Sunday, January 02, 2011

Will 2011 Be a Year of Supplier-Retailer Pricing Conflicts?

If, as some economists argue, large government deficits will result in inflation, then suppliers will have no choice but to increase prices. If consumers, having become used to heavy discounting, resist the increases, then fights between suppliers and retailers will become commonplace.

Here we see reports of ConAgra and General Mills seeking price increases. General Mills is seeking to cut $1b from its costs to offset commodity price increases, but will nonetheless have to pass some increases on:
The company posted earnings and sales on Thursday that missed Wall street estimates, hurt by higher commodity costs and spending on promotions.
The story was similar at ConAgra:
ConAgra Foods Inc is looking to price increases to help boost results in coming months after reporting quarterly profit that fell due to rising commodity costs and weak response to promotions.
And the issue is not limited to the US, of course. In China, the leading supplier of noodles, Ting Hsin, stopped shipping to Carrefour after Carrefour rejected a price increase of 0.2 yuan (about three cents) per unit.
Ting Hsin International told the Hong Kong Stock Exchange in October that it was raising the retail price of each package of instant noodles from 2 yuan (30 cents) to 2.2 yuan due to an increase in raw material prices.

Two months after the announcement, the Taiwan-based food and beverage maker halted shipments of instant noodles to Carrefour stores in the mainland. A company official told First Financial Daily that the reason for the halt is that Carrefour wants to cut 0.1 yuan from the suggested 0.2 yuan price hike.

Whether these attempts to raise prices succeed will depend in large part, of course, on the strength of the supplier. ConAgra and General Mills have some very strong brands, and Ting Hsin’s Master Kong brand has over 40% of the noodle market. Other suppliers recognize that they may not be able to do the same:
"Only large suppliers such as Ting Hsin can negotiate with the retailers. For small suppliers like us, it is always take it or leave it," said Yang Lei, general manager of a food and beverage distributor in Beijing. […]

"We have little bargaining power over the purchasing price of the big retail chains. Because they have extensive sales channels with high sales volume, suppliers can't afford to lose this business relationship," said Yang, whose company supplies to Carrefour and Wal-Mart.

Also in China, Kraft recently stopped shipping Oreos to local chain Lianhua in a pricing dispute.

Exit Question: Are you expecting to see an increase in supplier-retailer pricing fights this year?

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