Minimising price rises: how to use contractual provisions to manage pricing up and down the supply chain

A number of brands and retailers including Next, Greggs and Cobra beer have all recently announced that they are increasing their prices. This is not a decision they will have taken lightly because of the negative publicity and the risk of pushing customers away in a highly competitive market.

Despite postponing this step for as long as possible to maintain customer loyalty, increases in the costs of staff, materials, manufacturing, energy and shipping all mean that retailers are now facing pressure to pass these escalating costs on to the consumer. Greggs, having previously chosen to absorb price rises like many retailers, has described its decision as being "very much a last resort". 

But price rises don't just affect consumers, the final price that they pay and where they choose to spend their money; price rises can also affect each stage of retailers' valuable supply chains and have the potential to destabilise them.

The threats of:

• Strained cashflow
• Poor stock levels
• Upstream business insolvency

are all very real concerns for any business in the supply chain which could cause swift and significant repercussions.

So, what can retailers do to protect themselves and keep trading?  It is increasingly important that retailers are agile and can source goods and services from multiple suppliers in the event that supply chain pressures affect product availability or prices become unviable.

We recommend implementing one or more of the following strategies to ensure flexibility in your supply chain:

Minimum quantity clauses and forecasting

Minimum spend obligations essentially bind you to a minimum order amount and this may conflict with your ability to source goods/materials elsewhere as you are committed to that particular supplier for certain products.

Where possible, do not agree to minimum spend obligations and instead consider the inclusion of a forecasting clause in your contract. Under such an arrangement, retailers can supply forecasts of their requirements for goods and materials which, in turn, allows the supplier to plan its sourcing and production schedule.  More regular communication and the flexibility to change volumes is likely to result in a more transparent arrangement and will minimise the risk of surplus unwanted products and wasted costs.  

Framework agreements

Retailers who seek to agree a framework arrangement at the outset of a supplier relationship will benefit from increased flexibility as each order constitutes its own separate supply contract. 

Operating in this way means retailers are not obliged to honour any minimum order quantity or spend but there is already a contractual framework in place for when they do wish to place orders.  This might not suit all retailers though because more flexibility can carry uncertainty – there is a risk that suppliers may not have sufficient stock if you require urgent fulfilment of orders. If you engage multiple suppliers using this arrangement then that risk can be mitigated.

Make use of price adjustment clauses

Supply contracts can provide for prices to be re-negotiated. These types of clauses usually provide for a periodic review of prices which allows fluctuating costs to be passed on or benefitted from throughout the rest of the chain. Agreeing a flexible price clause in any new supply contracts should enable retailers to share any cost savings with customers to maintain brand loyalty. We recommend that any price review only takes place annually, certainly no more frequently than that, for budgeting purposes. Also, certain price review clauses could result in either an upwards or a downwards change to reflect market conditions which clearly comes with additional risk – the exact position will depend on the wording in the relevant contract.

Ensure your termination provisions are clear

If a supplier relationship breaks down irretrievably, either due to poor performance or it is no longer commercially viable, retailers need to be able to walk away quickly with minimal consequences.

The most flexible option is the ability to end a contract by giving written notice. The contract will usually be specific regarding how much notice must be given; the shorter the better for retailers to offer maximum flexibility. Whilst a retailer will be responsible for the costs of goods or services up to the date of termination, there are unlikely to be any other financial consequences, although be aware of early termination fees if you're seeking to bring a fixed term contract to an end before the expiry of the term.

Where a supplier contract includes a price review mechanism, we recommend retailers seek to include specific wording which allows them to end the contract if they do not agree to price changes proposed by the supplier at the time of the price review to avoid the supplier being able to unilaterally increase prices during the contract term.

Next steps

We suggest incorporating some of the above approaches into any upcoming contract negotiations or renewals. Retailers may also wish to undertake a supplier audit to assess the flexibility of their existing contractual arrangements in order to ensure their supply chain can absorb the ongoing uncertainty with minimal disruption and negative financial impact.