Now, I’m a bit of a chocolate lover, so when I saw an article in the Financial Review recently with the words Tim Tam in the headline, I knew I had to read it. It turns out that this article lead 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 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% 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 than small suppliers
Negotiation 101 teaches us that we need to know our BATNA, or the Best Alternative to a Negotiated Agreement. That is, what would we do if we can’t come to an agreement with the party we are negotiating with?
For the average supplier to Coles, failure to agree 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% 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 limitation 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 them out of almost half the market, it seems they had sufficient confidence in customer demand for their product that they were prepared to value their BATNA more strongly than Coles.
Campbell Arnott’s alternatives hurt Coles’ interests
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 their high brand value, it may be harder to restock with a product that generated similar revenue or profit. We saw on social media that some customers 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.
So 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 their margin or if the increase will be passed straight through to customers.
Coles were smart in their public response to this negotiation though. They turned a “loss” into a public relations victory. Whether by luck or design, the news of this negotiation had 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 multinational bully.
So to wrap up this last post before Christmas, I present you with my three top Tim Tam tips for negotiation.
- 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?
- Know their alternatives – what will they do if don’t reach agreement. Are they in a strong or weak position?
- 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 is our last blog post for 2015. The team at CMA wish you all a very merry festive season and a successful, prosperous new year.
About the author: Nicole Davidson is a Senior Consultant and facilitates workshops across CMA’s full suite of programs, including Getting to Yes.