Food represents a significant portion of our disposable income – 11 per cent in 2022 -- and when prices increase, that’s red meat for news media. This environment of heightened public awareness makes it even more difficult for producers and processors to negotiate cost increases.
It should be easier to negotiate a cost increase. Everyone knows inputs, packaging, labour, energy and many other factors are rising in cost. The problem is, retailers will be blamed for increased prices and they will do their best to slow down the increases and deflect the blame.
Recently, Loblaw was in the news for responding to consumers about rising prices. It was interesting to see Canada’s largest food retailer interacting directly with consumers about food prices and inflation.
Work in advance of the increase
When negotiating a cost increase during a period of inflation, do not assume your increase will be approved. Retailers seem to push back more than ever. You need to do your homework and justify the reason(s) for the increase.
Talking about cost of goods is not usually an enjoyable experience. It is a negotiation and suppliers usually want more and retailers think they should be able to produce for less. Although not always enjoyable, these negotiations need to be done regularly.
Suppliers should be communicating to their customers about the costs they are incurring in their business. A cost increase should never be a surprise. Sharing the details of proposed increases from your packaging suppliers sets the table for the conversation you will need to have at some point. If your cardboard supplier says the cost of your master case is increasing by 12 per cent, let retailers know. If possible, tell them you have bought enough cardboard in advance to offset the need to change your cost for four months.
Wherever possible negotiate with your suppliers. Two benefits: offset an increase and build credibility with your customers. If you can negotiate a delay in an increase or perhaps switch to another supplier, you can reduce the increase or hold your price for a few more months. Unfortunately, retailers believe they are the link in the value chain who negotiate the hardest, to keep prices in line for consumers. Whether this is true or not, this is what they perceive.
When you can share some stories about negotiating with your suppliers to delay increases or reduce the impact, retailers will appreciate your efforts and give you more respect.
Your customers are often asking for locked-in prices, in advance of your season. Ask your suppliers for the same commitments. Some will work with you and some will not. If you have enough size to have some leverage, you can negotiate commitments on pricing. It is a volatile market for everyone but guaranteed volume will be good for some of these businesses, just as it can be good for yours.
Negotiating your increase
With this homework behind you, let’s hope you have a smoother negotiation on the increases you propose. Retailers are tired of price increases and they are tired of being blamed for the food inflation issue. They will be ready to push back and they will really be difficult, if they feel you are trying to take advantage of a market where prices are rising.
You will need to share some information but not too much. One cost component that will never decrease is labour. Usually, the labour market is influenced by minimum wage. When you negotiate costs the percentage increase in minimum wage is a public number and you can let retailers know labour represents 30 per cent of your total cost of goods. A six per cent increase in minimum wage will result in the following change to your cost of goods:
Previous cost of goods $3.50
Labour represents 30% of costs
Minimum wage increased 6%
Previous labour cost 1.05
New labour cost with 6% increase 1.11
Your per unit cost has increased by .06. When discussing labour with retailers remember to get past minimum wage. In some markets we have seen producers have to increase more than the minimum wage just to get people to come to work. You can also factor this in.
Industry averages are a good fact to use in your negotiations. Statistics Canada publishes the consumer price index every month. This will also include a year over year number which is probably more relevant. The following information is available for food:
Source: Statistics Canada
The consumer price index (CPI) for fresh potatoes was up 8.4 per cent from December 2021 to December 2022. This does not justify an increase if you are in the potato category, but it does illustrate the entire category is up this much. If you can propose an increase slightly below the category CPI, it is more difficult for your customers to negotiate aggressively.
There are components of cost that do not add as much value as others. Logistics for example is required but consumers never know if you ship 200 or 225 on a pallet. If you can find a way to ship 225 for the same pallet price as 200 your price will go down or perhaps you can ship 225 for an increased price but keep your freight cost per unit close to the previous level.
Retailers have been a challenge in fresh departments with regards to more frequent deliveries because they perceived the product to be fresher. This is true for berries but not a storage crop such as onions or potatoes. It is possible to negotiate less frequent deliveries with bigger quantities to reduce freight costs per unit.
We see many products in food and beverage changing sizes. Smaller package sizes can reduce the cost per unit. This will change the retail price point to a level the retailer sees as more acceptable to consumers and allows them to maintain their category margin. This is tougher to achieve in commodity markets because all suppliers need to change. Retailers are challenged to manage 350g from one supplier and 425g from another in the same commodity. If the entire commodity shifts it can be beneficial to suppliers and retailers.
Cost increases are never easy
Although input costs are rising, it is tougher than ever to secure the increases required. Include cost in conversations throughout the year, baking in the facts, and sharing anecdotes about the reality of producing nutrient-dense fruits and vegetables.
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