Where are the UK Mults headed in your portfolio?

With Mike Coupe reporting better than expected results (1.1% drop in Q2 sales, and profits 19.5% down on the previous year) for Sainsbury's, coupled with Morrisons 2.4% fall in like-for-like Q2 sales, Asda's 4.7% fall in Q1 underlying sales, and fingers crossed for next week's Tesco wheel-tightening, NAMs have to ask themselves where now for their four largest customers...

Having to struggle with a perfect storm of a fundamental shift in buying behaviour - smaller, cheaper, closer, more frequent - coupled with a war on waste, and cash-strapped consumers 'making do', the mults are barely holding their own, as they experience market share drift to the discounters, convenience and online...

However, it is the structural impact of increasingly redundant large space retailing that represents the main threat.

Given their inability to trade out of the problem, the mults will have to address the issue of increasingly excessive space by progressive sell-offs of redundant outlets, fast enough to reduce the capital base (improving ROCE) but slowly enough to avoid a collapse in market values..

Meanwhile, NAMs have to keep in mind that most discounter growth will come at the expense of brands, unless branded suppliers can find ways of optimising the discontinuous relationships required in dealing with Aldi and Lidl.

In addition, those that survive the Tesco product re-sets need to anticipate the inevitable knock-on removal of overlap in other retailers as they also attempt to simplify their offerings and shore up their balance sheets.

All of this means that all stakeholders need to go back to fundamentals, before someone does it on their behalf...

In practice this means stripping your offering down to the bare essentials that satisfy consumer need, make you better than available alternatives, and allow you to demonstrate a positive, but tailored contribution to each retail player, even the mults...

Aldi Online - a contra-move that breaks the discounter-rules?

News that Aldi are going online appears to be a complete break with its traditional platform:
- Limited range
- ‘Bare-bones’ shopping experience and service
- Resulting in no-frills prices that are 15% lower

Going online pits it not against Tesco and the mults, but in direct competition with the high-service, unlimited range standards set by Amazon:
- 1-click ordering
- Returns as easy as 1-click
- And dense local coverage that drives down delivery cost

All of these go against Aldi’s core strengths…

The Dandy Lab - a merging of retail and technology

On your next store-visit to Spitalfields, why not try something really different by dropping into Dandy Lab, a new tech-enabled menswear store that stocks a small and exclusive selection of 'Made in Britain' cult brands?

NAMs will not be fooled by the superficial similarity to an innovative 'mens' outfitters that includes a selection of floppy handkerchiefs and crafted cuff-links appealing to the 'Dandy' elements of our nature.

The 'Lab' is where things get a bit more interesting. There's the 'Story Wall' - an interactive display allowing you to scan a product, which in turn activates a video with information that helps you get inside the tin, revealing details of its provenance, performance capabilities and the craftsman who produced it. The Story Wall, coupled with photographic analysis of your needs, helps you achieve that integrated look. In addition the technology gives you an insight into the story behind the products, the amount of work that went into its production and where your money goes. See more, including slideshow at Timeout

Finally, as you leave the store, you can share the results, including your photograph, with colleagues and buyers via social media, thereby adding to the productivity of your store visit...

Seriously, the Dandy Lab appears to be a genuine attempt to elevate shopping experience to new tech-enabled levels. They have set themselves high hurdle-rates by focusing on our most resistant gender...on the assumption that male-conversion will make the winning over of time-scarce savvy females a push-over...

I wonder...

...a thousand words?

..a journey barely started...

Tesco scraps 24-hour opening at two large stores - portfolio lessons for NAMs?

In the way that companies portfolio-manage brands by developing a mix of established with new products, and NAMs manage a mix of embryo and mature customers, the strong carrying the weak, so too retailers tolerate varying store profitability providing the national totals of sales and net profits are acceptable.

Thus Tesco, faced with pressures on national performance are probably re-assessing store-level viability based on individual branch P&Ls.

Whilst the obvious short-falling branches have already closed, or are on the waiting-list, marginal cases are obviously being tweaked as a last chance move.

Opening hours reduction obviously provides such an opportunity.
Tesco's original strategy of opening 24/7 was always a better option than guessing in advance whether an area around a store was likely to yield sufficient night-time traffic, given the ease of reducing the opening hours to match demand, via first-hand pragmatism.

So there should be no surprises here.

The question is where this leads, in that it seems inevitable that, should the new opening-hours window not translate into sufficient  improvement in the  bottom line, the knives will be back, in terms of executing a store-portfolio 're-set'.

In other words, Tesco will again bite the redundant-space bullet, starting with store closures, and searching for alternative usage of instore space where the outlet is retained in the portfolio.

This means that Tesco have the courage to cut, and continue to cut, until a sufficiently healthy retailer remains...(ROCE 15%, NPBT 5%, Stockturn 20+...)

And this in turn has to be a way forward for suppliers that need to shore up their bottom lines via a vigorous re-assessment of brands' and customers' portfolios, re-labeling as invest, maintain or divest in recognition of stages of business unit life-cycle evolution, and investing accordingly.

The alternative has to be continuing as usual and relying on a new owner to do it on our behalf...

How to get above-average insights from managing averages, via data animation...

A key issue for action-driven NAMs in unprecedented times is how to derive meaningful and actionable insights from well-intended but over-simplistic averages currently produced by ‘internal’ research.

A major problem with this approach, and a great deal of business reporting in general, is that it presents senior management with a host of averages:

category average margin
average space in store
average basket size
average customer spend
average shelf life etc.

We know these are important measures - the buyer keeps reminding us - but as measures, they have gone too far. In other words, they are a starting point, but we need to find ways of getting behind the averages, and data animation can help.

Guy Cuthbert, of Atheonanalytics, in a fascinating article, starts with a retailer’s average gross profit margin and shows via exploration and visualisation of underlying data, how to discover and communicate far more about the richness of shoppers' buying behaviour, helping us move towards the goal of any commercial analytical exercise – the oft-requested “actionable insight.”

In his graph-by-graph process he drills down and visualises by Customer Segment, Product Category, Sub-Category, Individual Customer, and converts a 2-variable scatter-plot to a 3-variable bubble-chart. He then adds total Profit (or Loss), using colour for this fourth variable, to highlight the variability in cash impact of the customers.

We are then in a position to loop back to the original question posed by the buyer – “How can we improve profitability?” – via a simple visual explanation of profitability, which can be explored by Customer or Product, and a recommendation to review customer discounting policy in the light of long-term customer value.

In other words, the data animation process has helped us move away from Averages of Averages, and provides a reasonable balance between simplicity and complexity, yielding actionable and communicable insight, far better than the average....

Peanut Corporation of America owner sentenced to 28 years

The ex-peanut company mogul was convicted on counts of conspiracy, obstruction of justice, fraud and other crimes in relation to the 2008-2009 salmonella outbreak which caused death of nine people and sickened more than 700. The incident caused one of the largest food recalls in US history. The QC Manager received 5 years and a food broker, 20 years, as parties to the conspiracy.

The key issue here is the escalation of accountability to the highest level in a company, along with the key players involved, and appropriate levels of punishment.

This development has to cause other companies and their teams to re-visit responsibilities re legislation and impact, everywhere.

Whilst in this case there appears to be no doubt as to culpability, it would be a pity if it caused business leaders and their teams to be over-cautious in terms of innovation and optimising resources in the marketplace.

Success in business is still about responsible risk-taking, working within existing rules and regulations, and this success will result from playing within the full ball-park, in full knowledge and observance of the legal and moral limits, while competitors seize this excuse for risk-avoidance in the centre of the pitch…

UK mults maxed out on space, losing 1m sq ft, a first cut in a decade

According to Financial Mail On Sunday, this represents a 1% space reduction, a long over-due combination of close-downs and sell-offs, in response to structural changes in the market.

Eight years of falling profits and flatline sales, combined with increased online efficiencies and consumer insights, have caused major retailers to re-assess their assortments. They have realised that, whilst overlap and duplication can be tolerable sources of back margin in good times, these surpluses become liabilities in a persistent downturn…leading to major range re-sets such as Tesco’s 30% SKU cull, in turn revealing that in large stores, upwards of 20% of retail space can be surplus to requirements….

The same navel-gazing by major mults has revealed that 80% of sales are made by 20% of the range, with ‘20% of SKUs selling but one pack per week’ in some cases.

Why the hesitation in making the cuts?
‘Normal’ businesses faced with these excess space issues would quickly sell-off unprofitable stores, but UK retail is special. As you know, the price of prime retail space is driven by sales/sq. ft. but no other business (except global Apple @ £4k/sq. ft./annum) can sell £1,000/sq. ft./annum.

Moreover, by applying a 2% depreciation rate per annum to their stores, retailers are saying that their assets have a 50 year lifespan - a 50yr lock-in - all leading to the fact that any sell-off of spare space could be at a loss, or drive down property values…

Whilst in good times, assumptions of 50 years of unchanging market conditions was understandable and even re-assuring, with the benefit of 20/20 hindsight, the structural changes resulting from closer, smaller, faster and more frequent shopping can be seen as inevitable, fundamental, and permanent… (in City terms, anything longer than a year is ‘permanent’ i.e. see long term debtors in the balance sheet..).

Limited options for B&M retailers
Thus it can be seen that Bricks & Mortar retailers have limited options available in attempting to restore historic levels of profitability, making online development - a major and compelling route back to profitability for the mults - even more appealing. And besides,online, space is not an issue, a place where long tails are irrelevant, and selling 1SKU a week, even a month, is still ok…

All that matters is exceeding consumer expectations 24/7 in terms of availability, speed, accuracy and contents of the tin…

The clarity vs. accuracy trade-off...

Wrong, but perfectly understandable, like watching the Rugby World Cup on TV (with aids) vs. in the ground...
The London tube map is a design classic, relying on equal spacing between the stations. This recent edition - produced to help engineers plan Crossrail - is a geographically accurate map showing the distance between the stations.

So now you know, it's quicker to walk the (almost) 329 yards between Covent Garden and Leicester Square stations than it is to get on the train.

Mouth-money indicators for Mult's CEOs?

According to The Business Desk, CEO David Potts has increased his £800k stake by investing £500k in Morrisons shares following a 10% drop in share price.  This has to be a major show of confidence and evidence of commitment in his new role, especially if other members of the board and staff are encouraged to do likewise.

Nothing beats a stake in the business to focus the mind…

Scope for NAMs to follow suit?
Now there’s commitment!

Seriously, Potts' latest move is bound to put additional pressure on the Tesco Board, with recent reports of City disquiet in The Guardian for their holding unusually low numbers of shares in company, and CEO Dave Lewis yet to invest any of his own money in the company…

This is being regarded as an indication that the Tesco executives have not been willing to back their turnaround plan by putting their own money into the retailer.

…thereby begging the question re how much suppliers can reasonably be expected to invest via trade funding…?

Retailer P&Ls: why 'contexting' helps....

Given normal pressures in the NAM day-job, one of the problems with firefighting is its tendency to prevent us stepping back to think... and place our data in context...

Take Morrisons latest annual results, and focus on the Net profit margin, before tax 

NAM's internal monologue:
Morrisons 2014 NPBT = (4.7%)...."almost a 5% loss.. "
"Panic, send for another an extra fire-engine!"

"Hang on, how about the other mults?"

Sector context:

Mults Sector 2014/5:
Tesco             (10.2%)  "Probably write-downs, but Trading Profit showing 1.1%, still a problem.."
Asda               3.9%  "Asda is probably a blip, forget"
Sainsbury's     (0.3%)
"That's a relief, everybody's down..." 

"But wait, how about other players in the UK?"
UK context:
Co-op               1.7%  "Better than 'non-profit' I guess..."
Waitrose          5.4%
Aldi                  4.9%
"Oops, this could be a mults' problem! Asda still a niggle...but the 'squeezed middle & and fundamental structural change' now making some sense..."

"Time for a continental view?"
EU context:
Carrefour          2.6%
Metro               1.1%

"All EU players low, but were never great anyway, time for a global look?"
Global context:
Walmart           5.1%

"Wow! Walmart are demonstrating that even in unprecedented, post-global financial crisis times, it is still possible to make net profit margins of 5%!"

"I now understand why the stock market is piling the pressure on the UK mults' share prices..."

"(I can also see that Asda's results, although better than other UK mults are still diluting Walmart's performance...)"

"Now, how can I help Morrisons?"

In other words, placing your customer's results in as big a context as possible, does not add further distraction, but can provide actionable insight, even in fire-fighting conditions....
NamNews - for big context...

Remember when monthly shopping breached the limit?

                                                                                                                                     pic: belgeinfo.com

Matt McKeown exceeds 70mph on his jet-powered shopping trolley in 2013, unconsciously signalling a return to weekly, then daily shopping trips, dragging large-space redundancy in its rear....

"Buyer's Office? Sorry, I'm running a bit late..."

                                                                                                                               pic: The Independent

26-lane gridlock photographed outside the capital New Delhi this week.

Last year’s trade strategy still feel right?

                                                                                         HT to Julian Barker via Stuart Green

What is going on in UK retail?
Retailers and pundits are calling it ‘structural change’ meaning an economic condition that occurs when a market changes how it functions or operates, making yesterday’s forecasts and decisions inappropriate.

In practice, as you now know, this is one of the most fundamental retail changes in career history for most people.

• Radical changes in how people shop: need to buy anytime, anywhere, any way they choose, or else..
• Major mults locked into large space outlets – their retail estates at least 20% over capacity - that cannot be released via sell-off without compromising the balance sheet (the value of a store is based on sales of £1k/sq ft/annum, which no other business can legally deliver, +2% annual depreciation means a lifetime expectation of 50 years, all contributing to lower sell-off prices..
• Long tail of instore SKUs: with 80% of sales produced by 20% of the SKUs, means that current stores are at least 20% too large, a gap too great to cover via instore theatre and alternative usage, putting more pressure on the £1k/sq ft/annum KPI. This means that the Tesco cull has to be just the start…
• Online still indicating an unknown upside, and an equally unmeasurable downside for traditional retail

Where is it headed?
Radical change has to result in a re-alignment of market shares, only issues are how long and how fundamental... Pragmatic business people have to plunge in and commit now, in order to optimise resources and profitability, while others ideally await a return to normal...

Taking Nielsen market shares as a basis, why not ‘what if’ the possible re-alignment – crude, but probably better than assuming share maintenance or even reversion to better times?

                       Current share    Share end 2017?
Total Mults          90.6%              88.0%
Tesco                 27.9%              25.0%
Sainsbury’s         15.9%              14.0%
Asda                   15.6%              14.5%
Morrisons            10.8%               9.5%
Aldi                       6.2%               9.0%
Co-op                     5.8%               5.0%
Waitrose               4.2%               5.0%
Lidl                       4.2%                6.0%

Key dynamics: 

• Drift of business away from large space retail, with lock-in + long tail causing profitability issues/write-offs
• Smaller, closer, more frequent shopping trips benefiting small local convenience players
• Growth of online - no space/tail issues - with click & collect diluting fulfilment costs

How does it affect you?
These changes represent both opportunities and threats. Threats for those who ‘wait & see’, but opportunities for the few who act now on incomplete information but can anticipate the inevitable consequences of fundamental change in their markets. The unprecedented forces unleashed in the market will not be limited to the market-share ‘tweakings’ indicated above – we are talking about fundamental change in market composition, the degree of which change will be determined by your category-customer-competitor mix…

What to do about it?
Back-to-basics review of relative competitive appeal vs. available alternatives – by definition this will re-evaluate brand capabilities vs. real consumer need, set against your company expectations of brand growth, time window, and appetite for risk, all assessed within a realistic – and objective – assessment of a current market context and its probable development

In other words, if your current trade strategy pinches a bit, perhaps our 3.5hr bespoke session can help secure a better fit?

More: contact me bmoore@namnews.com

More on compliance = Less on trade investment..........You're kidding, right?

That's Not My Job!

Co-op reforms not quite paying Dividends, but...

For years the training ground for young, ambitious NAMs, with a typical two year tenure 'to understand how it works', anyone claiming 100% insight at the end of the induction-period was promptly sent back for another two years, to appreciate the extent of their naivety in presuming to make sense of this unique business model, ever...

In practice, it took a crisis that would have destroyed normal PLCs to demonstrate the inner strengths of an organisation that for years aimed at breaking even, and obviously came in with a 3% loss at year end, in contrast with 'normal' retailers that aim for a 5% Net Profit that inevitably results in 2.5%...

Having bitten this particular bullet - aiming for and delivering a moderate profit, and even mentioning ROCE in despatches - the organisation  last year addressed the cumbersome governance structure and made it more merit-based, and even more democratic via a 1 man, 1 vote modification.

This made it more tolerable to adopt other normal retailer moves aimed at cutting waste and improving profitability. In fact this morning's Independent lists the jettisoning of non-core businesses, such as the pharmacy chain and the much-loved farming business, using some of the savings to fund an 8.5% pay rise for staff.

Even the 'Divi' appears to have been replaced by the immediacy of discount vouchers at point of sale...

In fact, anyone that has heard Richard Pennycook's IGD presentation of the turnaround, realises that the Co-op is truly on the way back, in part evidenced by their ability to survive the current price wars in UK retail, better than most...

All that said, perhaps it is time for Co-op NAMs to step back a little from the fire-fighting, and consider using the ROCE, Net Margin and Capital Rotation tools that provide an effective working platform for their Big Four colleagues, all adapted to the realities of a Co-op attempting to morph into responsible capitalism.

At the very least, this approach will provide practical career-move training in how to optimise one of the mults a few years later. However, in the meantime, this change in MO will pay dividends in terms of job satisfaction... 

Tesco PLC's Balance Sheet Re-set: why selling South Korea may not be enough

Following today's confirmation of the sale of its South Korean operation to MBK Partners, and according to The Motley Fool, Tesco is now in the final stages of its asset sell-off aimed at reducing its adjusted net debt of £8.5bn by the £5bn Moody’s rating agency believes is necessary to meet stock-market expectations.

Ideally, asset sales will yield: 
- South Korea £4.2bn
- Dunnhumby between £700k and £1bn

Given global stock-market uncertainties it is possible that these sales may not yield sufficient sums, in which case Tesco will have to resort to seeking more cuts within the business and/or attempt a Rights Issue to raise cash.

Rights Issue Risks
Whilst the latest share price is a daily reminder of stock market opinion re Tesco’s potential, actually asking shareholders to invest more in a falling share price - via a Rights Issue - would not only cause investors (and analysts) to take a really fundamental view of Tesco’s prospects of a successful turnaround in terms of re-balancing the business, but also question the retailer's ability to regain market share in a flat-demand market, re-assess their competitive edge vs. available alternatives and question their ability to compete with newer retail players.

And this apart from a Rights Issue yielding less as their share price falls in the current stock-market turmoil…

This leaves further cost-cutting in the business, a possible re-set of the product re-set, and a more aggressive approach to selling off redundant space, at any price…with no sign of a fat lady singer anywhere…

Germany moves towards credit card usage in retail - at a price!

                                                                                   Pic: Brian Moore - Berlin tourist shop 30-08-2015

Cashback cull: Tesco halves Clubcard points for 2.8m credit card holders

According to The Telegraph, EU rule changes on the fees paid by retailers accepting payments via Third Party credit cards has been halved to 0.3% of purchases to reduce shelf prices.

In practice, credit card owners like Tesco either have to reduce the reward points on usage of their card in non-Tesco outlets, or absorb the losses on such deals.

Tesco have decided to reduce the rewards from £1 per £400 spend (0.25%) to £1 per £800 spend (0.125%), whilst retaining the £1/£400 spend in Tesco stores. 

In practice, being a lead player, other retailers will follow Tesco, and savvy shoppers will probably switch to a more rewarding card for their non-Tesco purchases. This means that the viability of retailer credit-card schemes built on the assumption of access to the entire market, will become less profitable and/or will result in additional charges/points reduction to claw back losses...

However, the real downside is that any attempt at detailed explanation will only heighten consumer awareness of the miniscule rewards available via credit-card and loyalty schemes, with questions asked re what costs are involved and how much is distributed via rewards, in an increasingly suspicious mode on the part of consumers, especially those returning from their first holiday trip refusals to show boarding cards at checkout...