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Putting the Relationship Back into Retail

Transactional deals between vendors and merchants are driving up costs and risk. Contract technology can help bring the trust back.

May 30, 2023 By Phil Barry

At a recent summit with PwC, George Mason University, and other industry experts on the significance of operational efficiency in the consumer goods and retail sector, the panel explored various strategies for retailers to enhance their operational efficiency. 

Key topics discussed included the importance of cultivating meaningful supplier relationships, achieving goal alignment between retailers and suppliers, and effectively managing large portfolios of commercial relationships. The session concluded with a focus on creating an environment that fosters shared insights. In light of these discussions, a question arose: "Has the pandemic improved or hindered the relationships between retailers and suppliers?"

The nature of the relationship between retailers and suppliers has evolved over time, much like other aspects of the industry. Whether these changes have been for the better or worse remains subjective, depending on the perspectives and stages of the companies involved. Yet it is undeniable that transactional relationships between vendors and merchants increase the perception of risk between the parties, which in turn increases costs. 

"Today, depending on the level of trust in the relationship, retailers are paying an estimated 5% to 15% more in order for suppliers to cover their costs associated with risk being created specifically by the merchants.”

Mike Hogenmiller, a retired Merchandising VP at The Home Depot, shared with me this startling stat: "Today, depending on the level of trust in the relationship, retailers are paying an estimated 5% to 15% more in order for suppliers to cover their costs associated with risk being created specifically by the merchants.”

How did we get here? Several factors contribute to this shift:

  1. Rotational programs: Many retailers now implement guidelines that rotate category responsibilities every 18-24 months, aiming to introduce fresh perspectives. However, this practice often leads to a loss of category knowledge, substantial loss of momentum of active programs, and even the cancellation of active programs. These changes are extremely disruptive to suppliers.
  2. Financial pressures: Most category managers are incentivized based on immediate results within their product areas. Consequently, silos form within organizations as individuals work independently rather than as a cohesive team, hindering collaboration and synergy. This type of short-term incentive activity will drain an organization of any long-term collaborative strategies with suppliers.  The merchant is usually only interested in the short term and will be moving on in the next 24 months regardless.
  3. Lack of trust: Consumer goods companies often exhibit a lack of trust in retailers, making it challenging to build strong relationships. Lack of trust results in increased costs—the higher the level of distrust, the higher the cost is.  Suppliers will protect themselves from unreasonable activity they have come to expect by building it into the overall cost of the relationship.  It's not a line item on the invoice, which results in the costs being unidentifiable by the merchant.
  4. Evolution of data analytics: The advent of advanced data analytics has reduced the need for retailers and suppliers to collaborate and share data. With data accessible to all, trust can waver as different interpretations and narratives can arise from analyzing the same dataset. Retailers are not evolving merchant behaviors at the same rate as new data becomes available, resulting in merchants who don’t see the why, the what, and the long-term negative implications they cause with the data decisions they make.
  5. Retailers as suppliers: In the past five years, retailers have leveraged their first-party data to enter the ad media business. This transition blurs the lines between traditional roles, potentially straining trust. 
  6. Consumer goods companies as retailers: The rise of consumer goods companies selling directly to customers creates competition with retailers, leading to friction and diminished trust.

The pandemic served as a true test for these relationships, as both sides relied on each other for support during challenging times. Retailers with strong relationships experienced better inventory availability, while those with transactional approaches faced difficulties by penalizing suppliers for service outages instead of partnering for optimal customer satisfaction. 

The question now arises: Will retailers and consumer goods companies ever regain trust in each other? Hogenmiller thinks it’s a must: 

"We have to change behaviors by removing ambiguity in the relationships with suppliers. The result will improve the merchant's accountability resulting in reducing the risk and the cost associated with it. When suppliers and retailers jointly document agreed-upon strategies which include timelines with toll gates, who is accountable for the actions necessary to drive the strategy on both sides and the means to challenge without consequences when tollgates are missed, the result is the level of trust increases substantially reducing cost in the relationship over time.

 As we emerge from the pandemic, retailers need to reevaluate their approach to working with suppliers and consider placing greater emphasis on building partnerships. In hindsight, some major retailers that have gone out of business could have potentially avoided their demise by treating suppliers as valued partners rather than mere vendors. Take, for instance, the recent downfall of Bed Bath & Beyond, where leveraging suppliers through delayed payments led to inventory and assortment challenges.

To strengthen retailer-supplier relationships, collaborative efforts are necessary to develop mutually beneficial goals that ensure long-term success for both parties. Effective communication plays a pivotal role in this process. It is crucial for both retailers and suppliers to document their plans, ideally in contractual language that is the foundation of the relationship, ensuring that partnership goals are clearly defined. This step helps mitigate the risk of misalignment in case of personnel changes and safeguards the relationship from potential detrimental alterations. 

Once plans are set, retailers should be systematic in ensuring the intent of the relationship is realized via managing obligations and entitlements. Here again, clear communication about what was agreed to in a contract and other planning documents—e.g., how a vendor is doing against delivery benchmarks, how a retailer is doing against payment terms—can foster a sense of trust and enhance collaboration.

Additionally, retailers should consider adopting a more holistic view of their supplier relationships. Rather than focusing solely on immediate results within specific product areas, it is essential to recognize the interconnectedness of the entire value chain. Collaboration across departments and functions, breaking down silos, and encouraging a team-oriented mindset can result in greater efficiency and improved outcomes for both retailers and suppliers.

All of these goals can be supported through technology. Contract intelligence technology can help retailers keep track of their large swath of supplier relationships. The right system can surface which relationships are proving fruitful and should be nurtured, and which aren’t and shouldn’t.

By leveraging advanced analytics and sharing relevant data, both parties can gain valuable insights into consumer trends, demand patterns, and market dynamics. Transparent data sharing builds trust and enables collaborative decision-making, ultimately benefiting the entire value chain.

The evolving landscape of retailer-supplier relationships demands a shift from transactional selling to relationship-based selling. While transactional activities have their merits, cultivating strong, long-term partnerships is crucial for sustainable success in the consumer goods and retail industry. The COVID-19 pandemic has highlighted the importance of trust, collaboration, and mutual support between retailers and suppliers. To navigate future challenges successfully, retailers must reevaluate their approach, prioritize effective communication, and foster a culture of partnership with suppliers. By doing so, they can build resilient and mutually beneficial relationships that drive operational efficiency, customer satisfaction, and sustainable growth.

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