Recently, I presented on the topic of challenging supplier cost increases in the food, drink and hospitality sector. While these businesses face particular pressures around margins, stock costs and supplier relationships, the lessons are relevant far beyond hospitality.
Almost every business relies on external suppliers for products, materials, equipment or other essential goods. When a supplier announces a price increase, the temptation can be to accept it as an unavoidable cost of doing business. But a supplier’s decision to increase its prices does not necessarily mean that you have to accept the increase.
Before agreeing to pay more, businesses should take a step back, review their contractual position and consider whether there is scope to challenge or negotiate the proposed increase.
1. Start with the contract
The first question should always be: What does the contract actually say?
A supplier may have a contractual right to increase its prices, but that right will generally depend on the terms agreed between the parties. Businesses should look carefully for provisions dealing with:
- Price review clauses setting out when and how prices can be reviewed.
- Index-linked increases tying price changes to a specified index.
- Annual uplift mechanisms allowing prices to increase at particular intervals.
- Cost pass-through clauses permitting certain increases in the supplier’s own costs to be passed on.
- Variation provisions governing changes to the contract.
- Notice requirements specifying how and when an increase must be communicated.
- Minimum contract periods and termination rights which may affect the options available if an increase is proposed.
If the contract contains a clear mechanism allowing a price increase, the supplier may be entitled to rely on it. However, the supplier must still comply with the relevant terms.
Equally, if there is no express provision permitting an increase, the supplier may not be entitled to impose one unilaterally.
This is why it is important to understand the contract before responding to a price increase. The fact that a supplier has announced a new price does not, by itself, establish that the change is contractually valid.
2. Look beyond the signed agreement
In practice, supplier relationships do not always operate solely according to the written contract.
Long-standing commercial relationships may involve historic price changes, informal agreements, negotiated discounts, correspondence and established ways of working. These can all be relevant when assessing the parties’ contractual position.
Businesses should therefore review the wider documentary history, including previous invoices, emails, quotations and communications about earlier price increases.
Depending on the circumstances, the parties’ conduct may support an argument that the contract has been varied, that a right has been waived, or that one party is prevented from relying strictly on particular contractual terms.
This does not mean that accepting an increase in the past automatically prevents a business from challenging a future one. Rather, the history of the relationship may be relevant and should not be overlooked.
3. Consider the legal position
There may also be statutory considerations, depending on the contract and the circumstances.
For example, the Sale of Goods Act 1979 may be relevant where a contract does not specify a price, as the law can imply a reasonable price in certain circumstances.
The Unfair Contract Terms Act 1977 may also be relevant, particularly where a supplier seeks to rely on its standard terms. Whether a unilateral price increase mechanism is enforceable will depend on the applicable legal framework, the wording of the contract and the particular facts.
The key point is that the wording and operation of a price adjustment clause matter. Businesses should not assume that every clause permitting a supplier to change its prices will necessarily operate exactly as the supplier suggests.
Where a significant increase is proposed, obtaining legal advice can help establish whether the supplier has the contractual right it claims to have.
4. Ask questions before accepting the increase
Even where a supplier has a contractual right to increase its prices, there may still be room for a commercial discussion.
Rather than immediately accepting the new price, ask the supplier some straightforward questions:
- What is the reason for the increase?
- Which specific costs have risen?
- How has the increase been calculated?
- Is it temporary or permanent?
- Is the same increase being applied to all customers?
- Can the increase be phased in, reduced or delayed?
These questions can help establish whether the proposed increase is justified and whether there is scope for a different outcome.
It is also worth benchmarking the market and obtaining alternative quotations. Understanding what other suppliers are charging can strengthen your negotiating position and help you assess whether the proposed increase is commercially reasonable.
Of course, the aim is not necessarily to reject every increase. Suppliers face genuine cost pressures too, and maintaining a productive relationship may be in everyone’s interests.
The objective is to make an informed decision rather than simply accepting a higher cost without question.
5. Weigh up the cost of switching
Changing suppliers can be an effective way to challenge an increase, but it is not always the best option.
A cheaper alternative may come with different product specifications, quality issues, delivery delays, minimum order requirements or additional transition costs. There may also be contractual restrictions or notice periods to consider before a business can move elsewhere.
The real question is whether the proposed increase makes the existing arrangement commercially unviable when compared with the available alternatives.
For some businesses, negotiating a smaller increase or securing better terms may be preferable to switching. For others, the increase may provide a good reason to reconsider the supplier relationship altogether.
Each situation needs to be assessed on its own merits.
6. Prevention is better than negotiation
One of the most useful lessons is that supplier price increases should be considered when contracts are first negotiated, not just when an increase arrives.
Where possible, businesses should seek clear contractual wording covering how prices can change, when reviews can take place, what evidence may be required to justify an increase and what notice must be given.
The more transparent and specific the mechanism, the less room there may be for disagreement later.
Businesses should also understand their termination rights and consider whether they have sufficient flexibility to move to another supplier if the relationship becomes commercially unsustainable.
These steps are particularly important where a business is entering into a long-term agreement or becoming heavily dependent on a particular supplier.
The wider lesson for business
Although my recent presentation focused on the food, drink and hospitality sector, the underlying principles apply to businesses across almost every industry.
Whether you are purchasing food and beverages, raw materials, packaging, components, equipment or other products essential to your operations, supplier price increases can have a direct impact on profitability.
The answer is not to challenge every increase automatically. It is to understand your contractual rights, examine the evidence, consider the commercial realities and make a deliberate decision about how to respond.
Before accepting your next supplier price increase, take the time to check the contract, ask questions and consider your options. A little scrutiny could help protect your margins, improve your negotiating position and ensure that any additional cost is one your business genuinely needs to accept.
If your business has received a significant supplier price increase and you are unsure whether it can be challenged, reviewing the contract and the circumstances surrounding the increase is a sensible place to start.