Retailers aiming to pass on pain down the chain?

News in yesterday's FT that Retailers are aiming to pass on pain down the chain, should not be news to UK suppliers.
Most members of a supply chain will try to pass risk and cost back to the previous member of the supply chain.
If they feel they are being over-charged or carry unfair risk, they are entitled to seek alternative suppliers…
The way forward for suppliers is to ensure that their selling prices are competitive (EMR-Buying Mix Analysis) on a genuinely like-with-like comparison with available competition. Any perceived 'unique advantage' will obviously work, at least until the customer sources a reasonable substitute, so even a slight market advantage has to be played carefully and realistically…
The big difference is that 6 months of recession have raised the game significantly, changed all of the supplier-retailer relationship-ingredients, and retailers are taking no prisoners.
We still have to live together, but we need a fair basis for implementing the partnership…

Find out how on our next Namnews webinar.

The value of rumours…

News that Sainsburys latest improvements in like-for-like sales may have prompted renewed attention from the Qataris, and possibly causing JS to re-consider a merger with M&S, raises the question of the value of rumours in supplier-retailer relationships…

Essentially, JS have undoubtely done a good job in improving like-for-likes by 6.5% and gained share from Waitrose, M&S and Tesco. However, this has been achieved at the expense of the bottom line. They need to improve Net Margin from its current 2.7% to something like double that figure in order to improve ROCE, and drive the share price to a level that will make them too expensive to buy, thereby giving them autonomy. Meanwhile, merging with a weakened M&S might be an option… (More)

Whilst the rumours are obviously distracting for the players concerned, such rumours can be valuable in forcing suppliers to seriously consider various 'what ifs', run the numbers and make decisions in advance of press announcements of a takeover that morning… Even if the rumours prove groundless, the exercise can help the company to re-consider its options, from a fresh perspective, and possible rationalise customer and product portfolios in the process, making for a better fit with market need…

Meanwhile, it is obvious that JS is undervalued in terms of market capitalisation (you could buy it for £6.5bn in the open market) so a merger with M&S is one way of delaying a full takeover by Qatari. This would mean gaining scale economies in private label food and some brands, but would entail coming to grips with the upper end of the rag-trade, where Stuart Rose has discovered, M&S shoppers' appetite for frocks is different…

Prompt business payment can benefit the buyer as well as the supplier?

A recent letter to the Telegraph by Institute of Directors, Forum of Private Business, Confederation of British Industry, British Chambers of Commerce, the Institute of Credit Management, and the Federation of Small Businesses, lists possible financial benefits throughout the supply chain in making prompt business payments.
'Prompt payment helps establish the best customer-supplier relationships, and enables customers to negotiate better deals and avoid late-payment interest charges. Prompt payment gives a signal to the market of confidence and financial wellbeing that in turn promotes further business opportunities and growth'.
Unfortunately, we believe that the letter misses the point, especially within the retail sector.
In our opinion payment terms are about power and need. Power comes from relative sizes of supplier and customer. In other words given the size of a major customer, accounting for 5% or more of a supplier's business, a supplier has no alternative but to await payment in an agreed period, and succumb if a retailer decides to to extend that period, or forgoe the business. Given that trade credit is an interest-free loan given to the customer, and a status quo has been established (say 30 days) then a retailer is unlikely to pay earlier without a concession of equivalent value in exchange.
Essentially, a retailer has three choices: invest money in a new store, deposit it in a bank or pay a supplier. The supplier simply has to demonstrate that their offer of an early payment discount exceeds the retailer's other two alternatives in order to secure earlier payment.
The only other possible approach is for the supplier to represent a niche market via a product that the retailer 'needs' to an extent that the retailer is prepared to compromise on their normal trading terms… Even then the supplier has to be watchful that competitors are not attracted into their niche area, thus weakening their 'solus' advantage… (Use our Buying Mix Analysis tool to assess the risk)
Unfortunately, awaiting help via government intervention requires a degree of lung-capacity beyond the capacity of most real-world suppliers…

Speciality Coffee-break…?

Those of us upping our coffee intake due to market pressures may be interested to know that a sometimes instinctive reaction, even in upmarket establishments, that the coffee 'tastes like gnat's* p...' may be closer to the truth than was thought…..
Kopi Luwak or Civet coffee is coffee made from coffee berries which have been eaten by and passed through the digestive tract of the Asian Palm Civet (Paradoxurus hermaphroditus, a cat-sized mammal). The civets eat the berries, but the beans inside pass through their system undigested. This process takes place on the islands of Sumatra, Java, in Indonesia, and was featured in the movie The Bucket List. (More on Kopi Luwak?)
* My thanks to 'anonymous' for pointing out typo (I was using 'knat' instead of 'gnat'), and sincere apologies to 'knats' everywhere...... see comments below

Transfer pricing and you (all multinational companies)

Yesterday it emerged (see full FT article) that the Special Commissioners - a tribunal that hears appeals against Revenue decisions - ruled last month that DSG did not properly account for the contracts as they were moved between a series of subsidiaries. This was the first time it had handed down a decision on transfer pricing arrangements, and is a land-mark ruling as far as other multinational companies are concerned. i.e. the Revenue Commissioners will use the ruling to re-open negotiations with other multinational companies, as part of government moves to increase tax recovery following yesterday's budget.
As you know Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization. It can be advantageous to arbitrarily select prices such that, in terms of book-keeping, most of the profit is made in a country with low taxes, thus shifting the profits to reduce overall taxes paid by a multinational group.
Obviously governments have made attempts to recover taxes on sales of products made within their juristriction by 're-pricing' transfer-prices. When you consider the number of ways in which prices can be 're-priced' (i.e. The OECD Guidelines refer to the following methods as 'traditional transaction method': Comparable Uncontrolled Price method (CUP); Resale Price Method (RPM); and Cost Plus Method (CP method or C+); and these are different from the tranactional profit methods such as Profit split method; and Transactional Net Margin Method (TNMM).) You can appreciate that this is going to become more distracting as the government pursues this approach....
This is worth passing on within your company
We shall keep you informed of further implications as the issue develops….

Budget action for NAMs & KAMs

Yesterday's budget side-stepped the real issues, the need to radically cut public spending and public sector employment…
Whilst the electorate will eventually take appropriate steps via the polls, NAMs & KAMs need to focus day-job activities on the here & now.

In other words really go back to basics.
Whilst the cliches abound, i.e. cut every cost (we have to assume everything possible has been cut), it is preferable to focus on making every £1 count…this means that if yours is a 10% net profit company, then every £10k spent on the customer needs incremental sales of £100k to justify the expense.
More importantly, it is crucial that your marketing colleagues re-assess your brand's pulling power with the consumer vs other brands and own label alternatives (try our Buying Mix Analysis tool for speed and consistency) and cut out the resulting 'me-toos' and passengers in the product portfolio.
Then apply the same technique to your customer portfolio to re-assess your appeal to each customer, using their latest financials..and form new trade partnerships.

These are radical moves, but yesterday the Chancellor proved that the problems are even more so.
Opportunities abound while others try to recover from shell-shock!!

Need to out-Tesco Tesco?

Tesco latest results indicate that apart from some local share slippage, their profit performance (Op profit margin of 6.2% in the one of the worst recessions in recorded history) indicate that they continue to provide a template for retail everywhere.

Essentially, they are simply good shopkeepers, doing simple things very well, while others are maintaining like-for-likes at a cost to the bottom line.

The options for suppliers include investing for growth with Tesco, and encouraging initiatives by other retailers that apply 'Tesco' principles such as meeting consumer-shopper fact-based need, space & supplychain optimisation, strong trade partnerships and effective use of money. (see how) for Namnews subscribers.

Sure, this will make Tesco an even greater, more powerful part of of your customer portfolio, and tougher to deal with, but the resulting skills are transferable, if you agree that the 'Tesco-template' is right for you. It also makes it easier to recognise the same qualities in other customers.
Find out how on our new webinars (H&B) & (Grocery+Nonfood )

Alternatively, why not short-change Tesco and invest the savings in 'weaker' customers, and see where that leaves you….

P.S.
Good video analysis of Tesco results on Financial Times

See Sky 3.5 min interview with Terry Leahy including suppliers, Value &
Discount ranges etc. on YouTube

Arrival of another Nokia moment?

Nokia, a manufacturer of rubber wellington boots, looked for a category that was such an early stage of development that every supplier was a beginner and began to make mobile phones i.e. Long established telecoms suppliers had no real advantage over new entrants.

It seems to me that we have now arrived at another 'Nokia moment' - a time when everything is changed, changed utterly, a time when the rules of the business game have so changed that all suppliers are at square one, demand is new, money has a new value, the consumer is more discerning, competitive set is different......

Opportunities abound for suppliers who treat this as a new market, re-identify consumer need, re-assess offering vs. available competition, re-evaluate routes to consumer, and especially trade partnerships i.e. time to re-evaluate product portfolio, customer portfolio and market match both brands and customers vs. latest consumer need.....

When a little means a lot…

The recession is teaching some of us that opportunities lie within:
A little extra vision
A little extra drive
A little extra value
A little extra difference
A little extra edge
A little extra speed
A little extra care
A little extra energy
A little extra space
A little extra ROI

And who knows, when all of these little advantages are added together, the resulting synergy might even help achieve sales of £1bn per week….!

Headlines for the year 2015 (Part 1)

Given all the political and economic uncertainty, we thought it might be useful to attempt to forecast the 2015 headlines to provide a realistic context to help with your trade forecasting:

Headlines 2015
- Green shoots beginning to appear - Brown
- Sir Fred returns to UK as pension provider
- Asda extends blind e-auctions to shoppers for ultimate value
- MPs expenses to be paid in Euros to support £
- Aldi opens 1000th store, 'may be getting some traction' say multiples
- Anonymous apology leaked from Downing Street 'an attempt to smear PM'
- Retailers trial 360 days credit to test supplier financial stability
- New shop opens in Gateshead
- etc
- etc
Why not add your suggestions? (only thing at risk is your possible knighthood)

Conclusion: use this year's forecasts?

Coping with the Empty Shops Syndrome…

Our medical friends use 'syndrome' to describe a recognisable collection of symptoms and signs indicating a particular disease or condition, which is probably an apt summary of recessionary impact on the retail trade.
With shop closures approaching 15% of national retail-space, (and some extremes like Gateshead at 52% !) and the government now encouraging the use of artistic window-dressing to disguise failure in the High Street, it is probably time for suppliers to rethink their routes-to-consumer strategy…
As Tesco and the discounters cannot be expected to fully absorb the growing over-capacity, the real issue for suppliers has to be the degree of permanance in terms of reduced retail space.
Instead of waiting for the endgame to play out, proactive suppliers could conduct a risk-analysis of the impact on their business of a 15% reduction in existing space (Risk analysis )
Then, assuming that retail demand will revert to pre-recession levels (!) the supplier needs to estimate the combination of shops and online that will absorb the business lost in the High Street.
This means re-auditing their trade management model (see Kamshop for a copy of our Trade Marketing Audit Checklist) and optimising the productivity of the customers still standing…while others sit and wait (or visit the new craft-shops)

Credit insurance and the role of independent retailers

Whilst the withdrawal of trade credit insurance cover for independent retailers has several implications in terms of increased customer concentration, changes in supplier-customer power-balance and supplier risk, the real issue for suppliers has to be the fundamental role of the independent retailer within their overall marketing and trade marketing strategies.
Essentially, in many categories such as electronics, toys, books and wines, the independent specialist provides a means for the consumer to get to know the product, 'press the buttons' and seek in-use advice, in ways not available elsewhere. The specialist (enthusiast/champion, how few of these are available?) often provides this service in the full knowledge that the 'shopper' will later source the product at a lower price elsewhere, often online.
Suppliers can feel that, as their brands benefit from the sale anyway, then little harm is done by the gradual shut-down of the independent specialist channel. This obviously ignores the fact that without the 'education' provided by a well-supported specialist, the consumer is more liable to choose an alternative brand.
Whilst the supplier may want to treat all retailers equally in proportion to their volume, and cannot afford to support inefficiency, there may be a case for acknowledgeing the 'educational' role of the specialist by developing a special support budget to cover additional attention by the specialist salesforce (business education of the retailer in terms of product knowledge, display, and especially retail-finance) The negative impact on the customer P&L could be neutralised by factoring in the eventual consumer purchase via other channels (i.e. calculate a % of multiples/online sales, net it off their P&L and add to the Specialist P&L) Incidentally, the additional risk of uninsured credit could be reflected as an additional cost on the customer P&L, in the short term, in the hope that continuous provision of advice on business finance will cause both parties to reduce financial exposure via shorter credit periods, for those specialists that can take the advice and remain standing….

Meeting consumer need for the perfect golf ball (video Animation)

Despite the fact that you can probably hit the ball for miles, and with a four-day weekend ahead, you might be interested in the fact that U.S. scientists have teamed up with a Japanese manufacturer in a quest to identify and produce the perfect golf ball.
In the Video Animation Model, computer-generated air surrounding the ball is colored blue to show the way a golf ball in flight interacts with air surrounding it. The animation is the result of enormous computer-power equal to that of 1,000 personal computers all hooked up together for 300 hours. It's also the central plank of a scientific experiment with potentially enormous commercial value.
Dr Elias Balarus, of the University of Maryland, is a lead physicist in the project funded by Japan's Sumitomo Rubber Corporation, which owns the Srixon golf ball brand, to create a ball that will travel further than any on the market. The key to success is in the dimples, which reduce drag on the ball as it flies toward its target.
Golf rules are strict about size and weight of a ball, but not when it comes to dimple patterns.
Manufacturers have relied on trial and error to produce dimple patterns and then identify the best prototype of a selection and mass produce it even though they don't know why it travels further than others. However, the new research uses mathematics to establish why a golf ball travels further.
Given variable factors of ball speed and rotation, dimple size and depth, calculations needed to arrive at a conclusive dimple pattern number in the hundreds of millions and it could take years before the optimal pattern becomes reality. Another complication is the U.S. Golf Association's rule limiting the distance a legal golf ball can travel in the air to 320 yards.
We await with interest the release of the resulting mathematical model as a possible value-adding enhancement for NamCalc !

Five success stories for recessionary times

Given the correct positioning and offer, it is possible for companies to prosper in recession.
In a move away from the doom and gloom the FT describes five private companies that are surviving and thriving in the downturn.

Skincare company Simple are outperforming the category with 11% growth vs. 1% (FT open-domain, folks)
With Poundland offering inexpensive self-indulgence (after all it is recession-time!) with 4% like-for-like, Timpson (keys and shoe repairs)making do with re-soles, Brompton folding bicycles to save on fares, and finally, E Bowman Stately Home repairs (keeping what you have, in good nick, especially the bankers* maintaining asset book values)

* NB See blog below for why retail rental prices will not be reducing to maintain occupancy, on any account!

“They were told to shag off* by both Irish and UK landlords.”

This perhaps give some indication of the gulf that currently exists between landlords and retail tenants in the UK and Ireland ref a more entrepreunerial approach to sharing the commercial risk in property usage by negotiating a combination of low rent and a % share of turnover, as per the US model.
Larry Brennan of Savills quoted landlord reaction in the Irish Times (8/04/09). He says companies formed to take over some of the UK multiples which had gone into administration had sought permission from the landlords to switch to a rent payment based on 3–7 per cent of the turnover.
A great many landlords have been approached to reduce rents and while some are apparently willing to consider it – rather than the prospect of a lengthy rent void – the institutions which own most of the buildings are generally unresponsive because of the likely knock-on effects on their pension funds i.e. the valuation of a property as an asset is put in the books at its rental value, therefore reductions in rental effectively reduces the value of the assets of the institution (i.e. bank!), something they don't need at the moment....
Hence the impact on us all (retailers, suppliers, consumers/tax payers), as the banking system is forced to join us in the real world...

* Old Irish expression often used interchangeably with "Go forth and multiply" to indicate a slight unwillingness to negotiate....

Tesco's City profile, an alternative view?

Weekend press reports would appear to indicate that some city analysts feel that Tesco is over-ranged, and over-focused on the bottom line, etc etc

We feel that this depends upon where you measure range.

Viewed at national level, Tesco's total repertoir would be vast. However, taking into account store-level assortment, at store level (where the consumer shops…) the assortment probably matches need. Where rate of sale indicates that this not the case, Tesco can re-arrange a store in a heartbeat.
Here Tesco have probably already reached a point on a journey upon which others are now being urged to travel (See Rule 4 'cluster your stores' in April edition Harvard Business Review, see also some good tips on focusing upon 'switchers')

Other mults could claim to do the same, but the difference is that Tesco can use Clubcard analysis to refine the selection better than most, and its internal efficiencies result in more margin dropping into the bottom line. They are not driven by margin, but because of their global rate of expansion, they need a good rate of ROCE (Margin x Capital rotation) to sustain the share price (i.e. reassure the City) , keep the cost of credit to a minimum, gain supplier support, maintain the respect of competitors, and build upon the loyalty of the consumer, at store level.

A great opportunity and a near-perfect match exists for those suppliers who realise that brand marketing is no longer about national coverage/saturation, but rather about being available in those parts of the country where the brand's consumer profile live and do their shopping, thus helping to get the brand closer to the newly savvy consumer, who is demanding personal attention, or else….(use our Buying Mix Analysis at consumer level to guage your pulling power vs.the competition)

We believe that Tesco can facilitate that process.

Making sense in recession (1)

Retail landlords being challenged to apply common sense to an antique 3-month rental, upward-only rent review model (ie better to have a shop occupied at lower rent, than have an empty shell dragging down the environment surrounding those still open, a perpetual reminder to shoppers not to spend too much!)

Retailers turning over some products daily, yet taking 30-90 days to pay suppliers, picking up resentment and bad press in the process ( i.e. As one of the few business models taking cash in at one end, perhaps retailers should ‘buy’ additional margin with shorter credit periods, and solve both problems in one stroke?)

Suppliers still spreading resources and product portfolio evenly over all major customers, when partner-fit has changed radically in the past six months (i.e. time to reappraise entire product portfolio vs. recessionary consumer need, related to recessionary customer-profile in order to allocate recessionary resources (new mix of time money and people) to the recessionary customer profile on the basis of Invest, Maintain or Divest?)

Tesco Looking To Open At Failed Pub sites

Tesco has reportedly lodged hundreds of planning applications to cash in on the failure of pubs and rival retailers. According to the Daily Mail, Tesco has already identified ten pubs that it plans to convert into stores
Obvious advantages in that readymade licences to sell food and drink simplify the conversion process.
Wild idea:
What if Tesco are planning to diversify into the pub business?
Think about it…..
In fact, Tesco are uniquely positioned to combine an unwavering focus on shopper satisfaction via an enhanced shopping experience, scale advantages in Food and Drink purchasing, value for money, etc, etc (name a few?)
Then spare a thought for drinks suppliers with potential prices & terms disparities, on and off-trade...

Tesco-Aldi 'head-to-head' in Ireland as a learning for UK?

In 10 years Aldi & Lidl have captured 7% of the Irish market. This coupled with the massive downturn in the Irish economy has resulted in Aldi moving into TV advertising, and Tesco advertising itself as "Ireland's Biggest Discounter", reducing prices on own-label and premium brands, and a sustained campaign building Tesco as a brand for lower prices.
According to Tesco Ireland, “People are spending less and looking for bargains. Our job as retailers is to be sellers. We have to sell our offers to the customer. Price has never been as important as it is now. The once-a-week shop has come back into fashion. Customers are now shopping around for value like they never did in the last 10 years.”
Are you ready for the possibility/probability of the similar changes in the UK market as the year 'progresses'?

A move from price-based value?

According to the FT, shoppers are changing their opinion of what constitutes value in purchasing brands, services or experience.
P&G calls this “performance-based value messaging”, allowing them to emphasise what consumers get for the money, thus moving the shopper away from price-based value. In other words, shoppers pay more for Bounty, but as the paper towels are “twice as absorbent as bargain brands”, so the extra money will be well spent.
Perhaps it is worthwhile for NAMs and KAMs going back to fundamentals {why not loop Marketing into this kamblog to enrich the exercise?} and conducting a performance-based value analysis?
You may even find our Buying Mix Analysis tool of value in doing more for less….!