Negotiating for the Best Cost of Goods

Convenience store owners need to work more closely with suppliers and wholesalers to get better supply contracts and offer consumers more competitive prices.

Pat Pape, Contributing Editor.

Convenience store owners need to work more closely with suppliers and wholesalers to get better supply contracts and offer consumers more competitive prices.

A plaque in Ray Johnson’s office reads: “Notice to All Vendors: Cost or Retail, You Choose.” Johnson, operations manager for Speedee Mart, a 21-store chain based in Henderson, Nev., is known as a keen contract negotiator, a skill that helps him manage inventory costs and maximize profits.
When it comes to margins, “I expect to be better than the competitors in my markets,” he said.

Today, about 80% of all volume sold in convenience stores comes from wholesale distributors, such as McLane or Eby-Brown. Retailers dissatisfied with margins can go to the product manufacturer or the wholesaler that delivers the products to negotiate a new contract. Johnson favors short-term contracts.

“You want the shortest term contract you can get, typically three years,” he said. “They only love you when you’re contract is up. That’s the time to negotiate.”

David Bishop, managing partner at Balvor LLC, a Chicago retailing consultancy, recommended talking prices with your current wholesaler before approaching a competitor. “Defer to the primary supplier, but disclose that you’re going to engage in discussions with others,” he said. “Doing so helps to maintain goodwill while trying to get the best deal.”

Johnson advises establishing priorities before the conversation begins. “I want to know what they are going to charge me for cigarettes,” he said. “They want to negotiate on things that aren’t important, like canned dog food. That’s not where you’re going to make a difference. You’ll make a difference on things you sell a lot of and make money on.

“Wholesalers will offer you the least amount to get your business,” Johnson said. “I charge the highest price I can, too, so I understand.”

Market Basket Bids
To determine best prices, retailers should put their business out to bid, asking several wholesalers for price quotes on the same market basket of goods (typically the 100-plus top-selling items in the store). “It helps establish a frame of reference,” Bishop said.

Clearly explain your objectives. “Emphasize that you want help growing your business in order to make more profits,” Bishop said. “Ask ‘How can you help us make more money? Is there something I should be doing that I’m not?’ It’s the responsibility of the retailer to ask suppliers for as much as possible.”

Giving the wholesaler a chance to recommend solutions can benefit both parties. For instance, the wholesaler may suggest control label products that may provide higher profit for retailers at lower prices for consumers. This is more effective in price-driven categories where brand loyalty is less important.

“Private label lines that do well for retailers offer a compelling value to the consumer,” said Bishop. “Control brands can be much more manageable for a single-store operator. They provide alternatives to national brands without the need to invest in developing a proprietary brand.”

Every operator wants better pricing, but there is a cost associated with converting from one supplier to another, and these are things no retailer should take lightly, Bishop said.

Prepare to Negotiate
Jim Callahan is director of marketing for Green Oil Co. in Atlanta and an industry consultant through his company, Convenience Store Solutions. He plans in advance for contract negotiations and carefully considers what he’ll ask for.

“When I reach a point that is slightly embarrassing to me or outrageous, that’s what I ask for,” he said. “It has to be reasonable, but I ask for more than I think I’ll get. It works two or three times out of 10.”

When negotiating with DSD vendors, Johnson, of Speedee Mart, first negotiates shelf placement, which provides a guaranteed payment before any merchandise is sold. “That contract typically runs only one year,” he said.

Next, he focuses on rebates. “Rebates are whatever you can get,” he said. “I want rebates based on every single unit sold. Some vendors want to look at your last year’s sales and only give rebates on increases over last year. But every single unit should be eligible for rebate.”

Certain vendors offer rebates based on scan data sales, but Johnson wants rebates based on purchase data. “If a cashier rings the product wrong, if it gets spoiled or broken, I still want the rebate,” he said.

He also wants rebate insurance. If a manufacturer requires Speedee Marts to stock certain SKUs to receive a rebate, Johnson wants assurance the wholesaler will carry and deliver those SKUs or reimburse stores for lost rebate funds.

Next, Johnson considers discounts off the invoice price. “When negotiating with a vendor, you need to know what Sam’s Club and Costco sell it for,” he said. “When they say, ‘This price is $28 a case, and we’ll give it to you for $26,’ you can tell them that it is $24 at Costco.”

Price change protection is equally important. “If (the manufacturer) announces a price change, you usually find out on Friday that it’s effective Monday,” Johnson said. “The wholesaler has price protection with the manufacturer, and I ask for half of whatever that is. If they have 30 days protection, I want 15. If they have a week, I want 3.5 days.”

Avoid contracts that automatically renew unless you cancel within a certain time period. “I got burned once to learn that lesson,” Johnson said.

Make it Personal
Every vendor wants to work with the 500-store convenience chain. That means the retailer with a couple of locations needs to showcase a quality other than size.

“The cleaner and friendlier your store is, the more vendors will want to work with you,” Callahan said. “It’s kind of like dress for success. It’s something anybody can do.”

He also recommended making the vendor like something about you: “Whether it’s your personality, your pricing or the cleanliness of your store. Find a commonality. Maybe you both went to the University of Georgia or grew up in Arizona. It doesn’t have to be big.”

No Free Lunch
Frequently vendors will promise a free case of product or other giveaway when the retailer becomes a client.“The vendor says, ‘Look what I’m going to give you.’ We remind those vendors that we’re supplying them with a clean store, and we have a cash register and a fabulous person in a uniform to ring up the product,” Callahan said. “Don’t be impressed by the free beanie weenie. You keep that store open at least 15 hours a day and maybe 24. Say to the vendor, ‘Look what we’re going to do for you.’”

There are other ways to cut inventory costs, such as joining a buying club—a third-party group that uses members’ purchasing power to shop like a major chain. Clubs can secure better pricing, meet purchase minimums a small retailer cannot afford and arrange better payment terms. But you must consider the time, effort, transportation costs and the ability to transport products from the club to your store.

“Inventory costs are critical, but operating a successful c-store business is about more than the cost of goods,” Bishop said. “At the end of the day, retailers will make more money if they’re able to sell more volume. Negotiating lower costs is only part of the profit equation. Retailers, to be more successful, need to work with supply partners to offer better consumer
solutions.”

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