Insights

Grocery insights: Time’s up for joint business planning

Joint business planning is outliving its usefulness to both grocery retailers and vendors. What began as a strategic response to intensifying competition is transforming into a costly, complex, and cumbersome undertaking that’s no longer delivering the desired results for either party. With growth prospects looking grim across the sector, it’s time for grocery retailers and vendors alike to embrace a simpler approach – one that relies less on short-term price promotions and more on long-term, sustained value gains that reduce demands on people and operations.

A good idea that’s running out of shelf lifeundefined
Joint business planning first emerged in the mid-2000s, and its use grew sharply in the following years. Grocery retailers pushed vendors for more trade investment to help stay competitive in an increasingly crowded market; vendors complied, demanding better performance and stretch volume targets in return.

The result? Incremental sales rose through intense price competition, only to be followed by lengthy periods of price deflation across many categories. Promotional calendars became congested. Vendor trade spend has increased while retailers’ gross margin has eroded. Both spend more and more time and money on managing a complex web of agreements and pursuing competing interests, rather than on the core business. What was meant as a collaborative process has often created more antagonism between vendors and retailers, fostering “us vs. them” thinking that has sometimes led to decisions and actions that consumers either didn’t care about – or notice.

Joint business planning’s diminishing returns have reached a point where it’s providing little – if any – incremental benefit to grocery retailers and vendors. Change is needed, and fast.

Growth prospects can’t justify costly joint business planning
The rising costs and poor returns associated with joint business planning are a growing liability in a grocery sector that’s facing significant growth pressures.

Arguably the most highly correlated macro indicator for food consumption – population growth – is slowing: Canada’s population grew a mere 0.9% in 2015, down from 1.1% the year before, and there’s no sign of a turnaround. At the same time, consumer trends are changing: consumers are cooking less and turning to convenience foods and out-of-home dining, and they’re also shifting away from mainstream brands in favour of new natural or organic offerings.

Given these market realities, grocery retailers and vendors will find it increasingly challenging to achieve top-line revenue growth, especially in off-trend categories. To preserve or improve margins, companies need to turn their attention to reducing costs found in their current operating model – and joint business planning is a great place to start.

Rebooting joint business planning for a low-growth world
Both grocery retailers and vendors stand to benefit from stepping back from the resource-intensive complexity of today’s joint business planning. Adopting simpler approaches can significantly reduce costs, improve efficiencies, and refocus energies on delivering value to consumers – which, over time, can give rise to long-term, sustainable boosts to revenue and, more importantly, profitability.

Some in the industry are already beginning this “reboot” of their planning process. A number of grocers are enlisting their national procurement groups to help consolidate and minimize the number of trade agreements in play, thereby reducing the administrative burden associated with them. We’ve seen one vendor roll program funding into the invoice price and entrust promotion to the retailer; no longer needing to manage that spend directly has allowed the vendor to trim its sales force. Another vendor has shifted away from promotional spending, deciding that its strong brand delivered stable demand; this change in strategy has translated into less stress on supply chains and less need to maintain costly “safety stock.”

Moving away from joint business planning requires companies to forego short-term revenue gains in exchange for lower costs, reduced complexity, and longer-term growth. It demands companies to have the determination and patience to stay the course – and reinvest savings into building the brand and delivering consumer value.

And improving consumer value is vital. Consumers will quickly notice fewer price promotions, and companies will need to deliver something to justify higher prices. For example, vendors may look to improve ingredients or improve packaging to make products easier or more convenient to use. Retailers will likely want to focus on improving the in-store experience, from the store environment to product assortment.

Ready to hit reset?
Joint business planning isn’t delivering what grocery retailers and vendors need in today’s market. It’s time to take action and reset thinking around this aspect of the business. Companies can start by looking at their array of current plans – are they delivering the expected value? If not, it’s time to dig in and find out why. This is also the time to determine whether management is willing to support a period of transition, and potentially missing short-term targets for long-term benefit in a low-growth world.

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