Selling products through the retail channel is not for the faint of heart. You need to understand how the relationship works between retailers and suppliers. You don’t have to like it, but you do need to know what it will cost. Rebates are a fee that is collected by retailers in exchange for having the product on the shelf. Listing fees get many products onto the shelf and rebates keep them there. This year we are helping you define different industry terms. We share insights into the terms and also how they are important to suppliers in the industry.
Rebates are amounts retailers charge suppliers for having the product in the listing base. Rebates are very general and they do not ensure specific performance or positioning for suppliers. They are more common in perishable or fresh departments but we do hear of them in grocery as well.
Listing fees are usually only for regional or national listings. Retailers do not charge these for products in their local program. Rebates are a percentage of supplier’s sales to the retailer, deducted before the supplier is paid. This is often in the 2-5% range and should be included in the amount suppliers count as trade spend.
A retailer’s justification
Last week we gave you some justification for listing fees and this week we will do the same for rebates. Retailers do incur expenses to get products through their system, onto store shelves and out through the front end. They also incur costs when suppliers do not deliver 100% service level or products get returned. Yes, there are compliance fines for late deliveries and other performance related issues but they do not capture everything.
In perishable departments there is more ‘market pricing’ as opposed to suppliers offering a discount for an ad. Retailers will reduce their margin on items in the flyer to drive traffic. They do incur costs to develop their promotion programs and distribute printed and electronic flyers. Rebates are used to offset some of these costs.
One challenge for suppliers is when one retailer does this, they all do. Retailers would like to think their procurement people are the best. They might be but it is easier to build a percentage into the supply agreement than to constantly monitor cost of goods. Retailers would justify this by saying, ‘if you can afford X% to retailer ABC, you should pay it to me’.
What suppliers get for rebates
For some retailers in some departments, rebates are the price to play. This has been built into supply agreements, retailer’s budgets and pricing. It is very difficult to negotiate out of rebates. Many of the items are commodities and it is difficult to justify why other suppliers should pay and you shouldn’t. In our current market with all of the inflation we are experiencing you can challenge customers about the absolute dollars paid in rebates and try to tie it to volume.
Suppliers should not let it become a lost conversation. It is worth bringing up and reminding retailers you are paying a rebate. Doesn’t hurt to ask what it goes towards. Probably will not change it but might make you feel better.
The cost of doing business
Retailers have this interesting idea that economies of scale are a guarantee. In theory, if you can do more volume to the same customer, it should deliver some savings. This is where the rebate idea was conceived. Retailers do not understand supplier’s businesses and economies of scale do not always materialize. The reality is rebates are a cost of doing business, not much different than the cost of freight. Unfortunately consumers do not benefit much but they do need to be built into your selling price.
Because retailers believe as your volume grows, you will see a lower cost of goods, they justify rebates. You will not win the argument with them so our advice would be don’t argue but also don’t tell them you build it into your cost. You have one chance to negotiate out of rebates and that is when you sign the supply agreement. If you sign it, with a rebate in there, the chances of eliminating it are very slim. It is a cost of doing business and you need to allow for that when you calculate your selling price.
If you have any questions or require help figuring out rebates, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
More labelling changes in Canada
Health Canada is giving food producers and processors until 2026 to make changes to the front of packaging to comply with new regulations. The focus of the changes will be on declaring high levels of saturated fat, sugar or sodium.
The rationale behind the changes is to help consumers make informed, healthy choices. Packaging is a challenge any time but even more right now with supply issues and cost increases. Suppliers should understand these new regulations and monitor inventory levels to ensure you can manage the change if it impacts you.
When is Peter speaking?
Ontario Produce Marketing Association - Aug. 11th
Finding the right shelf
Learnsphere Supply chain 123- Sept. 28th
Alberta/Manitoba Consumers & Customers – Satisfying Both
Learnsphere Supply chain 123- Oct. 12th
Alberta/Manitoba Getting on the Shelf: Building Relationships with Customers
Learnsphere Supply chain 123- Oct. 26th
Alberta/Manitoba Getting off the Shelf: Consumer Marketing
FCC Peer groups in fall of 2022
It has been a real privilege to work with FCC in 2021/22 to launch the pilot program for their food and beverage industry peer groups. We had some incredible discussions with processors about our industry and they really did learn some very valuable insights from each other. We discussed so many topics from customers to ecommerce to distributors to co-packers and so much more.
We are excited to let you know FCC plan to continue with the program and if you are interested this could be a great program for you in the fall of 2022. Check out the details and if you have any questions just let me know!
