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Source: http://www.doksinet 5) How do your negotiations with Supplier X affect your colleagues? Many suppliers span multiple categories, and often one category manager is not managing the entire portfolio of a given supplier – indeed, it is not unusual for different category managers to have very different perspectives on a supplier’s performance. It is therefore in the retailer’s best interest to understand how the supplier’s organization is structured. Does the same sales team call on several category managers? Do the supplier’s business units operate independently or as a whole? Do funding structures vary across different business units? A holistic negotiating approach, with a defined ‘point person’ to coordinate all category managers involved, ensures that everyone understands how their decisions affect the negotiations of their colleagues – and ultimately, the financial performance of the retailer as a whole. We often find that simply presenting a unified front to

cross-category suppliers can unlock a great deal of value; if nothing else, the retailer prevents the supplier from offsetting savings offered to one category manager with a cost increases for another. Using data more intelligently and not depending on suppliers for information creates negotiating power. Supplementing category managers’ trading instincts with solid analysis opens up other opportunities besides. The retailer can restructure supplier panels; or offer more appealing incentives to top performers, while asking for more in return from those suppliers. SKU optimization ceases to be a hazardous experiment, followed by numerous ‘corrections’ to address customer complaints. Ultimately, retailers exist to serve customers, not suppliers – and the way trading decisions are made should reflect this fundamental truth. The questions described here obviously cover only a fraction of the things a category manager needs to know – and a retailer’s ultimate aim should be to

gain the upper hand in the negotiating process by building a comprehensive understanding of their customers and suppliers. Better use of information allows a retailer to talk about its own customers, not about national averages; to present its own insights in negotiations, rather than listening to pitches from suppliers; and to rely on data from its own stores, not external reporting services. v Retail About Oliver Wyman Oliver Wyman’s Retail Practice has a 20-year track record of helping clients deliver highimpact performance improvements. We combine deep industry knowledge with clear insight into what it takes to succeed in retail. Our proprietary, state-of-the-art analytical tools and techniques provide an unrivalled understanding of how to create shareholder value, and we work closely with clients to develop practical, real-world solutions that make this happen. Oliver Wyman is an international management consulting firm with more than 2,900 professionals in over 40 cities

around the globe. For more information please contact: Matthew Isotta Global Retail Practice Leader matthew.isotta@oliverwymancom +44 20 7 852 7458 Bernard Demeure French and Southern European Retail Practice Leader bernard.demeure@oliverwymancom +33 1 45023 209 James Bacos Retail Practice Leader: Central and Eastern Europe, Nordic Region james.bacos@oliverwymancom +49 89 939 49 441 Nick Harrison UK Retail Practice Leader nick.harrison@oliverwymancom +44 20 7 852 7773 Five Questions Retailers Must Answer to Negotiate Effectively Most retail category managers are tough negotiators – but nonetheless, they often enter negotiations at a disadvantage to their suppliers. This short note gives some tips on how better preparation can help category managers get the best deal. Paul Beswick North American Retail Practice Leader paul.beswick@oliverwymancom +1 617 424 3259 Copyright Oliver Wyman. All rights reserved 5 Five Questions E 300 / 08/10 www.oliverwymancom Source:

http://www.doksinet etailers have more information than ever about their suppliers and customers, from high-level score cards to detailed point of sale data covering every transaction. But in practice, this often leads to information overload rather than improved knowledge about the business; paradoxically, retailers are drowning in data but missing key insights. Taking full advantage of the wealth of data available is no simple task, and many retailers still rely on figures provided by their suppliers – ceding too much control of their categories in the process. Retailers can and should exploit the information they possess, because it can give them a significant edge during negotiations, and can also change the terms of the entire discussion. Partnering with your suppliers is a good thing; letting them run your business is not. Answering the five questions below is one way to begin this process. They cover a broad spectrum, but have one thing in common: all rely on making more

effective – in this context, one might say more aggressive – use of the rich vein of data that retailers possess. Senior executives should not rest easy until they know their category managers can answer these questions. 1) How well does each item use your shelf space? 2) Which promotions drive value for the retailer, not just the supplier? 3) Which brands and items do customers really value? 4) How much profit are you generating for your suppliers? Everyone knows different items generate different sales and cash margin per foot of shelf space – but few retailers make systematic and detailed comparisons across all competing products. Pointing out variations in financial performance can help get better terms from suppliers whose products underperform. Products with low cash margins must move faster, and conversely the slow movers must produce higher-than-average margins. If a supplier won’t offer lower prices, the retailer should take action to improve cash margin per foot

in other ways – ways that the supplier may not like. A detailed understanding of space productivity enables the retailer to drive a productive, fact-based discussion with the supplier. Retailers often lose sight of a key fact when discussing promotions: their interests and the supplier’s interests are not aligned. Brand switching means incremental sales to the supplier but cannibalization for the retailer; the reverse is true for store switching. If a large part of promotional volume comes from other items on the same shelf, the promotion likely reduces the retailer’s sales and margin. Retailers need to understand the true economics of the promotions they run, including all effects: uplift, discount, cannibalization, purchase pull-forward, store switching effects, and supplier funding. Once they have this information, category managers usually discover that many promotions are not funded adequately by suppliers – enabling category managers to make a convincing argument that

they are better off stopping unproductive promotions if funding levels do not increase. When negotiating with suppliers, the ultimate sanction is removing items, or entire brands, from the shelf. But to make this threat credible, category managers need to be able to counter suppliers’ claims that their products are customer favorites, and are therefore vital to the assortment. The key is to understand how willing customers are to switch one item for another, by measuring their past purchasing behavior. This will show that a few items are indeed essential, but in most cases if a retailer de-lists a product it will regain the lost sales through substitute products. Making this clear to suppliers dramatically strengthens a retailer’s bargaining position. When negotiating an item’s cost, the strength of a category manager’s bargaining position is defined by the financial contribution it makes to the business (see questions 1 and 2) and the importance that customers attach to it

(see question 3). Of course, it is also vital to understand the strength of the supplier’s bargaining position. Consumer goods manufacturers typically run at higher gross margins than retailers (40% - 60% of sales): relatively speaking, volume matters more to them than to the retailer, and margin matters less. Using information from its own label suppliers, a retailer can build a simple model of each supplier’s economics and predict what any deal looks like from the other side of the table – which helps the retailer adopt a negotiating position that is tough, but still advantageous to the other side. It also enables a retailer to determine how the proceeds of its growth are being shared with suppliers. Typically, we find that the standard practices of the industry allow manufacturers to capture the lion’s share of the profit created by a growing retailer, unless the retailer takes a strong stand. Exhibit 1 shows an example, generated by linking planograms to sales data to

compare how well each supplier uses shelf space compared to the rest of the category and store. Furthermore, comparing shelf profitability often reveals differences between suppliers that are much greater than variations in percentage margin. This can justify asking for a better deal from underperforming suppliers. Exhibit 1 Space Productivity Exhibit 2 Brand Switching Matrix – Refrigerated Orange Juice Health & Beauty category Each circle represents a brand; circle size proportional to sales Weekly sales per floor inch 1. Leading national brand Some niche brands offer a high enough margin to justify their slower turns The #2 brand has similar margin to the leader – but its slower turns push it below the category average productivity but others do not 10% 21% Premium brand 1 Premium brand 2 Second national brand 27% 34% 29% 0% 0% 7% 10% 13% 0% 0% 12% 7% 0% 0% 13% 0% 0% 0% 0% 66% 69% Premium brand 1 79% 78% 3% Premium brand 2 85% 74% 3%

9% 2. Second national brand 85% 73% 5% 6% 16% 3. Regional brand 1 86% 46% 20% 7% 10% 11% Economy brand 1 91% 85% 0% 7% 4% 4% Margin % Regional brand 1 Economy brand 1 Five Questions 3 100 80 43.2 Depreciation / amortization R&D Advertising Rent Salaries 60 100.0 40 36.5 19.2 56.8 39.5 20 20.3 0% 0 0% 1. The leading national brand is truly differentiated in customers’ eyes, with low switchability into other brands Of the volume that would switch, 10% would go to Private label, 27% to Premium brand 1, etc. 2. By contrast, the second best-selling brand has much lower loyalty – indicating sales “bought” with deep discount promotions 3. Regional brand 1 has very low loyalty, and its volume is switchable into Private label, as well as the leading national brand Source: Oliver Wyman Analysis 2 Private label The supplier’s trade funding is a key part of the economic picture, and is worth particular attention. Category managers are usually

aware of how much trade funding they receive, but have no visibility into what suppliers are trying to achieve with these funds, and therefore how they can be used – what performance requirements exist, which funds can be moved into base cost and which cannot, and so on. We have seen situations where minor changes in merchandising unlock major increases in funding, but to achieve this a category manager needs a detailed understanding of the rules of the game. Estimated Volume Variable (VV) Margin – Beverages company Values indexed to 100 Private label Some low margin brands are actually strong performers Category average weekly cash margin per floor inch Leading national brand Exhibit 3 shows how a retailer can use financial statements from publicly traded companies to estimate the margin its suppliers make on additional volume. Most suppliers have far higher variable margins than retailers – and hence have a stronger incentive to boost incremental volume. Exhibit 3

Supplier Volume Variable Margin How much switched volume would go to each other brand? Switchability: How much of today’s sales would switch into other brands? 0 Exhibit 2 shows a switching matrix, which quantifies how much volume will be captured by other products if any given item is removed. It is based on actual transaction data, rather than surveys in which customers say how they behave. Indexed values R Sales Cost of sales Sources: Company 10K, Oliver Wyman Analysis Five Questions 4 Gross profit Operating costs (mix of fixed and variable) Operating profit Fixed costs Volume variable profit Volume Variable Margin = 39.5% Five Questions Source: http://www.doksinet etailers have more information than ever about their suppliers and customers, from high-level score cards to detailed point of sale data covering every transaction. But in practice, this often leads to information overload rather than improved knowledge about the business; paradoxically, retailers

are drowning in data but missing key insights. Taking full advantage of the wealth of data available is no simple task, and many retailers still rely on figures provided by their suppliers – ceding too much control of their categories in the process. Retailers can and should exploit the information they possess, because it can give them a significant edge during negotiations, and can also change the terms of the entire discussion. Partnering with your suppliers is a good thing; letting them run your business is not. Answering the five questions below is one way to begin this process. They cover a broad spectrum, but have one thing in common: all rely on making more effective – in this context, one might say more aggressive – use of the rich vein of data that retailers possess. Senior executives should not rest easy until they know their category managers can answer these questions. 1) How well does each item use your shelf space? 2) Which promotions drive value for the

retailer, not just the supplier? 3) Which brands and items do customers really value? 4) How much profit are you generating for your suppliers? Everyone knows different items generate different sales and cash margin per foot of shelf space – but few retailers make systematic and detailed comparisons across all competing products. Pointing out variations in financial performance can help get better terms from suppliers whose products underperform. Products with low cash margins must move faster, and conversely the slow movers must produce higher-than-average margins. If a supplier won’t offer lower prices, the retailer should take action to improve cash margin per foot in other ways – ways that the supplier may not like. A detailed understanding of space productivity enables the retailer to drive a productive, fact-based discussion with the supplier. Retailers often lose sight of a key fact when discussing promotions: their interests and the supplier’s interests are not

aligned. Brand switching means incremental sales to the supplier but cannibalization for the retailer; the reverse is true for store switching. If a large part of promotional volume comes from other items on the same shelf, the promotion likely reduces the retailer’s sales and margin. Retailers need to understand the true economics of the promotions they run, including all effects: uplift, discount, cannibalization, purchase pull-forward, store switching effects, and supplier funding. Once they have this information, category managers usually discover that many promotions are not funded adequately by suppliers – enabling category managers to make a convincing argument that they are better off stopping unproductive promotions if funding levels do not increase. When negotiating with suppliers, the ultimate sanction is removing items, or entire brands, from the shelf. But to make this threat credible, category managers need to be able to counter suppliers’ claims that their

products are customer favorites, and are therefore vital to the assortment. The key is to understand how willing customers are to switch one item for another, by measuring their past purchasing behavior. This will show that a few items are indeed essential, but in most cases if a retailer de-lists a product it will regain the lost sales through substitute products. Making this clear to suppliers dramatically strengthens a retailer’s bargaining position. When negotiating an item’s cost, the strength of a category manager’s bargaining position is defined by the financial contribution it makes to the business (see questions 1 and 2) and the importance that customers attach to it (see question 3). Of course, it is also vital to understand the strength of the supplier’s bargaining position. Consumer goods manufacturers typically run at higher gross margins than retailers (40% - 60% of sales): relatively speaking, volume matters more to them than to the retailer, and margin matters

less. Using information from its own label suppliers, a retailer can build a simple model of each supplier’s economics and predict what any deal looks like from the other side of the table – which helps the retailer adopt a negotiating position that is tough, but still advantageous to the other side. It also enables a retailer to determine how the proceeds of its growth are being shared with suppliers. Typically, we find that the standard practices of the industry allow manufacturers to capture the lion’s share of the profit created by a growing retailer, unless the retailer takes a strong stand. Exhibit 1 shows an example, generated by linking planograms to sales data to compare how well each supplier uses shelf space compared to the rest of the category and store. Furthermore, comparing shelf profitability often reveals differences between suppliers that are much greater than variations in percentage margin. This can justify asking for a better deal from underperforming

suppliers. Exhibit 1 Space Productivity Exhibit 2 Brand Switching Matrix – Refrigerated Orange Juice Health & Beauty category Each circle represents a brand; circle size proportional to sales Weekly sales per floor inch 1. Leading national brand Some niche brands offer a high enough margin to justify their slower turns The #2 brand has similar margin to the leader – but its slower turns push it below the category average productivity but others do not 10% 21% Premium brand 1 Premium brand 2 Second national brand 27% 34% 29% 0% 0% 7% 10% 13% 0% 0% 12% 7% 0% 0% 13% 0% 0% 0% 0% 66% 69% Premium brand 1 79% 78% 3% Premium brand 2 85% 74% 3% 9% 2. Second national brand 85% 73% 5% 6% 16% 3. Regional brand 1 86% 46% 20% 7% 10% 11% Economy brand 1 91% 85% 0% 7% 4% 4% Margin % Regional brand 1 Economy brand 1 Five Questions 3 100 80 43.2 Depreciation / amortization R&D Advertising Rent Salaries 60 100.0 40 36.5

19.2 56.8 39.5 20 20.3 0% 0 0% 1. The leading national brand is truly differentiated in customers’ eyes, with low switchability into other brands Of the volume that would switch, 10% would go to Private label, 27% to Premium brand 1, etc. 2. By contrast, the second best-selling brand has much lower loyalty – indicating sales “bought” with deep discount promotions 3. Regional brand 1 has very low loyalty, and its volume is switchable into Private label, as well as the leading national brand Source: Oliver Wyman Analysis 2 Private label The supplier’s trade funding is a key part of the economic picture, and is worth particular attention. Category managers are usually aware of how much trade funding they receive, but have no visibility into what suppliers are trying to achieve with these funds, and therefore how they can be used – what performance requirements exist, which funds can be moved into base cost and which cannot, and so on. We have seen situations where

minor changes in merchandising unlock major increases in funding, but to achieve this a category manager needs a detailed understanding of the rules of the game. Estimated Volume Variable (VV) Margin – Beverages company Values indexed to 100 Private label Some low margin brands are actually strong performers Category average weekly cash margin per floor inch Leading national brand Exhibit 3 shows how a retailer can use financial statements from publicly traded companies to estimate the margin its suppliers make on additional volume. Most suppliers have far higher variable margins than retailers – and hence have a stronger incentive to boost incremental volume. Exhibit 3 Supplier Volume Variable Margin How much switched volume would go to each other brand? Switchability: How much of today’s sales would switch into other brands? 0 Exhibit 2 shows a switching matrix, which quantifies how much volume will be captured by other products if any given item is removed. It is

based on actual transaction data, rather than surveys in which customers say how they behave. Indexed values R Sales Cost of sales Sources: Company 10K, Oliver Wyman Analysis Five Questions 4 Gross profit Operating costs (mix of fixed and variable) Operating profit Fixed costs Volume variable profit Volume Variable Margin = 39.5% Five Questions Source: http://www.doksinet etailers have more information than ever about their suppliers and customers, from high-level score cards to detailed point of sale data covering every transaction. But in practice, this often leads to information overload rather than improved knowledge about the business; paradoxically, retailers are drowning in data but missing key insights. Taking full advantage of the wealth of data available is no simple task, and many retailers still rely on figures provided by their suppliers – ceding too much control of their categories in the process. Retailers can and should exploit the information they

possess, because it can give them a significant edge during negotiations, and can also change the terms of the entire discussion. Partnering with your suppliers is a good thing; letting them run your business is not. Answering the five questions below is one way to begin this process. They cover a broad spectrum, but have one thing in common: all rely on making more effective – in this context, one might say more aggressive – use of the rich vein of data that retailers possess. Senior executives should not rest easy until they know their category managers can answer these questions. 1) How well does each item use your shelf space? 2) Which promotions drive value for the retailer, not just the supplier? 3) Which brands and items do customers really value? 4) How much profit are you generating for your suppliers? Everyone knows different items generate different sales and cash margin per foot of shelf space – but few retailers make systematic and detailed comparisons across

all competing products. Pointing out variations in financial performance can help get better terms from suppliers whose products underperform. Products with low cash margins must move faster, and conversely the slow movers must produce higher-than-average margins. If a supplier won’t offer lower prices, the retailer should take action to improve cash margin per foot in other ways – ways that the supplier may not like. A detailed understanding of space productivity enables the retailer to drive a productive, fact-based discussion with the supplier. Retailers often lose sight of a key fact when discussing promotions: their interests and the supplier’s interests are not aligned. Brand switching means incremental sales to the supplier but cannibalization for the retailer; the reverse is true for store switching. If a large part of promotional volume comes from other items on the same shelf, the promotion likely reduces the retailer’s sales and margin. Retailers need to understand

the true economics of the promotions they run, including all effects: uplift, discount, cannibalization, purchase pull-forward, store switching effects, and supplier funding. Once they have this information, category managers usually discover that many promotions are not funded adequately by suppliers – enabling category managers to make a convincing argument that they are better off stopping unproductive promotions if funding levels do not increase. When negotiating with suppliers, the ultimate sanction is removing items, or entire brands, from the shelf. But to make this threat credible, category managers need to be able to counter suppliers’ claims that their products are customer favorites, and are therefore vital to the assortment. The key is to understand how willing customers are to switch one item for another, by measuring their past purchasing behavior. This will show that a few items are indeed essential, but in most cases if a retailer de-lists a product it will regain

the lost sales through substitute products. Making this clear to suppliers dramatically strengthens a retailer’s bargaining position. When negotiating an item’s cost, the strength of a category manager’s bargaining position is defined by the financial contribution it makes to the business (see questions 1 and 2) and the importance that customers attach to it (see question 3). Of course, it is also vital to understand the strength of the supplier’s bargaining position. Consumer goods manufacturers typically run at higher gross margins than retailers (40% - 60% of sales): relatively speaking, volume matters more to them than to the retailer, and margin matters less. Using information from its own label suppliers, a retailer can build a simple model of each supplier’s economics and predict what any deal looks like from the other side of the table – which helps the retailer adopt a negotiating position that is tough, but still advantageous to the other side. It also enables a

retailer to determine how the proceeds of its growth are being shared with suppliers. Typically, we find that the standard practices of the industry allow manufacturers to capture the lion’s share of the profit created by a growing retailer, unless the retailer takes a strong stand. Exhibit 1 shows an example, generated by linking planograms to sales data to compare how well each supplier uses shelf space compared to the rest of the category and store. Furthermore, comparing shelf profitability often reveals differences between suppliers that are much greater than variations in percentage margin. This can justify asking for a better deal from underperforming suppliers. Exhibit 1 Space Productivity Exhibit 2 Brand Switching Matrix – Refrigerated Orange Juice Health & Beauty category Each circle represents a brand; circle size proportional to sales Weekly sales per floor inch 1. Leading national brand Some niche brands offer a high enough margin to justify their slower

turns The #2 brand has similar margin to the leader – but its slower turns push it below the category average productivity but others do not 10% 21% Premium brand 1 Premium brand 2 Second national brand 27% 34% 29% 0% 0% 7% 10% 13% 0% 0% 12% 7% 0% 0% 13% 0% 0% 0% 0% 66% 69% Premium brand 1 79% 78% 3% Premium brand 2 85% 74% 3% 9% 2. Second national brand 85% 73% 5% 6% 16% 3. Regional brand 1 86% 46% 20% 7% 10% 11% Economy brand 1 91% 85% 0% 7% 4% 4% Margin % Regional brand 1 Economy brand 1 Five Questions 3 100 80 43.2 Depreciation / amortization R&D Advertising Rent Salaries 60 100.0 40 36.5 19.2 56.8 39.5 20 20.3 0% 0 0% 1. The leading national brand is truly differentiated in customers’ eyes, with low switchability into other brands Of the volume that would switch, 10% would go to Private label, 27% to Premium brand 1, etc. 2. By contrast, the second best-selling brand has much lower loyalty –

indicating sales “bought” with deep discount promotions 3. Regional brand 1 has very low loyalty, and its volume is switchable into Private label, as well as the leading national brand Source: Oliver Wyman Analysis 2 Private label The supplier’s trade funding is a key part of the economic picture, and is worth particular attention. Category managers are usually aware of how much trade funding they receive, but have no visibility into what suppliers are trying to achieve with these funds, and therefore how they can be used – what performance requirements exist, which funds can be moved into base cost and which cannot, and so on. We have seen situations where minor changes in merchandising unlock major increases in funding, but to achieve this a category manager needs a detailed understanding of the rules of the game. Estimated Volume Variable (VV) Margin – Beverages company Values indexed to 100 Private label Some low margin brands are actually strong performers

Category average weekly cash margin per floor inch Leading national brand Exhibit 3 shows how a retailer can use financial statements from publicly traded companies to estimate the margin its suppliers make on additional volume. Most suppliers have far higher variable margins than retailers – and hence have a stronger incentive to boost incremental volume. Exhibit 3 Supplier Volume Variable Margin How much switched volume would go to each other brand? Switchability: How much of today’s sales would switch into other brands? 0 Exhibit 2 shows a switching matrix, which quantifies how much volume will be captured by other products if any given item is removed. It is based on actual transaction data, rather than surveys in which customers say how they behave. Indexed values R Sales Cost of sales Sources: Company 10K, Oliver Wyman Analysis Five Questions 4 Gross profit Operating costs (mix of fixed and variable) Operating profit Fixed costs Volume variable profit

Volume Variable Margin = 39.5% Five Questions Source: http://www.doksinet 5) How do your negotiations with Supplier X affect your colleagues? Many suppliers span multiple categories, and often one category manager is not managing the entire portfolio of a given supplier – indeed, it is not unusual for different category managers to have very different perspectives on a supplier’s performance. It is therefore in the retailer’s best interest to understand how the supplier’s organization is structured. Does the same sales team call on several category managers? Do the supplier’s business units operate independently or as a whole? Do funding structures vary across different business units? A holistic negotiating approach, with a defined ‘point person’ to coordinate all category managers involved, ensures that everyone understands how their decisions affect the negotiations of their colleagues – and ultimately, the financial performance of the retailer as a whole. We

often find that simply presenting a unified front to cross-category suppliers can unlock a great deal of value; if nothing else, the retailer prevents the supplier from offsetting savings offered to one category manager with a cost increases for another. Using data more intelligently and not depending on suppliers for information creates negotiating power. Supplementing category managers’ trading instincts with solid analysis opens up other opportunities besides. The retailer can restructure supplier panels; or offer more appealing incentives to top performers, while asking for more in return from those suppliers. SKU optimization ceases to be a hazardous experiment, followed by numerous ‘corrections’ to address customer complaints. Ultimately, retailers exist to serve customers, not suppliers – and the way trading decisions are made should reflect this fundamental truth. The questions described here obviously cover only a fraction of the things a category manager needs to

know – and a retailer’s ultimate aim should be to gain the upper hand in the negotiating process by building a comprehensive understanding of their customers and suppliers. Better use of information allows a retailer to talk about its own customers, not about national averages; to present its own insights in negotiations, rather than listening to pitches from suppliers; and to rely on data from its own stores, not external reporting services. v Retail About Oliver Wyman Oliver Wyman’s Retail Practice has a 20-year track record of helping clients deliver highimpact performance improvements. We combine deep industry knowledge with clear insight into what it takes to succeed in retail. Our proprietary, state-of-the-art analytical tools and techniques provide an unrivalled understanding of how to create shareholder value, and we work closely with clients to develop practical, real-world solutions that make this happen. Oliver Wyman is an international management consulting firm with

more than 2,900 professionals in over 40 cities around the globe. For more information please contact: Matthew Isotta Global Retail Practice Leader matthew.isotta@oliverwymancom +44 20 7 852 7458 Bernard Demeure French and Southern European Retail Practice Leader bernard.demeure@oliverwymancom +33 1 45023 209 James Bacos Retail Practice Leader: Central and Eastern Europe, Nordic Region james.bacos@oliverwymancom +49 89 939 49 441 Nick Harrison UK Retail Practice Leader nick.harrison@oliverwymancom +44 20 7 852 7773 Five Questions Retailers Must Answer to Negotiate Effectively Most retail category managers are tough negotiators – but nonetheless, they often enter negotiations at a disadvantage to their suppliers. This short note gives some tips on how better preparation can help category managers get the best deal. Paul Beswick North American Retail Practice Leader paul.beswick@oliverwymancom +1 617 424 3259 Copyright Oliver Wyman. All rights reserved 5 Five Questions E 300

/ 08/10 www.oliverwymancom Source: http://www.doksinet 5) How do your negotiations with Supplier X affect your colleagues? Many suppliers span multiple categories, and often one category manager is not managing the entire portfolio of a given supplier – indeed, it is not unusual for different category managers to have very different perspectives on a supplier’s performance. It is therefore in the retailer’s best interest to understand how the supplier’s organization is structured. Does the same sales team call on several category managers? Do the supplier’s business units operate independently or as a whole? Do funding structures vary across different business units? A holistic negotiating approach, with a defined ‘point person’ to coordinate all category managers involved, ensures that everyone understands how their decisions affect the negotiations of their colleagues – and ultimately, the financial performance of the retailer as a whole. We often find that simply

presenting a unified front to cross-category suppliers can unlock a great deal of value; if nothing else, the retailer prevents the supplier from offsetting savings offered to one category manager with a cost increases for another. Using data more intelligently and not depending on suppliers for information creates negotiating power. Supplementing category managers’ trading instincts with solid analysis opens up other opportunities besides. The retailer can restructure supplier panels; or offer more appealing incentives to top performers, while asking for more in return from those suppliers. SKU optimization ceases to be a hazardous experiment, followed by numerous ‘corrections’ to address customer complaints. Ultimately, retailers exist to serve customers, not suppliers – and the way trading decisions are made should reflect this fundamental truth. The questions described here obviously cover only a fraction of the things a category manager needs to know – and a

retailer’s ultimate aim should be to gain the upper hand in the negotiating process by building a comprehensive understanding of their customers and suppliers. Better use of information allows a retailer to talk about its own customers, not about national averages; to present its own insights in negotiations, rather than listening to pitches from suppliers; and to rely on data from its own stores, not external reporting services. v Retail About Oliver Wyman Oliver Wyman’s Retail Practice has a 20-year track record of helping clients deliver highimpact performance improvements. We combine deep industry knowledge with clear insight into what it takes to succeed in retail. Our proprietary, state-of-the-art analytical tools and techniques provide an unrivalled understanding of how to create shareholder value, and we work closely with clients to develop practical, real-world solutions that make this happen. Oliver Wyman is an international management consulting firm with more than

2,900 professionals in over 40 cities around the globe. For more information please contact: Matthew Isotta Global Retail Practice Leader matthew.isotta@oliverwymancom +44 20 7 852 7458 Bernard Demeure French and Southern European Retail Practice Leader bernard.demeure@oliverwymancom +33 1 45023 209 James Bacos Retail Practice Leader: Central and Eastern Europe, Nordic Region james.bacos@oliverwymancom +49 89 939 49 441 Nick Harrison UK Retail Practice Leader nick.harrison@oliverwymancom +44 20 7 852 7773 Five Questions Retailers Must Answer to Negotiate Effectively Most retail category managers are tough negotiators – but nonetheless, they often enter negotiations at a disadvantage to their suppliers. This short note gives some tips on how better preparation can help category managers get the best deal. Paul Beswick North American Retail Practice Leader paul.beswick@oliverwymancom +1 617 424 3259 Copyright Oliver Wyman. All rights reserved 5 Five Questions E 300 / 08/10

www.oliverwymancom