Vendor Negotiations

1. Vendor Negotiations Strategic Implications

2. Retail Buyer: Autonomy & Compensation • Critical entrepreneurial component—key to the retailer establishing autonomy, or self-control, in relationships with vendors. • This course is important only as long a buyer is employed by a retailer. The buyer must be a negotiator.

3. Discretionary categories more important to high growth categories Top 10 Fastest Growing Categories (Dollar Sales % Change vs. Year Ago) food & beverage categories (bolded categories on both lists) Source: Nielsen Scantrack, Total U.S. – All Outlets Combined; 52 week increments (vs. prior year); UPC-coded117 major category groupings U.S. Buying Trends

4. Discretionary categories dominate list of fastest unit growth categories Top 10 Fastest Growing Categories (Unit Volume % Change vs Year Ago) food & beverage categories (bolded categories on both lists) Source: Nielsen Scantrack, Total U.S. – All Outlets Combined; 52 week increments (vs. prior year); UPC-coded117 major category groupings U.S. Buying Trends

6. Product Variety and Solution Motivators To what extent do each of the following influence your decision to shop at a particular retailer? Source: Nielsen, Global Online Survey, Q1 2011  Consumer Shopping Behaviour Q2 2011

7. Private Brands 15.3% growth rate! 2012 $108.6 billion 2009 $94 billion Source: Nielsen Scantrack, Total U.S. – All Outlets Combined;52 weeks ending 12/26/2009 & 11/24/2012; UPC-coded U.S. Buying Trends

8. Importance of the Retail Buyer • When the category is relatively small… • When consumers do not respond or are not interested in variety… • When consumers do not respond to price promotions… • When brand loyalty (can’t be switched) is above average for a FMCG category… • When the “supplier knows best” what SKUs to stock in the assortment…

9. Value is a key driver of store choice but not the only lever to pull • 59% - Good value for the money • 59% - Great sales and promotions • 56% - Products in stock • 55% - Lowest price • 53% - Convenient location • 53% - High quality fresh & produce • 48% - Quality meat department • 48% - Carries a variety of items Source: Nielsen, Global Online Survey, Q1 2011; Highly Influential answers  Consumer Shopping Behaviour Q2 2011

10. Importance of the Retail Buyer • When there are few geographic differences in demand… • When the retailer decides to go with an exclusive arrangement with a supplier (won’t stock competitors’ lines)… • When only two supplier firms are in competition… • When state law restricts you to a limited set, or only one suppliers…

11. % saying they Agree/ Strongly Agree: Strong perception of store brand quality & fewer think store brands for those on tight budgets U.S. Buying Trends Source: Nielsen Homescan, Panel Views surveys

12. When the buyer’s role is not significant… • How important can retail differentiation be to the sector? • How attractive can the gross margins be, relative to other retail types? • When the functions of determining the assortment gets shifted to the supplier… • When the buyer’s role in the channel is of little significance, what does that indicate about a retailer?

13. Buyer Challenges • Who will be the suppliers? • Manufacturers • Wholesalers • Can we encourage a new supplier? What do we have to offer? • Can we create competition by making the category more important to consumers? • Private label—will we bear the risks of a supplier?

14. Retailer’s demand curve Vendor’s demand curve

15. Retailer’s demand curve Vendor’s demand curve

19. Distribution Intensity • Shopping goods • Convenience goods • The supplier ALWAYS wants distribution to be more intensive than the retailer/buyer.

20. Type of relationship One-Time, “Transactional” Relational partnerships Strategic alliances Functional relationships Characteristics Don't expect further contact Series of one- time exchanges Close, trusting, seek mutually beneficial relationship Mutual investment, shared profits Time horizon Short-term Recurrent Long-term Long-term Concern for other party Low Low Medium High Trust Low Low Low High Investment in relationship Low Low Medium High Accommodation Negotiation Nature of relationship Conflict, bargaining Coordination

21. Transactional/Functional • Short term or “on-off” • Many suppliers and buyers • Disloyalty and lack of commitment • Low switching costs, little or no investment made in relationships, new suppliers encouraged • Changes in customer/supplier make little difference • Loose or no standard procedures • Exchange centered on single person in firm

22. Partnerships/Alliances • Long-term • Few suppliers and buyers • Higher degree of loyalty and commitment • High switching costs, significant investments will have been made in the partnership • Change in customer/supplier causes disruption • Strict procedural guidelines • Many people and departments involved in the exchange

23. Strategic Alliances • Alliance between a vendor and retailer with the highest levels of mutual trust and commitment. • Trust—should not mean that monitoring is “non-existent” • Commitment, vendor not seeking additional retailers, retailers satisfied with exclusive dealings (current dependence on vendor)

24. Markdown Money • Payment from vendor to retailer to compensate retailer for “unanticipated” discounts (reductions) necessary to sell merchandise in season. • Not a consistent expectation across retailers, but necessary for some suppliers to maintain the relationship. • Come to characterize the relationship between a larger retailer and its branded apparel suppliers. • Inefficient channels tend to have dysfunctional behavior. How long can markdown money remain a characteristic of apparel?

25. Retailer able to obtain aguaranteed 50% markup, vendor with unique product

26. Retailer can’t sell product, and must discount beyond anticipated levels, receives markdown money to cover portion of discounting.

27. Retailer able to obtain aguaranteed 50% markup, vendor with unit markup becomes more profitable lowering costs