Understanding the retail buyer and how to use marketing intelligence successfully (Part One)
This article explores the retail buyer's role in their business, provide an understanding of their needs, and explain how market intelligence can support your negotiations with buyers.
Over the past decade Mintec has spent a great deal of time working collaboratively with the procurement and sourcing departments of global retailers and multi-national manufacturing companies.
By working as a supplier to the purchasing function, we have been able to gather a large amount of insight into the thought processes and objectives of a buyer.
Back to basics
Any successful salesman\account manager needs to understand the priorities, motivation and problems of the buyer. This includes their particular role within their company and their job description:
A buyer's role:
- Buyers are not market traders
- They don’t operate in a vacuum
- They are working for a company, with responsibilities to that company
A buyer's job description:
Ultimately, a retail buyer must ensure a continuous supply of products or raw materials at a price level that matches their company’s corporate objectives.
1) Supply of materials
- Keep the factory (shop etc..) supplied and running
- In the eyes of the business, the buyer’s biggest sin is to stop production / have empty shelves
- Usage forecasts
- Placing contracts / orders
- Stock control (shelf space)
- Just-In-Time (JIT) supply-chain
In most businesses, supply assurance issues take up a considerable proportion of a buyer’s time. The actual process of market analysis and contracting only takes up 10% of a buyer’s time, leading us into the second priority of the buyer: cost.
2) Cost of Purchases (vs. Price)
In order to understand what is being bought and for how much; the buyer needs to be aligned with the cost objectives of their business.
Is the product being purchased a loss leader? Is it a value, mid-range or premium product? Is the product strategically important to the business? Depending on the answer to these question one of more of the behaviours below may be adopted:
- Beat the market
- Buy at the lowest possible price
- Manage risk (commodities are volatile)
- Beat budget costs (usually set by the buyers themselves)
- Beat competitors
Retailers are strongly influenced by a competitor’s position; therefore this becomes an objective of the buyer. The buyers will also be strongly influenced by their budget / standard prices.
It’s important that these behaviours are understood by the buyer and their company because they can influence:
- Pricing policy
- Profit margins
- Packaging specifications (printed prices, weights, nutrition etc..)
- Marketing (offers, promotions etc..)
Market Intelligence: supporting negotiations between the buyer and seller
Now that we understand the motivations of the buyer, let’s explore how market intelligence can be used by a seller to support buyer negotiations.
Where can internal market intelligence support the seller?
When conducting supply assurance, the main data required is internal data from the retailer including:
- How much product is being sold
- How quickly is it selling
- What is your margin
- What is hot and what is not
- What are your competitors doing (external data)
This list is certainly not exhaustive, however armed with some of this data, as a seller, you can employ the following tactic:
Tactic: Negotiate around margins and competitor prices
Once you understand the margin the retailer is aiming for, and you understand the price levels at which your competitors are selling (as well as other retailers), then you’ll have an excellent starting position for agreeing a sales price (assuming it’s a valid price). Use this information to drive your own agenda.
Where can external market intelligence support the seller?
If there is limited scope to negotiate around competitor prices (maybe you are producing an innovative product or a premium product) - there is a second approach that can be taken: negotiate around “Cost vs. Price”.
Successes here can have a significant effect on both a company’s bottom line and on account manager’s KPIs.
Remember that in order to perform well, buyers need INTELLIGENCE and MARKET KNOWLEDGE
When it comes to COST and PRICE there are two distinct types of buying:
- NEGOTIATION - where the aim is essentially to reduce your margin
- MARKET DECISION - where price volatility in the market swamps your
margin and much bigger gains can be achieved by TIMING of PURCHASES
Let’s explore these two approaches in more detail:
NEGOTIATION - from the perspective of the retail buyer
- Widely regarded as the use of power to beat down the seller price
- Power can come from volume and also from information - by understanding the seller’s business and cost structure
As sellers aim to understand the motivations of buyers, so too do buyers attempt to understand the seller’s environment. Modern professional retail buyers arm themselves with accurate, timely, external market intelligence including:
- Raw materials
- Currency rates
Buyers can also obtain information from your own corporate accounts:
- Labour rates
- Profit margins
Retail buyers also have the tools needed to analyse this data:
- Market intelligence services (Mintec Datagain, Dun & Bradstreet, Mercaris etc.)
- Recipe costs calculators (excel)
- Spend analysis platforms
- E-sourcing portals
Mitigation Tactic: intelligence, intelligence, intelligence
Being prepared before any negotiation is vital. As a seller, you need to have the same information as the retailer (if not more). Prior to any meeting, gain an understanding of the market position of your raw materials (what does the retailer see), understand what is happening to the energy markets, inflation, interest rates, understand your historical selling price, understand your own business and, most of all, understand the buyer’s objectives. This way you will have no surprises in future meetings.
Market Decision Buying - Can you support the retailer?
Market decision buying arises when fluctuating price commodities make up a considerable proportion of the buyer’s product cost, and, as a result, influences the decision of:
When to buy and how much to buy
This has a much bigger impact on the buyer’s costs than your (relatively static) profit margin.
- Margarine : almost 80% vegetable oil
- Mayonnaise: 70-83% vegetable oil
Tactic: Collaborate with the retailer
When markets have decreased, work collaboratively with the retailer. Help them to time their negotiations with you. If they buy at the bottom of the market, this will allow you to protect your business by securing your supply and agreeing a fixed margin. If the markets move upwards, this will place pressure on the competition, strengthen your retailer relationships, as well as providing guaranteed revenue for your firm.
The conclusion of this article is very straight forward: do your homework prior to negotiations.
If you understand what the buyer is trying to achieve and you have access to similar data, you can try and steer the argument away from cost. Starting talking about price and the value you can bring to the table.
Look out for Part Two of this article coming soon.