Retailers and suppliers have long been locked into a fight for margin. But now discounters have changed the game for good, it’s time for a customer-focused approach that benefits everyone at the table.
UK retailers and suppliers have responded to declining grocery volumes by going on defence when they should be going on offence. They’ve long been adversaries in a fight for margin, but the new economic reality demands they become allies in a fight for volume.
Retailers and suppliers must refocus on the consumer – particularly on value perception and willingness to pay. It’s no longer enough for each side to think only about how to win a larger slice of the pie for itself. Both must now focus on growing the pie overall – and discovering which categories can do the heavy lifting.
A feud with a long history
The impetus for the long-running feud over margin is clear. While suppliers and retailers may generate a comparable rate of return on invested capital, suppliers generally have a bigger cushion to absorb cost increases, respond to competitive actions and weather dips in demand. This dynamic produces a predictable outcome: behaviour rooted in self-preservation, even to the point of public conflict.
In 2024, it was Carrefour versus PepsiCo. In 2022, it was Tesco versus Kraft Heinz, Rewe versus Mars and Edeka versus Coca-Cola. Every few years, the tension breaks into the open, a supplier or retailer walks and both sides eventually settle – yet the structural issue remains unresolved.
For three decades, retailers and suppliers have battled for share and margin. When there was enough growth to go around, that was a viable (if not optimal) course of action. But the economics are different now: the pie is shrinking. Declining volume creates a new kind of jeopardy – one neither suppliers nor retailers can escape alone.
The impetus for the long-running feud over margin is clear. While suppliers and retailers may generate a comparable rate of return on invested capital, suppliers generally have a bigger cushion to absorb cost increases, respond to competitive actions and weather dips in demand. This dynamic produces a predictable outcome: behaviour rooted in self-preservation, even to the point of public conflict.
In 2024, it was Rewe versus Mars, and Edeka versus Coca-Cola. Every few years, the tension breaks into the open, a supplier or retailer walks, and both sides eventually settle – yet the structural issue remains unresolved.
For three decades, retailers and suppliers have battled for share and margin. When there was enough growth to go around that was a viable (if not optimal) course of action. But the economics are different now: the pie is shrinking. Declining volume creates a new kind of jeopardy – one neither suppliers nor retailers can escape alone.
The discounter domino effect
Collaboration has long been a relatively tentative endeavour for retailers and suppliers – even though the need for closer partnership has been evident for many years. It should now be considered a business imperative.
Discounters have changed the game. With Aldi and Lidl winning on price alone, other retailers have responded by pushing their own label ranges. However, that own label growth has come straight out of branded volume, with every swap a lost sale for suppliers such as Nestlé, Unilever and PepsiCo.
Lower branded volume erodes scale, which affects retailers as well as suppliers. When manufacturers lose the capacity to invest in innovation, marketing and demand creation, the whole category weakens – and growth stalls. A flat or falling category hurts the retailer too, even if its own label numbers are up. Protecting share and margin in the short term breeds stagnation in the long term.
Retailers might believe every swap into own label is a win in their column, but that’s not always the case. In certain categories, especially those that act as value signposts, own label is margin-eroding. So too are suppliers’ efforts to stay competitive by offering smaller packs at lower price points.
With limited control over how their products are ultimately presented and marketed, suppliers can’t rebuild volume on their own. With limited control over what products come to market, retailers can’t rebuild volume on their own.
They need each other – now more than ever, because the industry landscape is so different from 30 years ago. A race to the bottom will have a winner, but it won’t be either of them. It will be the discounters.
What closer collaboration looks like
Traditional grocery retailers won’t be able to fully match the lockstep approach discounters have with manufacturers (a built-in advantage of their business model). But the following changes can help narrow the gap.
Eliminate the mystery – Most retailer-supplier relationships would benefit from greater candour. To invest in research and development, demand generation and new capacity, suppliers have to know where they stand. Unpredictable, transactional relationships stunt growth for both parties. Retailers that identify priority categories and strategically select long-term partners to help grow them will have an advantage over those that insist on going out to bid every year for the sake of negotiating leverage.
Deepen the connection – If a retailer and supplier are strategically significant to one another, engagement between them shouldn’t be limited to the buyer and the account manager. Each organisation should bring the full scope of its resources to the table: product development, sales, supply chain, marketing and merchandising. By pooling their cross-functional expertise, they can tackle the challenge of increasing volume in key categories far more effectively.
Unearth issues together – Unsparing assessments of fully loaded profitability are a must for any company. But when a retailer and supplier carry them out together, they gain an even clearer view of which SKUs make money and which erode margin. AI tools can help process the vast amounts of data involved, making these evaluations – including those on price and promo elasticity – faster and more affordable.
Provide greater visibility of the consumer – Retailers should consider how they can use their data to help suppliers create products that resonate more powerfully with customers. This doesn’t mean the end of data as a revenue stream. It means suppliers expected to grow critical categories alongside the retailer are better informed about what customers want. That guidance will supercharge design-to-value initiatives that benefit both retailer and supplier.
Partner on product innovation – When a retailer and supplier partner across functions, assess categories jointly and align on what matters most to priority customer segments, a far more advanced level of product innovation becomes possible. The trust this requires can be rewarded through exclusivity on the products developed, which enhances the brand’s reputation and drives footfall for the retailer.
Revisit artificial constraints – It’s not uncommon for retailers to have strict rules about which factories can be used to produce items bound for their stores and to require that those factories be used to supply them exclusively. Instead of holding tight to procedures designed to create leverage, retailers must prioritise the needs of customers. For example, what if removing self-serving supply chain constraints would lower costs? There would be tradeoffs for such a move, but that’s reason to carefully evaluate an option, not dismiss it.
In the modern competitive landscape, the customer has to be the focus. Anything different will make the business unsustainable in the long run.
The data on winning together
Establishing symbiotic relationships isn’t a concession. It’s better business. According to NIQ , three UK retailers (which it didn’t name) drove more than 70% of own label growth and more than 86% of branded growth in 2024. Own label and brands grew together – not one at the other’s expense. Remember: the customer experiences the store holistically, and satisfying them so they come back again and again is the ultimate goal.
The industry has spent 30 years asking who should take the hit – the retailer or the supplier. That’s the wrong question now. Volume can’t be rebuilt unilaterally. The retailers and suppliers that work that out together will find the growth everyone else is still chasing.
It’s far from simple to change partnership dynamics that have been decades in the making. At AlixPartners, we specialise in exactly the kind of transformation that will be needed for retailers and suppliers to get back to growth. Contact us to start a conversation.
For more on how to reverse declining volumes, explore AlixPartners’ new report: Unlocking Volume Growth.
This feature was written by Paul Martin, Andy Searle, Anna Del Mar and Julian Short from AlixPartners.
