Channel Info Feature: How to ease the pain of the cost price increase

20 December 2016:

For the foreseeable future, the office supplies industry is facing a big challenge. The UK’s decision to ‘Brexit’ has left the value of the pound weakened to levels not seen since 1985. Making imports of office products sold in the UK cost more than usual.

We speak to Nick Wilson, CFO at Office Power who shares his advice on how independent dealers can ease the pain of cost price increases.

Examining the situation

The UK office supplies industry relies heavily on imports; from paper to ink, it’s predominantly manufactured overseas in Eastern Europe and the Far East. As a result of the devalued currency wholesalers purchasing office products in US Dollars and Euros will see an increase in the cost of goods. In essence, they are getting less for their money than they would have done previously.

The value of the currency looks set to remain under pressure due to the uncertainty of Brexit, therefore it is not possible for wholesalers to absorb these higher costs for an extended period of time. So the increases have been passed through to the dealer base.

The industry so far has experienced an increase of 5 – 10% on paper products and up to10 – 15% on EOS. These price rises are being felt across the industry at various levels of the supply chain in the UK.

Are some independent dealers seeing larger increases than others?

The impact of the cost price increases will be felt differently depending on the contractual agreements dealers have in place with their wholesaler. Some wholesalers may use this opportunity to also pass on other cost price increases (for example transport/employment costs).

Dealers who have partnered with Office Power have access to our wholesaler relationships and buying power. Therefore, the contractual agreements we have in place reduce the impact and risk of unexpected cost price rises for our dealer partners.

Mix and gap analysis to identify new growth areas

Mix and gap analysis is an important activity to carry out regularly throughout the year, however, when cost price increases occur it is even more important. If dealers are concerned about losing customers when they push through price increase, they should first analyse how much value these customers provide.

Do they have the full wallet spend of their customers or is that customer who the dealer considers to be valuable already buying products elsewhere? By using gap analysis data, dealers will have more time and clarity to create targeted strategies and embrace new methods to grow their customers and maintain (or improve) profitability.

Mark Rostock from Just Office explains how the Office Power gap analysis tools help him: “Based on the new data we have on our system we have identified that we have in excess of £47k as additional sales opportunity for this month alone.”

Pricing Strategies (long tail and short tail)

Dealers should use their back office system to set the right pricing strategies for their various customer segments. Often dealers are asked to quote last price paid, however if this continues over a number of years, dealers are at risk of eroding their margins and when they finally do pass on a cost price rise, their customer could be more resistant.

Our advice to dealers is to advise customers as soon as possible and start educating them on the reasons why they will experience a cost price increase. Customers will be aware of the increases seen on raw materials, for example the Marmite cost price rise was well publicised and makes this topic more understandable at this time.

Furthermore, dealers’ customers will likely be experiencing similar cost price rises in their industries too and in much the same way as you need to pass on the costs, they may well have had to do the same.

Variable cost model

As well as looking at pricing, mix and gap analysis, dealers should also consider moving to a variable cost model. This would allow them to reduce their fixed costs to a much smaller amount and give more flexibility in terms of finances when such issues like cost price increases occur. So for example, during the transition period, even if dealers need to reduce margins for some products during the transition, they can do so knowing that their business overall can remain profitable.

Cost price rises are not a time to sit back or attempt to ride out the storm. Dealers need to take action and be pro-active in putting together a strategy for their business that will help them continue to be successful.