A supply contract is the way forward
Mike Matthews, Associate
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So you have finally secured the deal with the large retailer to stock your food products. It will be plain sailing from now – massive orders, secure cash flow and national exposure for your brand. Right? Not necessarily, and in fact for most businesses, securing the deal is just the first step in a very important process.
Whilst having a deal is good news, producers need to make sure that their business is protected when dealing with larger retailers. This is particularly important for smaller producers, but just as critical for large food businesses where investment will often have to be made to meet expected demand.
A supply contract is the way forward. This is a document that sets out your relationship with the retailer and you will work together and importantly, it protects your business.
Many retailers will have a standard supply contract, but you need to make sure that it works for you and protects your business, so be prepared to negotiate!
What can be covered in a supply contract?
The supply contract covers all the key aspects of how you will supply your product to the retailer. Essentially you need to think about what could go wrong and prepare for it. It can cover:
Price: What price are you offering to the retailer and for how long is this fixed? When will the price be reviewed and under what circumstances can this take place? If you rely on a major ingredient, what happens if the price of that ingredient doubles and affects your costs of production? Is the price sales-volume dependant and what happens if sales are not as expected – will you be expected to drop your price?
Your freedom to sell elsewhere: Some supply contracts have exclusivity agreements built in to them, i.e. they restrict sales of the product through one retailer either indefinitely or for a period of time. Be careful when entering into such agreements – whilst they may open the doors to greater promotion and an increased price by the retailer, they may also restrict your business expansion, so think before you sign. An important recent development to consider is whether you will be able to sell your products directly from your website at the same time as it is in store - you will make a much higher profit selling direct and you don't necessarily want to reduce your income for the sake of the retailer.
Notice: How much notice does the supplier have to give you to change the terms of supply, and how much do you have to give the retailer? This is very important as it affects production planning, cash flow and logistics. You may have different notice periods for price and volume of orders, but the important aspect is that they are part of the contract. You also need to include a termination notice – how much notice each of you need to give to terminate the contract altogether should things not work out.
Payment: When will you issue invoices and what are your payment terms? Often larger retailers have their own payment terms, but you need to make sure it is something that works for your business. You also need to state what you will do if you don’t get paid on time.
Quality: Who will decide whether a product is of the required quality? When will samples be taken and what happens if the product falls below an agreed standard? Who pays for the collection of rejected products and how will this affect future orders?
Logistics: How, where and when will products be delivered? Most large retailers have regional distribution centres and specific carton sizes. You need to consider how these impact on your costs.
This is just a sample of the areas that can be covered in a supply contract. As with all documentation, it pays to seek legal advice from a sector specialist and if you have any questions please speak to one of our Food team . The work you put into getting the contact right now will not only protect your business, but hopefully put you in a position ready for further growth.