Retailers expect suppliers to offer them the best possible cost and to keep the playing field level, between them and their major competitors. Every Day Low Cost (EDLC) was developed to simplify the relationship and negotiation between retailers and suppliers. We will explore how we got there and if we are still there or not. Google and dictionaries can provide definitions, but they do not always help you understand the importance of the term or perhaps even a specific meaning in our industry. We are going to share some food and beverage industry terms and explain how they can benefit or impact your business.
Every Day Low Cost (EDLC) is the price retailers pay for products from suppliers, with all promotion activity and other trade spend factored into the cost. Originally, it was calculated by taking the supplier’s regular price and subtracting all of the investments the supplier made related to that item. This would include all promo activity, over and above dollars and any other investments made with the retailer to drive sales. The retailer’s philosophy was ‘you could afford all of that last year, with the volume you did, so we will just reduce the price we will pay and we will determine when and where to make the investments’. In some retailers this strategy can be effective and in others it leads to a lot of issues.
How we arrived at EDLC
There is a lot of history that has shaped the relationship between suppliers and retailers. In the 1990s, Efficient Consumer Response (ECR) was the theme. This was a concept introduced by retailers to improve the consumer experience by removing unnecessary or redundant steps in the supply chain. Retailers used this as an opportunity to consolidate distribution and reduce cost of goods from suppliers. The belief was that with a more efficient supply chain system, suppliers should eliminate expenses and product costs. Retailers presented a number of “efficiencies” in the chain and suppliers were expected to reduce costs by the respective amounts. Costs were reduced, but many suppliers believe consumers never benefitted. Trust was eroded.
When Walmart started selling food and beverage in Canada, there were more changes to the supplier-retailer relationship. Walmart really influenced the shift to EDLC. They eliminated invoice deductions and significantly reduced trade spend options, to simplify the transaction and reduce administrative work. Walmart’s focus is to make things as efficient as possible and eliminate costs. This shift to EDLC or dead net costing was adopted by other retailers.
The EDLP concept
As we discussed EDLP last week, these concepts can sound good. The premise of EDLC was:
1. Regular price less investments was the true cost,
2. Reduce costs calculating discounts and other promotions,
3. Stop paying people in accounting to track the o&a dollars,
4. Retailers know the category sales and how to deliver them,
5. Deliver a more level playing field,
6. Category managers could focus on selling, not negotiating,
7. Plans could be made more efficiently than waiting for supplier deals
8. More efficiency drives cost out and lower overall prices to consumers.
In theory, it is more efficient for both suppliers and retailers if there is one price. Retailers calculated every spend made by suppliers and subtracted them from the regular cost to get to a dead net price. Previously, suppliers had to trust retailers to deliver the same amount of promotion, over and above merchandising and other programs to deliver volume targets.
It was inevitable that issues would arise when volume did not materialize as quickly as the cost was changed. In some cases, suppliers who did not participate had money to invest and steal market share in the category.
Some retailers are very good at operating this system. They understand what is required to deliver total category sales and they invest where they need to and deliver results. Other retailers do not make the right investments and rely on suppliers investing even more to allow them to promote items and deliver sales and/or margin. This is when the problems start. Vendor A has provided a true EDLC and is going to rely on the retailer to invest and promote the product to deliver the volume. Vendor B might have kept some dollars for a rainy day and when they offer it to the retailer, they get the space and the volume. Vendor A who negotiated in good faith is left on the sideline, without the volume and has no money left to invest. It becomes a very difficult situation and is very frustrating for suppliers.
Once this started to happen, many suppliers believed they could not offer a true EDLC because they would be penalized. Trust was eroded even more than ECR and many suppliers have an EDLC which ended up being a lower price and then they have to manage more spend and now fund compliance fines and perhaps arbitrary fees for e-commerce or new distribution networks and the promise of more volume.
How suppliers need to manage EDLC
If you have heard me talk about our industry, you have heard me say all retailers are different. Yes they are all selling food and beverage but they have their own way of doing it. Some retailers are able to deliver the volume effectively with an EDLC strategy. They will work with suppliers to plan promotions and through the year you can have productive conversations about volume. Certainly, they expect you to do your part with consumer marketing and bringing ideas to the table. You cannot just wait for the PO’s to come in.
Other retailers really are not very good at this and will continue to look for the deals and over and above investments to drive their programs. If you are selling into these retailers you can have a regular price but you will need to maintain some margin to make investments. If you do not have this available to you then you will risk being left out of promotions and other sales driving initiatives.
Everyone’s job would be simpler if EDLC was in place at all retailers. What a business this could be if we had more trust but unfortunately that is not reality. Suppliers have to manage their costs by customer to ensure they have the ability to deliver the results in their own business.
If you have any questions or require help managing EDLC, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
McKinsey update on e-commerce
McKinsey are a large consulting firm who share detailed perspectives on different industries. We know e-commerce exploded during the pandemic and they predict it will continue to grow. Although their consumer information is from the U.S. there are good indicators for the Canadian market.
They see shoppers using e-commerce for different reasons as the pandemic subsides and for those reasons they believe it will continue to grow to over 20% of the market.
Foodprocessing.com summary of ExpoWest
Expowest is a huge trade show focused on natural food categories held on the west coast of U.S. each year. It is certainly a great place to see where trends are focused and likely what is coming soon in Canada.
There is a good summary of some interesting products they found at the show. If you were not able to be there in person it is worth a review.
When is Peter speaking?
Learnsphere Supply chain 1-2-3 Food & Beverage Manitoba
Sell successfully to retail- May-June
Food & Beverage Atlantic SIAL
Follow up and virtual sampling - May 12
Association of Municipal Administrators of NS- Jun 16
With the Kilted Chef
To help promote the Atlantic Canadian companies participating in SIAL I had the opportunity to create some videos with Alain Bosse, the Kilted Chef. We had a great time putting the videos together and they should be a valuable tool for these companies to help build their brands in the market.