A sophisticated competition
Strong brands are monopolists – their customers cannot switch to competitor brands. This applies even though similar products are usually available, as the alternative product cannot attain the mystique of a successful brand. Manufacturers of these brands are fully aware of this, of course, so they defend their interests with confidence. Buyers from businesses who want to negotiate successfully need to prepare very thoroughly and base their approach on partnership.
Negotiating with strong brands can be challenging, but it’s not in the interests of either the retailer or the supplier to have empty shelves. If negotiations fall through, both sides lose. Negotiators who bear this in mind can act more effectively and ultimately find viable compromises.
It’s important to prepare especially thoroughly and carefully for negotiations with teams representing strong brands. The negotiating strategy is based on an in-depth supplier analysis and a Total Cost of Ownership (TCO) review. In addition to sales figures, other factors for consideration include joint advertising activities and the long-term quality of the collaboration. The TCO analysis enables you to formulate realistic negotiation objectives and identify potential win-win solutions. During the next stage, the procurement team develops arguments and counterarguments, assigns roles, and works out negotiation scenarios, escalation steps, and alternative plans.
Unfortunately, many buyers and category managers see these discussions more as a necessary evil, and therefore conduct them as infrequently as possible. It is regrettable that holding annual negotiations with suppliers is by no means standard practice as regular negotiations and fixed meetings encourage mutual understanding, deepen trust, and provide an opportunity for innovative shared solutions.
A deeper analysis of failed negotiations often reveals that the analysis preparation in the run-up to negotiations was not profound enough to recognize and use the right levers. Either data is not available, or there is no tool for evaluating it and drawing the right conclusions. By taking this approach, however, retailers in particular are relinquishing a position of power to strong brands instead of genuinely negotiating as equals.
Separating the people from the problem means sticking to facts rather than allowing emotions to take hold. The person you are negotiating with is not your “enemy” but someone else with a vested interest. The procurement manager at a renowned European trading firm – reminded his negotiation team before every challenging meeting that “things can get tough but it’s nothing personal. The sellers are fighting just
as hard for their company as we are for ours.”
Focusing on interests rather than positions means asking why the other side has chosen a particular position. The advantage? You can agree or disagree with a position but, if the positions are incompatible, there is no solution. There are different ways to pursue and realize your interests, however. Questioning the motivation and underlying interests therefore opens up a new space for negotiating and compromising.
If, for instance, a supplier demands a price increase of four percent, their underlying interest is to obtain a higher profit margin. If the procurement team cannot or does not want to agree to this, they should put forward proposals that increase revenues in other ways. At this point, the aim is to generate new ideas that will benefit both sides. It’s important to start by collecting suggestions in an unbiased way so as not to stop at what might appear to be the easiest and fastest solution. It therefore makes sense to outsource this part of the actual negotiations; for example, through a strategy workshop.
The various suggestions are then evaluated against objective criteria – this is principle number 4. Both sides therefore need to agree on which criteria they want to apply and how these will be defined in practice. For the negotiations to be a success, customers and suppliers must agree on the parameters selected and see them as fair.
The Harvard method offers a helpful format for preparing to enter discussions with suppliers of branded goods. This strategy places the focus squarely on a shared solution. The Harvard method has four key principles:
1. Separate the people from the problem
2. Focus on interests, not positions
3. Invent options for mutual gain
4. Insist on using objective criteria
In a perfect world, negotiating teams would follow these four steps to come to an agreement that satisfies all parties involved – a win-win situation. Unfortunately, it doesn’t always work out this way; either because the parties’ interests are too far apart despite their willingness to compromise, or because the other side adopts a confrontational stance. Preparing to negotiate involves planning for exactly these scenarios. The core idea is encompassed in the acronym BATNA, which stands for “best alternative to a negotiated agreement.” BATNA acts as a benchmark defining the point at which you walk away from the negotiating table. Procurement teams need to determine their plan B ahead of each negotiation. This is because, when negotiation teams consider the potential scenario of the negotiations falling through and come up with an alternative strategy to cover this eventuality, it makes the risk of failing to reach an agreement a less terrifying prospect.
Another key element is the ZOPA – the “zone of possible agreement.” This is the intersection where each side involved in the negotiation identifies shared solutions that enable them to successfully conclude the negotiations.
It is therefore important to increase the ZOPA and include more bargaining chips in order to increase the chances of reaching an agreement. One example of this is marketing materials, which often play an important role for brand suppliers. There are various areas for possible negotiation here; from the shop window presence of a fashion retailer to the placement of brochures in hardware stores, or displays in supermarkets. Online presence is becoming increasingly crucial for retailers and suppliers of branded goods in all categories. An appealing website that provides a good user experience for customers, along with professional tracking, provides the procurement team with powerful arguments. Professional collaboration should also involve the business making anonymized online data available to its suppliers. Wherever possible, data gathered online should be combined with data from physical retail sites.
Other areas for negotiation that are often used are the (partial) defrayment of salaries or transfer of employees – for example, for shelf maintenance – as well as the option of investing in the presentation of a brand on the retailer’s business premises.
If negotiations fall through, both sides lose.
Despite good preparation, it can happen that suppliers refuse to adopt a collaborative approach – or even consciously escalate a negotiation situation. To achieve an agreement in situations like this, it helps to focus solely on the facts and to understand the interests behind any strongly entrenched positions. This is achieved through calm, purposeful questioning and repeating statements. Ask why
they have rejected the proposal and be open to criticism – it might be justified! The negotiating process may feel exhausting but what ultimately matters is finding a workable compromise.
is a Principal at INVERTO in Hamburg. She is an experienced buyer in the retail and consumer goods industry, advising customers from these sectors as part of comprehensive procurement optimization projects.