopefully you are now in a better position to defend your pricing and terms. Taking proactive steps should turn this into an opportunity to grow your business, rather than a risk to your P&L. Why not review your pricing and terms across all of your channels and customers, so that next time a merger takes place, you have defensible structures in place and less risk.
At Acumen, we have been helping our clients for over 10 years navigate their way through customer mergers to come out the other side more profitably. We quantify and evaluate the pricing and terms risk, and work with clients to develop their customer investment strategy, whether that’s around profit protection or unlocking future growth.