June 2011 Big Grower

Fueling a Relationship By Dean Chaloupka

This is always an interesting time to offer perspective on the big box retailer and supplier world. The southern half of the country is certainly past the peak of their spring season with definite knowledge of what the overall results will look like. It's a little different in the north, whether that be the Pacific Northwest, Midwest, or East Coast. The weather pattern through most of April has been severe. Weather fronts with severe storms, tornados, rain and snow hit some part of these regions almost daily through the early part of spring (or more aptly described as the fourth month of winter). Although May remains the single most critical month for sales in these markets, good June weather and sales will be equally important for lawn and garden consumers, retailers and suppliers alike.

While the poor start due to weather in northern markets is significant, the real gorilla in the room for suppliers and retailers is the sudden rise in diesel fuel and gas prices. One of the only benefits of the economic downturn in 2008 was the sudden drop of fuel prices and now most prices are back to 2008 levels or higher.

What about implementing transportation surcharges?

These are now very common and a standard practice by transportation companies that deliver the industry's plants to the market, most of the input's used by growers, and just about everything else we deal with on a day-to-day basis. It is an ongoing struggle, though, for growers to adjust their pricing to be adequately compensated for these very real cost increases. It's common to hear from suppliers to national retailers that a surcharge can't be implemented because prices were negotiated months ago and locked in. With that perspective, you are sure to never get one increase or surcharge implemented.

So what do suppliers do?

Get ready to open your books (show your costs or cost structure) if you want to sit at a table and talk about getting fairly compensated for what you do and supply. If you are uncomfortable or not prepared to do so, your struggles to get fairly compensated will continue. In conversations with manufacturers in other industries dealing with significant corporate customers, this has become standard practice. These manufacturers get amused at the suggestion that growers can effectively sustain a relationship with a national retailer and not be required to openly discuss their cost structure in detail over time.

Don't only expect to open your books when costs rise and you need to receive more money. Strong, open relationships will be built on this practice continuing through times of both rising and declining costs.

Expect to be able to prove why you, your company, and what you are asking for is worth it and provide evidence of why your relationship has been beneficial to your customer in their terms. A quote in a training program called Action Selling that has stuck with me for many years and resonates even more on issues such as this is, "You will never get a commitment that is greater than the relationship you have built." The answer you will get from your customer when you discuss a surcharge will as much be about what you have built in terms of a relationship and your ultimate value to them as it is about the actual dollars involved.

There are many suppliers who have taken these steps with retailers and will sustain themselves through this period. They will thrive going forward because dealing with issues such as this is part of their internal DNA and their ongoing relationship with customers.

How should retailers/customers deal with requests to pay surcharges or higher prices?

The landscape within the industry is much different than it was even three short years ago.

• The number of growers or suppliers to big box retailers has been reduced in the name of efficiency and simplicity. The reliance is on a much smaller number of suppliers.
• The benefit of the lower energy costs for heating and transportation has been passed on in order to drive many of the promotions offered to consumers. The cost to bring these to market has risen sharply.
• Lenders and stakeholders operate much differently than in the easy credit markets per- 2008 and will be looking to how these rising costs are managed.
• Just as always, most products are delivering directly to stores and not distribution centers with growers being asked to make more frequent, smaller deliveries in an effort to keep product fresh, shrink down, and sell-thru high.

Partners share information and look longterm at the benefit for each and the fact that prices were set months ago is really a short-term issue. Setting in place a way to deal with significant cost swings, up or down, is something that is long overdue.

Overall Supply Chain

Why are surcharges passed on from suppliers through the brokers/distributors without many times first being negotiated? The distributors just pass through the surcharges they get from suppliers. Most don't have the margins in place to absorb this increase. Since most large growers use the relatively small number of brokers/ distributors as short-term banks with seasonal payment terms for what they buy, they have no leverage. Quit using the broker as a bank and you may have the ability to discuss the issue on a more equal basis. Remember, in this situation, you are the customer.

If you get notified of a new surcharge or price increase with an email, fax or form letter, it's time to start looking for a new supplier. It means you have no relationship or one that the supplier thinks little of. Those suppliers who value their customer and the relationship they have with them will broach this subject with a personal phone call at a minimum and a face-to-face meeting if at all possible. Think of it this way, "You will have no relationship bigger than the commitment you make to it."