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This week, we hear from Dmitry Sevalkin, Managing Director of Advantage Group Russia who speaks about COVID-19 and the impact it has had on the country.

Q1 - What impact has the pandemic had on relationships between retailers and suppliers in Russia?

The pandemic dramatically increased demand in selected categories such as cereals, pasta, eggs, meat, poultry, and hygiene products. In response to this, manufacturers quickly sold out their stocks and started delivering right from production. They increased the number of production shifts and utilized all their production equipment. For some of these manufacturers, it was the first time that they reached their actual maximum production capacities.

Despite these measures, most manufacturers could not satisfy all demand and were forced to decide how to allocate product distribution between accounts. In this situation, suppliers behaved somewhere along the spectrum between the following extremes.

  • Speculative – Revision of previously made agreements on assortment, promotions, prices, and volumes. In some cases, stopping or limiting delivery to some customers and redirecting delivery to more profitable customers.
  • Partnership – Honoring previously made agreements on promotions, prices, and volumes. Collaboratively working with the retailer to find temporary solutions such as: reducing assortment to minimize production changeovers, limiting geographical coverage, and changing delivery routes.

Typically, a speculative strategy led to tension and hostility between the retailer and the supplier. The partnership strategy typically led to strengthened relations, even though the manufacturer sacrificed short-term opportunities for a stronger long-term relationship.

Irrespective of whether commitments to pre-pandemic volumes of products could be met, retailers valued predictability of deliveries. In this respect, manufacturers demonstrated one of two models of behavior:

  • Open – Manufacturers payed a lot of attention to informing their retailer partners about problems and opportunities; proactively and sincerely communicating deadlines and volumes, and promptly responding to retailers’ requests.
  • Closed – Manufacturers avoided communication with their retailer partners around whether they would be meeting commitments, did not reply to retailers’ requests, and under-delivered with no warning.

Obviously, retailers preferred the open model. In exchange, retailers were also more open and shared more information related to off-take in stores, stock levels, and planned marketing activities.

Like manufacturers, retailers also had to choose between a speculative and partnership approach with their suppliers. For example, during the pandemic some retailers formally committed to previously agreed promotions but did not translate these discounts to shoppers.

Overall, in the categories with a major increase in demand, relations between retailers and manufacturers either greatly improved or greatly deteriorated.

At the same time, retailers were actively looking for alternative sources of products, including smaller local manufacturers. Some of these manufacturers had never previously received much attention from retailers and had a chance to put their products onto the shelves of some of the largest retail chains. Agreements, which before the pandemic could be under negotiation for months, were now being signed in less than three hours in some instances.

Q2 - How did retailers and suppliers adjust their ways of working during the pandemic?

During the pandemic, the personnel of many large retailers and suppliers switched to working from home. In general, this had a minimal impact on the quality of interactions between retailers and suppliers. In some companies the availability of personnel improved, while in other companies it became worse.

One challenge from people working from home was around information systems as companies had to provide remote access to various fragments of data while also ensuring data security. Most retailers and suppliers experienced delays in signing and exchanging paper documents. Companies with more advanced electronic document flows were in a better position.

Some off-line (“brick-and-mortar”) retailers slowed down activities related to new product introduction, the implementation of category management and supply management projects. On the contrary, online (e-commerce) retailers became faster in assortment management and supply chain development.

Retailers’ warehouses placed a priority on receiving goods in high demand categories, so other suppliers had to adjust. Concurrently, suppliers of imported goods suffered from disruptions in international supply chains related to the closure of some foreign production facilities and complications at border customs.

The above factors required frequent changes in forecasts, orders, and time of delivery. This led to more “manual” decisions and more frequent communication between retailers and suppliers. Commercial personnel from both sides got more involved in delivery issues. Both sides shared more information on sales, stock levels and forecasts.

During the pandemic, some companies gave more authority to their customer service personnel to allow a prompter response to the rapidly changing environment. People could deviate from established formal processes and take “shortcuts” to make things move faster. The ability to make fast decisions and the availability and responsiveness of personnel became attributes that were highly appreciated by the other party.

Over the course of the pandemic both sides relaxed requirements and became more flexible. This became evident in the waiving of penalties for under-delivery and not meeting minimum order requirements as well as in the willingness of both sides to accept delivery times that were not in the predefined schedule.

Q3 - Once the pandemic subsides, what will be some of the lasting changes on the Russian grocery industry?

1. Relationships 

  • Based on how the two sides behaved during the pandemic, future relations will either strengthen or become more limited. 
  • Retailers and manufacturers will be more willing to work from home and conduct remote video conference meetings. 

2. Pricing Decisions 

  • Retailers and suppliers will be involved in difficult negotiations over price increases if the price increase was delayed during the pandemic. Overall, they will have to choose between a drop in profitability and a diminishing market share. 
  • Retailers and suppliers will try to drive demand in the presence of declining shopper purchasing power. This may include a shift to the lower end of the assortment and a further increase of volume-on-deal in revenues. 

3. Smaller Manufacturers

  • Some smaller manufacturers will not survive the pandemic, so the market will see some consolidation. 
  • On the other hand, some smaller manufacturers who managed to get on the shelves of big retailers for the first time during the pandemic may remain there. 

4. Shifts in Channels  

  • Retailers and manufacturers will pay more attention to online retail. 
  • The shift of shopper traffic from hypermarkets to convenience stores, which happened during the pandemic, may partially persist after the pandemic, which will change the comparative importance of retailers for suppliers.