Seven essentials for suppliers and buyers

Negotiating price increases is always complicated and a feeling of mutual success between the parties requires certain skills in any supply chain. Today, we find ourselves in an especially challenging place – an inflationary market after many years of low inflation (largely below five per cent for the best part of thirty years). And frankly, that means that many retail buyers and suppliers’ sales teams simply have never had experience of the intricacies of putting through price increases successfully during inflationary times. To help the industry, BHETA has set out the factors that suppliers and buyers really need to understand.

Here are the statistics: The Consumer Prices Index (CPI) rose by 10.1 per cent in the 12 months to March 2023, down from 10.4 per cent in February, and while that slight drop is – we hope – an indicator of further improvement to come, there is no doubt we remain in a cost-of-living crisis which affects suppliers and retailers as much as it does consumers. We all know the background. Inflation is the story of the world economy postCovid, with the cost of energy, raw materials and labour shortages, war and OPEC all playing a part.

So, BHETA suggests seven key points that need to be covered in any meeting about price:

Proportionality – product costs are made up of many elements, including raw materials, transportation – locally and internationally - labour, energy, and processing costs. For highly processdriven products energy costs could represent 60 per cent of the product cost, while raw materials only represent 20 per cent. It is important both parties understand what is involved in production, and the suppliers tell the story well to retailers. when a supplier sells to a wholesaler who then sells to buying groups. In an inflationary market the supplier needs to be able to price four months’ worth of future inflation into the price agreement.

Lags – while prices of raw materials may spike up and down quickly many suppliers spot buy large volumes of materials which they use for many months. A raw material price dropping 20 per centin the last three months might be irrelevant for a manufacturer who bulk bought stock six months ago.

Country of origin – for large and heavy products imported from the Far East, the cost of freight can be highly significant, far outstripping the raw materials costs. Many such products only have a small number of units per container and became uneconomical to ship from China in 2021/2 when container prices rocketed.

History – when considering proposed price increases from a supplier, retail buyers need to consider the historic price changes made by individual suppliers for individual products, and not impose blanket bans. For example, some manufacturers have actively avoided annual price changes, but when input prices have risen to the point where a price increase is imperative, they have then been hit by blanket price increase rejections. It is important not to penalise companies who have held off from standard annual price increases when circumstances dictate genuine need.

About BHETA

The British Home Enhancement Trade Association (BHETA) is the voice of authority on everything home improvement and home enhancement, including DIY, housewares, garden, small domestic appliances and home decor. It represents £5 billion at retail and 9,000 employees and brings together manufacturers, suppliers, retailers and opinion formers to drive growth at home and abroad. For more information about retailer and supplier co-operation, contact BHETA on 0121 237 1130, or email wj@bheta.co.uk, or visit the website at www.bheta.co.uk for product manufacture can be radically different. ‘Specified steel’ is often formed using energy intensive processes, meaning the price might be three times that of raw, with the largest element of the value being the energy needed to transform it. The price of the ‘raw steel’ can be totally misleading.

Exchange rates – Many UK business pay in dollars for imports. UK Sterling lost 12 per cent of its value against the dollar during the 12 months to February. A commodity bought in dollars may have dropped in price by 10 per cent but the dollar rate alone may mean that an individual product price increased by two per cent.

Notice periods – many commercial agreements between buyer and supplier have a notice period. For example, this could be four months

Specification of ‘commodity’ items – retail buyers need to be aware that there is often a huge difference between the price of ‘commodities’ quoted on websites and exchanges, and the specified version of that commodity that is then actually used in products. Steel is a great example. The fluctuating commodity price of steel is widely available. However, the price of ‘raw steel’ from a foundry and the price of ‘specified steel’ which has been worked into a form usable

One final point for both suppliers and retailers - price increases are not necessarily all bad news for the market. Real supply chain partners need to make money mutually to deliver profit, shareholder value and longevity. Price increases are inevitable in an inflationary market, and for retailers who have negotiated rebate structures, price increases drive real added value for those receiving the rebates! This is all about communicating the facts effectively.

For more information about BHETA, BHETA events and BHETA services, contact the BHETA Member Services team on 0121 237 1130 or visit the BHETA website www.bheta.co.uk.