Supporting Grocery Strategy with data
Over the years category management has developed into a systematic process designed to maximise the value of a category by segmenting spend into similar supply and usage factors.
Marketing intelligence and analytical tools for private label buyers
Through the use of market intelligence and other analytical tools we can analyse a lot of data available to us; ranging from supply cycles, cost drivers, supplier cost structure, competing suppliers to future trends in the market.
As private label buyers we have some additional advantages:
- We control new product development (taste, quality, marketing, price)
- We control the approval of recipes/specifications
- We have access to all the proprietary information of our manufacturers
Through investigation of our suppliers we can gain an excellent understanding of labour costs, profit margins, overheads and to some extent the value of non-volatile raw material pricing, however, one area we cannot control are the volatile raw materials that go into our products. Volatile raw materials can make or break a category if we take the wrong approach.
Tomato sauce - understanding the data
Let’s explore the effect of volatile raw materials on a high quality private label tomato sauce. In our hypothetical example a half litre bottle of tomato sauce has the following ingredient composition:
From our supplier we have established that 50% of the product costs are related to raw materials. We sell €30 million Euros of product each year.
Crunching the numbers
By accessing market intelligence we know that tomato paste is the most expensive raw material in the product; the price per kilo ranges from €1 to €0.75 per kg. This means over a four year period the potential volatility of the tomato puree is 33%.
In our example we can now put some of the facts together:
- 50% of the purchasing price of tomato sauce is the raw materials cost
- 50% of the product is made from tomato paste
- Current sales volume is €30 million Euros
- Potential price volatility is 33%
This means that based on recent tomato paste prices (over the last four years) we couldhave product volatility of +/- €2.475 million Euros.
Depending on your tolerances this might present itself as a significant cost threat.
What strategy should we take?
Now that we understand that raw material movements can have a large impact on the supplier of this product, and therefore our pricing – historical data will help support our position.
The raw material increases in 2013 were significant, some questions for you to explore:
- If this were to re-occur would this be too big for the supplier to absorb?
- For the supplier to survive, would they need to pass on the increases on?
- What is happening to other raw materials like the price of sugar and vinegar?
Looking at the quartile analysis I would certain suggest that both you and the supplier look toward to the longer term strategy. The risk based on historical information is certain to move upwards in the short-term.
Future direction - help us decide
The great thing about being involved with private label is there is always scope for improvement. There is certainly more information we can gain as a buyer going forward and certainly more content for a future newsletter – if you would like us to write about any of these topics please let us know.
- Establish quality cost modelling information
- Establish accurate indices
- Set contract terms to benefit the longer term
- Motivate the supplier to see the buyer as a preferred customer
- Agree purchase timings