Retailers are pushing product suppliers to cut back on costs

Over the past two years, product suppliers have been jacking up prices to deal with inflation — essentially passing the cost to consumers. While this has helped some suppliers pump up their revenue — PepsiCo, for example, hiked prices by double digits for the seventh consecutive quarter and reported a net income growth of 14% in its recent quarter — retailers took a hit from people buying fewer products and cheaper products. Some shoppers have opted to shop at discount stores and dollar stores for essential items. 

While inflation is still persisting, the cost of commodities has significantly improved, Rachel Dalton, head of retail insights at Kantar, said. The World Bank’s report released in April indicates that overall commodity prices are projected to drop by 21% in 2023 relative to the previous year — the sharpest decline since the pandemic. As a result, retailers now have more bargaining power over suppliers. 

“There’s a general view now that the economic environment is starting to improve. It’s not of course fully back,” Dalton said. “Because of that, retailers feel that there may be some levers that they can pull depending on the category and the brands in their overall assortment.”

For example, Whole Foods told suppliers during a meeting in December that they needed to lower costs so they could attract shoppers. Whole Foods told The Wall Street Journal in January that it wanted prices to reflect cooling inflation.  

Retailers are making pricing negotiations public

Pricing negotiations are by no means new but some retailers are being more vocal about their attempts to negotiate prices. Walmart CEO Doug McMillon told analysts in May that it is working with food and consumable suppliers to “get costs down more as fast as we possibly can.” Spice maker McCormick & Company Inc and Schick razor maker Edgewell Personal Care Co both cited that Walmart was pushing back against price increases.

McMillion said that bringing costs down could help “drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods.” 

Ben Wynkoop, global industry strategist for grocery and convenience at Blue Yonder, said that these types of pricing negotiations typically happened behind closed doors, but now retailers are speaking out to publicly show their efforts to consumers and shareholders. He said that grocers especially run on thin margins, and losing customers to lower-priced retailers significantly impacts their finances.

“They’re being vocal about it with Wall Street, they’re being vocal about it with their consumer,”  Wynkoop said. “They’re going to be very vocal about it because that then puts pressure on the supplier.”

Joann has also publicly disclosed that its suppliers had already agreed to price concessions. The company said that it is well on its way to slash $200 million worth of expenses in areas like product and supply chain. “We initiated a broad-based initiative to reduce product costs across our business. This effort will yield significant product cost savings,” CFO Scott Sekella said in an earnings call in August.

Overseas retailers are taking an even more drastic approach to pressure retailers to cut costs. French supermarket Carrefour put signs on its shelves in September, warning shoppers that certain products had been shrinkflated, a tactic where CPG brands reduce the quantity of a product while still maintaining the same price.  

Downstream effects

Asking suppliers to cut their price tags isn’t easy, however. Mary Lou Gardner, associate partner for CPG, retail and logistics at Infosys Consulting, said that retailers could run the risk of hurting their relationship with suppliers when making these price negotiations. 

Last year, CPG giants Heinz and Mars briefly stopped supplying products to Tesco after the ​​U.K. supermarket refused to hike prices. At that time, the consumer product makers wanted to raise prices due to soaring inflationary costs. 

“The relationship in this industry is important because you can get extra help from your CPG partners if you have really good relationships,” Gardner said. “But at the end of the day, they have to do what’s right for their customers.” 

Smaller brands that are just starting to expand their wholesale distribution could also have a harder time justifying price reductions. These smaller brands could feel pressured to give in to retailers’ demands and see a dip in profitability.

Gardner added that while retailers might have the upper hand in negotiations now, the pendulum could shift in favor of suppliers.

“Vendor negotiations are annual, sometimes semiannual, conversation,” she said. “It’s a constant dialogue. It’s just more public right now than it has been in the past.”