Retailers can learn some valuable lessons in negotiation from Coles’ Tim Tams price rise stand off.
By Nicole Davidson* – CMA Learning Group
As a chocolate lover, when I saw an article in the Financial Review last year with the words ‘Tim Tams’ in the headline, I knew I had to read it. It turns out that this article led me down a very interesting line of investigation into the use of power in negotiations.
Over the past few years, there has been increasing criticism of our two major supermarket chains for the way they negotiate with suppliers. Both Coles and Woolworths have come under fire for their unconscionable conduct with suppliers.
Coles even received a $10 million fine in December 2014 for demanding “payments from suppliers to which it was not entitled, by threatening harm to the suppliers that did not comply with the demand”.
It was interesting then, that in the great Tim Tam scandal of 2015, we saw a case of Coles being pushed around by one of its suppliers. Tim Tams’ maker, Campbell Arnott’s, was seeking a price increase of up to 10 percent across 54 products.
Coles initially refused the increase on the basis that customers didn’t want to pay more. After four months of negotiations, Coles caved in, agreeing
to Campbell Arnott’s increased price on 44 products.
So why did Campbell Arnott’s succeed where other suppliers had failed?
Campbell Arnott’s had stronger alternatives
Negotiation 101 teaches us that we need to know our BATNA, or the Best Alternative to a Negotiated Agreement. That is, what will we do if we can’t come to an agreement with the party we are negotiating with?
For the average supplier, failure to agree to a supply contract with Coles will shut it out of a significant chunk of the Australian grocery market. Given that Coles and Woolworths represent almost 80 percent of that market, the number of options for where to sell a high volume of product are relatively limited.
For a product such as Tim Tams, the picture is different. Even though the same limitations in grocery outlets apply, the brand strength of Tim Tams means that customers may choose to follow the product to other grocers. While customers may be happy to substitute brands of shampoo, pasta, or
broccoli, they may be more likely to make an extra trip to Woolworths (or another store) to ensure a stock of Tim Tams in the cupboard.
So for Campbell Arnotts, while walking away from a deal with Coles would lock it out of almost half the market, it seems it had sufficient confidence in customer demand for the product that it was prepared to value its BATNA more strongly than Coles.
Campbell Armott’s alternatives hurt Coles
In Coles’ case, whether dealing with a small or large supplier, its BATNA may well be removing the product from its range and using the shelf space for other products.
The degree to which this meets Coles’ interests depends on the product. Where a supplier has a generic or less well known product, Coles may well
have access to a variety of other suppliers.
Customers may accept this substitution without question. There may be little, if any, impact on revenue, profit, or customer satisfaction. So for these products, Coles has a pretty strong BATNA.
In the case of Tim Tams, with its high brand value, it may be harder to restock with a product that generated similar revenue or profit.
On social media some customers said they would go so far as to take all their business to Woolworths if they couldn’t include Tim Tams in their weekly shop. Coles’ BATNA looked pretty bad from a customer satisfaction perspective.
Did Coles lose the negotiation?
In the end, Coles ended up agreeing to price rises on 44 of the 54 products in question. Ultimately, time will tell if that will impact its margin or if the increase will be passed straight through to customers.
Coles was smart in its public response to this negotiation though. It turned a ‘loss’ into a public relations victory. Whether by luck or design, the news of this negotiation delivered Coles significant positive feedback on social media. Far from the ACCC’s claims that Coles is a bully to its suppliers, social
media was flooded with support for Coles for standing up against a multi-national bully.
To wrap this up, I present you with my three top Tim Tam tips for negotiation:
1. Know your alternatives – what will happen if you don’t come to an agreement with your negotiating counterpart? Are you in a strong or weak position?
2. Know their alternatives – what will they do if don’t reach agreement? Are they in a strong or weak position?
3. If your alternatives are weak and theirs are strong, think about how you can improve your alternatives.
Are there other stakeholders involved who are relevant to improving your overall position?
This article first appeared in ARA’s The Retailer February edition.
*Nicole Davidson is a Senior Consultant at CMA Learning Group and can be contacted at email@example.com, or (03) 9613 0766.