What do Retail Suppliers need to know (& DO) about Special Buys?

In this episode of The Savvy Supplier,  Boyd Evert & Al Frank discuss the complexities of special buys in retail, including their purposes, potential pitfalls, and the importance of price protection. They delve into the challenges suppliers face with pricing discrepancies, the necessity of clear communication, and effective management of returns. The conversation emphasizes actionable strategies for suppliers to navigate these challenges and ensure better outcomes in their retail partnerships.

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Transcript

Transcript

Special buys sounds great, right? Well, not necessarily. The possible pitfalls of those one-time buys on this episode of the Savvy Supplier.

Welcome into the Savvy Supplier and thanks for joining us. Our goal is to save you time and money. I'm Al Frank and as always, Boyd Evert, CEO and co-founder of HRG is here to share some really important things that suppliers need to know. So let's get right to it, shall we? Void, what's the purpose of one-time purchases, aka special buys? Special buys serve several different purposes. First of all,

new store allowances. Most retailers expect you to help shoulder some of the costs in opening a new facility. So typically they'll ask for five or 10 % off on the initial buy to stock the shelves. And so typically when you see a new store open, pretty much the product that is on the shelves has received a discount and usually a discount comes in the form of a special buy.

Other special buys are when you're pushing in merchandise for a seasonal category. It could be lawn and garden. It could be holiday items. There's other cases where, for instance, you may be moving to a new packaging and most, most suppliers want to pick a point in time and launch that new product and packaging. And it could be a new improved package. And so they'll push out that inventory out to the stores.

give them the special buy to take on that merchandise with the older product and packaging. And so those are just a few that come to mind in the area of special buys. So there are some positive things about special buys, but are there any pitfalls that suppliers need to sidestep? Yes, of course. This is retailing, right? Nothing happens. Anytime there's change, tell people, anytime there's change, there's always going to be an opportunity for mistakes. So for example,

(02:08.43)

When you push in merchandise, let's say that you're moving to a new product and package, you push in that merchandise. And then when it comes time to launch that new product or new packaging, the retailer sitting on all that inventory. And so in some cases they'll end up wanting to reduce the cost on that merchandise. so then you're, buying the cost of inventory down. One area of impact would be price protection. So let's say you push in a bunch of merchandise with the

previous packaging and now the supplier wants to roll out the new product, new packaging, and they're sitting on this inventory. typically when you do markdowns from the old packaging, you'll provide price protection that basically you're buying the cost of inventory down. And so when you do that, the average cost of inventory doesn't match with what actually was sold in because you're commingling the regular cost.

with the special buy cost. Take us a little deeper into that. What is price protection? How would you define it? And why do retailers like it so much? Right. Good point. So price protection is essentially a means by which a supplier can push out a new lower cost to the consumer and the retailer lowers the retail at the same time you're lowering the cost. Being a very competitive marketplace, right? Everyone's

Everyone has a direct or indirect competitor. And when you, when the marketplace is moving and your competitors, lowering their price on their product, you want to match that because you don't want to lose market share. And the only way to get a retailer to take that new lower cost is if you take all of their inventory and buy down the cost difference. let's say that you've sold in a product for $2 and now you're, selling it for $1 75. So let's 25 cent difference.

you would take the total amount of inventory that's in the stores and the warehouses, as well as what's in transit between your facility and the distribution center or warehouse. And then that becomes your in transits. And then you have your on hand, your inventory, and you take that and you multiply it by 25 cents and that's your price protection. And so then, then the retailer can act on that new lower retail.

(04:27)

And that keeps you competitive retailers like it because they can continue to buy something. Let's say in electronics, there's a new model coming. Some retailers, this is back in the sixties and seventies, would be a little hesitant because they would, why would I want to be heavy in inventory with the old model? And so right around that period of time in the, in the 1960s, I believe they came out with price protection as a means by which to

to ensure that you're going to continue to sell through your existing inventory. And then when your new inventory comes in, your new model, whatever, you can just sell that in as easily. It's easy and seamless. Well, sounds good for the retailer. I could see why they would like this. But for the supplier, what could possibly go wrong? OK, so that's a good question. One of the things that can go wrong is price protection is calculated on the system cost.

And so in that scenario of, say you're going from $2 to 175, what happens if you threw in some special buys in there at, say, 185 and maybe half of your inventory, it was bought at one eight purchase at 185. Well, now your average cost of inventory is somewhere between 185 and $2. Right. So, and so then what happens is you're paying

more for price protection than you should. And so because most retailers when they're calculating price protection through a co-op or rebate, they're not looking at average cost of inventory. They're just looking at this is what the system says the cost is, and this is how many items we have, and this is what you owe us. And so that's one of the pitfalls of having price protection involved when you have a special buy. Thanks for the warning.

We might need the warning sirens in the background on this episode. I'm not sure. Any other traps that the supplier might trip as they walk through these deep woods? Yeah, there's another one that comes to mind is same day pricing. And so you'll have these internal auditors as well as third party auditors come in and look at the transactions after everything's been paid and received and sold. And what they'll do is they'll go back and they'll look at the price of the item.

(06:47)

And sometimes there's maybe no paper trail, their email's not there, correspondence. And so they're really not sure what was negotiated, but the auditor will look and say there was two orders placed, two large orders. One was fulfillment and one was a special buy. And they're at two different prices. And the prejudice that's involved when auditing on behalf of a retailer is the lower cost is usually the correct cost.

And so what will happen is you do a special buy and you're doing them a favor for this special buy. But then the auditor will come back and see these other purchases and will usually bring it to the attention of the buyer and say, should you be paying two different prices for the same item on the same day? And you're no, you're right. They owe me the money. But see, it doesn't stop there. It gets worse. There's weight, there's more. You can do that by purchase order date. So the order, date is ordered.

the date it's shipped, the date it's invoiced, and the dates received. And so that same day pricing can take several different shapes and forms. And not only that, you end up having similar or liked items. So you'll have sometimes two different items that are very similar in traits and perhaps behave similarly that they're in the same family of items and same price point. Some will get the lower cost and others won't, and some...

Sometimes you'll have somebody is backing into what the correct cost should be. So you can see how this slowly propagates across the entire portfolio for the retailer. know, I'm glad you're a great trail guide for people. would you say is some actionable advice for suppliers as they navigate all these challenges that you've mentioned today? So let me put my pith helmet on here and look at the map. So what I see ahead is

First of all, you want to have clear communication. You want to make sure that you're clearly articulating what you are doing. But a lot of times people don't think about, what am I not doing? Right? And so it's just as important to say what you're not doing as much as you are what you are doing. As I mentioned earlier about the similar or like items that sometimes the auditor may look at that and say, well, you forgot to include this item or that item. So

09:08)

You say these items, not those items, if it's in the same family. And then the second part, and this is just as important as the first, is you need to save and archive those emails, those communication, because if you don't have them, all the best practices in the world, they're not going to help you if you don't have a paper trail. So I always encourage suppliers to make sure that they have a systematic way to archive this. Sometimes people use a share drive and copy out their emails, but you really need something that's

that's working at the firewall and that's what retailers use. I'm recommending to suppliers exactly what the retailers are doing internally is they're usually capturing email from to and from their suppliers and handing it off to the auditors. Well, suppliers should do the same thing. They should trap all of those communications at their firewall with all of their customers and be able to provide it to their internal group and any third parties that they use.

Interesting perspective on that because you've been on both sides of that table, right? Yes, sir. Yes, sir I have and and it's it's interesting to see when I was on the other side or certain Yeah, that makes sense that two different, you know prices on the same that this doesn't make any sense Well when I when I moved over to this side at 2010, I started to realize others There's the other there's the Paul Harvey rest of the story. Okay, so I started to see that that that's

That's what the purpose or the function of that special buy is. It's not that they're saying on this day, everything we sell is at that lower price. there's one more thing, sir. one of the same one more thing. Yeah. One other area of concern that comes to mind is the area of returns. So some suppliers will at the beginning of a season, let's say we're in a seasonal category, maybe fans or air conditioners and such where they'll

push the initial fulfillment to fill the spots on the shelves or on the floor will come from import side. And typically that's a lower cost than it would be on the domestic side. So you push in the initial amount of inventory into the stores and then as they sell through those items and need to place fulfillment orders, refill orders, then you will end up

 (11:28)

getting the domestic side, which is going to be slightly higher, which what happens is after they do the initial push of inventory, the system cost is then adjusted to the new higher domestic cost for those fulfillment orders. What happens then is typically your returns are towards the end of the season, right? When you launch a new product, even though you're offering a defective allowance, you're not getting returns that usually typically the first day of sales. Usually they trail a few weeks or even months.

So it's the same thing in any category. So what you end up seeing is the returns come in are heavily weighted towards the higher cost. some cases, one of our, one of our suppliers or one of our clients typically would sell in about two thirds of the merchandise would come in from import and maybe the last third were coming off of domestic, but the returns were coming in around three fourths were at the domestic costs and only

One quarter was the import price. So what we did is we went back through and had to true up the whole season showing that really if we're going to manage these returns and mirror the proportion to the sell through, we created what's called a rebuild. So we basically put together a bill for the retailer saying that you charged us more for these returns than was due.

And usually those are in the mid to high six figures for some of our clients and in which case the retailer on every occasion we've presented it has repaid it. for those of you who do have some seasonality you need to track the proportion of fulfillment that's happening at the store level. So you make sure that when those returns come through, you're not paying the higher return price.

for something that was sold in at the lower import price. Boyd, you've done it again. You've shared some great valuable insights for our suppliers today. And we have much more help to offer retail suppliers at two different websites, SavvySupplierPodcast.com and HRG-Audit.com. Both of those great places, websites that are filled with great info for retail suppliers.

(13:53)

Both sites also provide ways to contact us if you want to get some help for your business, especially when it comes to managing your deductions. HRG has a team of wise, experienced auditors who would love to help you. Also, if you have a question for us or if you would like to suggest a topic for an upcoming podcast, we'd love to hear from you. Our wish for you is this, wiser decisions, fewer deductions. See you next time on The Savvy Supplier.