WHY HARMONISATION OF TRADE TERMS AND CONDITIONS IS IMPORTANT TO A GLOBAL PRICING STRATEGY AND HOW YOU DO IT

Craig MacDonald, Managing Partner, Deeb MacDonald & Associates, LLC., USA

Scope of Global Pricing Strategy. The wide variations in trade terms applied by manufacturers and retailers in different regions have become more critical as retailing has developed into a global sector. Addressing such disparities is not straightforward since trade terms are determined by a number of factors, such as logistics and regulations. For global manufacturers, the ability to establish local trade terms is essential to operate effectively. However, to convince retailers that these are within an acceptable range, they must have the "visibility" to understand exactly which factors are involved and how.

Trade Terms and Conditions. The complexity and inconsistency of trade terms has been a source of both inefficiency and conflict in the retail business. A manufacturer may offer a retailer numerous incentives such as a 2% rebate on the invoice for payment within seven days or a bonus for a prominent position in the store. Intense competition in local markets has seen such terms multiply, with many broad "conditions" being changed into obligatory terms.

Current landscape. On the manufacturer side, some companies have moved to harmonise their trade terms, some have attempted to preserve local flexibility, while others have ignored the issue. The simple fact is that the problem will not go away and manufacturers will have to invest in IT systems and training to address it. Among retailers, frustration is growing at variations in terms, with some operators demanding harmonisation. In the short term, the situation will get worse, with certain companies exploiting it and others losing out.

Influencing factors. Four key factors will influence the issue of terms in the future. Firstly, consolidation, which will give rise to large groups seeking simplified rules in order to support growth. Technology will help these big players centralise data and eliminate disparities. Secondly, governments will have a major bearing through regulation but any impact should be clear and communicable to consumers. Thirdly, the rise of common currencies such as the dollar and the euro will make harmonisation of terms simpler for companies. Finally, the pressure to sustain growth and generate strong but transparent financial results will make efficient trade practices critical.

Why harmonise? For global manufacturers, the main benefits are greater efficiency and competitiveness vis-ˆ-vis local rivals. For retailers, there is the prospect of greater consistency, visibility and simplification. Both parties should also enjoy higher profits in the context of a long-term relationship based on trust. Although there are certain costs and risks involved in changing approach, failure to move in this direction could lead to a significant loss of business through inefficiencies and a continued adversarial relationship with partners.

Critical success factors for implementation. Both manufacturers and retailers will require full support internally on this issue, backed up by investment in systems and training. To get the execution right, companies will have to develop clear strategic goals if the changes are to be followed through.

What are the business benefits? In summary, manufacturers should gain a competitive advantage from a simplified business process and a long-term business relationship. Retailers will enjoy a similar competitive edge, using the simpler, more stable supplier relationship to support expansion.

Q&A
Asked how harmonisation of trade terms could be compatible with a consumer-driven price strategy, Craig McDonald emphasised that it was up to the retailer to set the final price. However, manufacturers needed to be able to explain a proposed buying price in relation to production costs and trade terms. The aim is thus to establish a clear and coherent price policy at the negotiations stage, which can then be adapted according to specific marketing needs. In practice, the retailer's use of trade terms will depend significantly on the regulatory environment, he added.