Are PMPs helping or hurting wholesale?

PMPs

The benefits to the trade of pricemarked packs (PMPs) seem like an open-and-shut case. Him! research, for example, shows that 83% of retailers say that PMPs sell faster in their stores than the equivalent plain packs.

But, as wholesalers well know, it’s not all sweetness and light with PMPs. Amid a maelstrom of challenges, the lack of decent shared margin on certain products is one of the key problems wholesalers say that they face. “Suppliers are squeezing the margin and it’s us who take the hit,” one wholesaler, who does not want to be named, says. “Manufacturers are trying to profit on the back of our woes.”

Philip Jenkins, managing director of Sugro, notes: “Creating a price ceiling with PMPs has proven to be successful in volume terms, but suppliers seem to have a fixation on PMPs as a tool, creating the impression that they wish to control the market through pricing.”

Others in the sector claim that they are ‘being forced down the PMP route’ by suppliers, with plain pack alternatives reportedly not being made available on some products. Many wholesalers, though, claim the bigger issue is that PMP price points don’t help c-stores match consumers’ changing perceptions of value, shaped by grocery staples often being heavily reduced on promotion at supermarkets, and that suppliers can be ‘too slow’ in changing the price point on PMPs. This situation seems damaging for all parties.

“I think the industry conversation around shared margins on PMPs has been too superficial,” suggests Trystan Farnworth, commercial director for wholesale at Britvic, from the supplier side of the fence. “This means the debate in reality is going nowhere, and the topic is therefore developing an air of Groundhog Day about it. This is in no-one’s interest, and it’s imperative that the debate moves away from soundbites to a more granular level.”

In an attempt to open up a dialogue that will help remedy the situation, Better Wholesaling approached 40 of the industry’s leading PMP suppliers. Most were unwilling to get involved in the debate or wanted to focus on studies showing the extent to which consumers value PMPs. While certainly warranting attention and confirming that wholesalers need to carry PMPs, only a handful of those approached were keen to tackle the problem head on.

Working backwards

What do leading suppliers make of accusations that the shared margin on offer on PMPs is hitting wholesalers in the pocket? Jonathan Hunt, senior channel manager for wholesale at Kellogg’s, says: “With the introduction of things such as the National Living Wage, if the margins on PMPs have remained constant, then there will inevitably have been a squeeze, at the same time as suppliers and retailers are equally feeling margin pressure. By speaking to wholesalers and retailers, visiting depots, and studying promotional leaflets, you get a good understanding of which margins can be made across respective categories. You then know the benchmark of where you need to be to drive the category forward.”

Andy Topham, off-trade wholesale account controller at AB InBev, says the alcohol giant strives to ensure that its PMPs reflect the potential for reasonable margin throughout the wholesale supply chain. But he cautions: “I would stress that it all starts with the consumer. You need to work with consumer insight backwards, looking at what they want and what they’re willing to pay, then moving onto retailers, then wholesalers, then us – understanding what potential margins are looked for at each stage.

“Key to this approach is our ability to be flexible with pack formats and promotional strategies. We recognise what doesn’t work and are willing to change to provide better deals that meet consumer shopper missions, and thus, perform better for retailers and increase opportunity for our wholesalers. At times, in promotional strategies, we can also promote more heavily to retailers to allow them to do a ‘cross off deal’ – adding a promo to a PMP that is already seen as a promotion to consumers. This helps maintain the same level of shared margin.”

Topham adds: “The main thing is managing three pools of margin that are equitable: our own margin, with consideration for duty, cost base, and inflation; a competitive wholesaler margin; and a good margin for retailers who need to provide a competitive price on-shelf for consumers – while having to deal with other external pressures like minimum wage rises.”

Stuart Graham, convenience and impulse director at Pladis, claims that the biscuit giant works with a “standard wholesale net price on all our brands”. He adds: “We set this
to offer a shared percentage margin that enables both the wholesaler and retailer
to make a healthy profit.”

Pladis is also investing in wholesaler promotional programmes that offer its brands to independent retailers at what the company says are ‘attractive margins’.

Graham says: “The margin pressures for retailers and wholesalers are immense, and we take our responsibility in driving category growth seriously. Recently, we relaunched our top-selling McVitie’s chocolate biscuit range in a revised PMP format, reducing the RRP from £1.75 to £1.50. This initiative offers a one percentage point improvement in margin to the wholesaler and a competitive headline price to the retailer, driving better base sales. It is a win-win solution for all, and a huge step forward in alleviating some of the pressures retailers and wholesalers are facing on margin. In addition to this, we also launched an exclusive wholesaler case size containing three free packs.

“These two initiatives have been positively received by our wholesale customers and our ambassador retailers.”

The value of warm beer

Farnworth notes that Britvic is looking to engage wholesalers and retailers in its PMP decision-making process in a number of ways. “In its most informal way, I personally make a point of seeking the views of the retailer when out on the depot floor or in-store to gauge general sentiment,” he says. “In my experience, the best decisions come from listening to the consumer and internal and external category expertise. If one piece is missing from that equation, the decision often ends up being sub-optimal.”

Pladis’ Graham adds: “We have regular conversations with wholesalers and are keen to know whether our products are margin additive. It’s a two-way conversation – after all, we all have to survive challenging market conditions and ultimately, we all want to grow margin.”

Meanwhile, Kellogg’s is just about to relaunch the PMPs on its core cereal range, and claims this will show an increase in shared margin. Hunt says wholesaler feedback played its part in helping Kellogg’s develop its new PMP proposal.

Hunt notes: “Changing all the PMPs across a portfolio takes time and significant financial modelling to ensure wins for the supplier, wholesaler, retailer and not forgetting the consumer. Invariably, changing the price point will have a knock-on effect with the promotional plan, which would need remodelling, and pack sizes may also change as part of a changing price point. All of this takes a significant amount of time – once you change, you need to be confident that you’re making the right decisions, because getting it wrong could be disastrous for a supplier.”

Pladis’ Graham says: “It’s not something that can be switched on overnight like the big grocery stores, who can use shelf-edge labelling, change their pricing overnight and flex to changing market conditions.

“We chose to fast-track and invest in a project this year on our top-selling McVitie’s chocolate digestive PMP range to reduce the headline price. The project was managed by a cross-functional team, including experts in the channel. It takes a great deal of management from suppliers and wholesale to run down stock and packaging, and to ensure that we do not affect availability to our customers and shoppers.”

Farnworth, meanwhile, doesn’t believe that it’s a question of speed, more of perspective: “The definition of fair value or market value is increasingly ambiguous in a market that is fragmenting at a rate of knots. A warm tin of beer poorly displayed on an ambient shelf has low value. A better-displayed, warm tin has greater value. A chilled tin has even greater value. The same liquid in a glass unit in a pub has a higher value again. A perfectly-served draught beer in a premium, on-premises outlet on a hot day when every other outlet is closed has a very high value! It’s all relative. Even in the same sector, we’re seeing retailers pursuing increasingly diverging pricing and promotional strategies in a way they never did before. This means that the benchmark for a ‘fair’ PMP is not as easy to judge any more.

“The issue isn’t the operational speed to change a PMP – most manufacturers can turn that around within a few weeks. It’s more a case of the whole pricing and promotional landscape changing beyond recognition. Therefore, the role of PMPs within this – including what level they should be set at – means that some suppliers’ strategies will need a rethink. Regrettably, there are no easy answers!”

Plain pack demand rise

Despite the helpful work being done by some suppliers to support wholesalers, Martin Williams, chairman of the Federation of Wholesale Distributors (FWD), says that the FWD is eager to see an improvement in shared margins, transparent pricing, clear long-term business plans, and evidence of suppliers’ own investment in the channel. As for what next year has in store for the market and PMPs, Williams expects to see years of food price deflation come to an end, which “changes the outlook for PMPs significantly”.

He adds: “While retailers have been willing to sell below the PMP price point in a deflationary market, if prices rise, they are unable to protect their profit on return if they’re stuck with a printed price on the product. PMPs have been tremendously popular, but we expect to see more demand for plain packs as price stability becomes less reliable over the next couple of years.

“With additional costs such as the National Living Wage and pension auto-enrolment, wholesalers will also resist any squeeze on their own margin and again, if the mark-up on PMPs isn’t right, they will start to demand larger volumes of unmarked packs.”

Britvic’s Farnworth believes that rather than damning PMPs outright, wholesalers need to target their conversations towards lower-margin categories and manufacturers, and ensure any discussions they have with suppliers are focused on overall margin chain profitability, as “percentage margin is only one part of the equation of what’s important to enable a sustainable level of profitability for all.”

At present, 90% of the volume Kellogg’s sells through wholesale is PMPs. But Hunt advises: “Speak to your respective suppliers and continue to follow the basic principles of wholesaling: ensuring that you are encouraging retailers to stock the right range, maintaining availability, and maximising off-shelf feature.

“If the PMP doesn’t offer a sufficient margin, take it up with the respective supplier, or consider the non-PMP alternative.”

What are your views on the topic? Have your say on the Better Wholesaling LinkedIn group, or share your views in the comment section below.

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