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Negotiating in an inflationary environment

When it comes to manufacturer versus retailer negotiations, it is safe to say that no one currently negotiating has experienced such market conditions. Most people were too young to play any significant role in negotiations or were not even alive since such inflationary levels were seen in the 1980s when inflation reached levels of 15% or higher.

The Commercialiser is supporting many companies to achieve their commercial and negotiation objectives in the current inflationary environment - here are a few occurrences that we are seeing in the market and what we are using to support our clients during supplier versus retailer negotiations across product categories.

It's a new game, throw your negotiation playbook out of the window, craft new solutions

Many negotiators we work with tell us "but this is what we typically do", "this is what we did last year" - referring to the usual give and take concession/conditional-trading choreography. We don't care what you did last year or over the last ten. If you act and operate as you operated last year you will dent your company's EBIT by 10-12% at least, which for some public businesses may mean profit warnings, or for private businesses this may mean mass redundancies and even bankruptcy.

You are playing a game never played before by anyone in your chain of command, including the CEO. It is your responsibility to think creatively and find solutions you've never thought of before.

Step out of your comfort zone, bring solutions to the table rather than problems and you will be rewarded by your business after the storm has passed.

Do not anchor yourself mentally to your historical negotiation targets

There is a level of fear that you can immediately perceive and breathe in the negotiation room when negotiators need to prepare themselves to negotiate with the country's largest retailers at a double-digit inflation mark. Most people perceive this to be an insurmountable challenge as in previous years they would negotiate at the 1-3% mark.

We negotiate often in markets where offers for a commodity or an asset can suddenly increase, even on a weekly basis, to 300-500% of their normal levels. This allows us to stay grounded and have no anchored negotiation level or magnitude. Therefore, be comfortable with stepping out of your routine working patterns.

The fact that this time you are trying to negotiate an inflation figure 5 to 20 times higher does not mean it will be 5 to 20 times more difficult. Indeed, it may be even easier as market conditions are really evident - this was seldom the case in the past and complex arguments had to be crafted to justify inflation. Now anyone just needs to open any newspaper to understand the tectonic shift we are all experiencing.

You are there to protect your company's profits or else you will damage the business that pays for your salary

Some front-line negotiators feel surprisingly guilty when negotiating double or triple-digit inflation figures. Some inherently believe this may be unfair towards their counterparties or the consumer. This is typically because they don't understand their company's P&L, unit economics, supply chain dynamics, and overall economic conditions.

We recommend to the businesses we support to expose their front-line negotiators to the buy-side of their own business to really help them understand the challenges that they themselves are facing in finding raw materials, supply chain disruptions, and price increases across the board.

Show your negotiators last month's increased energy bill in your manufacturing plant - show them how profits will be squeezed, putting the company at risk if they don't achieve an objective which, ultimately, is merely there to support the company to continue serving its customers with products they love.

Adopt a small business mentality, no matter how large your multi-billion dollar corporation is. We are all controlled by an equation: Profits = Revenue - Cost. If negotiators understand the financial dynamics of your business, they will fully understand the dynamics at hand and increase their chances of wholeheartedly embracing the mission.

This current inflationary environment is not a corporate strategy to increase company profits - it's an economic Tsunami that is bigger than any of us - governments, the Federal Reserve, IMF, and other central banks have not been yet able to stop it - despite trying really hard. Tackle it appropriately or you'll drown in it.

Be empathetic towards your counter-party but firm to protect your interests

Protecting your interests doesn't mean you need to be insensitive to your counterparty. They have, just like yourself, their own profitability and margin problems.

William Ury, once said in his book 'Getting to Yes', "tough on the issues, warm on the people". There's no more appropriate time to do that than now. Negotiators on the other side might be desperate too and, if frightened, might put theirs and your business in a lose-lose scenario where orders stop. However, this in itself should not make you afraid, when armed with a plan for this probable occurrence well in advance,

Your counterparty is afraid of losing customers to competitors if they decide to follow your price increase suggestion and if they decide not to increase and hang on to low prices to attract customers thanks to your great product. they will sell at below inflation level prices, they are deciding to erode their trade margin, which, makes their business unprofitable. They are often between a rock and hard place themselves - not knowing how consumers will react to their price movements in this new inflationary environment.

It is important to be empathetic, understand, and care about their non-tactical concerns - you may dismiss tactical ones for what they are, negotiating tactics - and, equally, explain how this price increase is inevitable. It isn't the "IF" or the "HOW MUCH" that must be discussed, it's the "HOW" that you may signal openness for discussion.

Plan to succeed, prepare for the worst

Be prepared to lose revenue when you push out your double-digit price increases. Not only as a result of distributors blocking market access but as a result of consumers deciding to switch to private label alternatives.

As a CEO or Commercial Director, are you prepared to take that risk? There is no right or wrong, just make sure you incorporate any occurrences into your negotiation plan and don't switch strategy to suddenly capitulating on all fronts as a knee-jerk reaction to protect revenues because you missed a monthly revenue target. Any such action will make you lose credibility and hinder any future negotiations.

Enjoy the opportunity and responsibility you have been given

When inflation levels return to 1-2% per year in several months or in a few year's time, you will look back at those experiences, and instead of remembering the anxiety you faced, you will remember the fantastic opportunity and historical responsibility you were given to negotiate in such a cataclysmic environment. You will recount over the rest of your career to new recruits and new negotiators how you were fighting in the trenches to defend your company's viability and how you succeeded in doing so, enduring pressure, discomfort, and abnormal inflationary levels while keeping a cool head.

Try and enjoy this process in the present if you can, get excited by the opportunity that you have to significantly impact your business rather than being afraid of what could go wrong - you may find negotiations more rewarding and a renewed sense of responsibility and purpose.

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