How many do you want? This is the first question a supplier asks when a smaller retailer tries to negotiate on price. Let's face it - the supply chain is now solely focused on volume.
How can a specialist retailer compete with the 1000-pound gorillas like Harvey Norman (Domayne and Megamart), Coles (Officeworks, Harris Technology, Kmart and Target) and Woolworths (Big W, Dick Smith and Tandy)? The honest answer is they can't, but read on for an outline of the terms these big boys enjoy.
Superstores have grown very quickly yet specialists are facing tough times. This growth has been made possible by sweetheart deals between suppliers and the superstores. They are purely focused on moving greater volumes.
The gorillas (or is that guerrillas) have managed to use market forces to obtain some pretty favourable trading terms. The following are "generic" to the extent that each group has its own particular method of dealing with suppliers. Harvey Norman for example is reputed to have a 25-page terms and conditions handbook for its suppliers.
Consignment stock: Generous terms mean superstores appear to be well stocked.
Payment terms: Most demand 60-90 days payment or a substantial discount for early payment.
Payment deductions: All demand the right to deduct from supplier payments any and all returns, refunds and price protection claims without question. I know of one reasonably small supplier that had 168 unsubstantiated deductions worth more than $100,000 from one chain alone.
Return terms: Stock can be returned unequivocally without any specific time limit for a full credit (it will be deducted from payment anyway).
Price protection: On all goods in stock plus those recently sold because of potential price match guarantees (again part of the payment deductions).
Return authorization: No questions asked on new for old replacement (or preferably a full credit) for goods at anytime during the warranty.
Warranty: Must be a consumer warranty starting from when the goods are sold to the customer, not invoiced to the superstore (regardless of how long it has been in stock). Some insist the supplier assumes statutory consumer warranty obligations.
Franchisor fees: Many franchisors take 15-20 per cent commissions from suppliers. Whether this comes from the supplier or franchisee store owner margin is immaterial however it is usually the later that suffers. Rumour is that many franchisors make 8-10 per cent margin to sale.
Advertising contributions: All charge for the inclusion of products in catalogues, TV, radio or newspaper advertisements. Many request that suppliers commit to a loss leader or extra value product for the catalogue.
Giveaways: Many insist on a percentage of free products to be used in promotions. Conference or road show contributions: Some request suppliers commit to taking exhibition space (at extortionate rates) at the annual conference or road show and provide staff samples.
Location, location: Some charge extra to stock products in prime locations like the end of aisles.
Market power: If the supplier has a highly substitutable product (memory drives, cameras, scanners, printers, notebooks, PCs) the superstore has lots of commercial negotiating power and the full range of conditions will usually apply. If the product is hot (like iPods) the supplier can modify terms. However, superstores are well known to employ strong-arm tactics. For example, Harvey Norman removed Compaq computers from its shelves after the vendor announced plans to open a retail chain of its own. It took six years for Compaq, now part of the HP stable, to get back on the superstore's shelves.
It's time for small independent stores to play hardball with suppliers.
At the very least, they should demand price protection, consignment stock, consumer warranty and stock returns.