Thursday, 4 January 2018

Making the Numbers Count at the 2018 Interface…

Given the nine year austerity fall-out from the 2008 global credit-squeeze and the pre-Christmas slowdown in UK retail, 2018 will have to be played very close to the financial edge…  This makes it is crucial that suppliers quantify and demonstrate key aspects of the risk-reward relationship at the supplier-retailer interface. Creative use of numbers can help.

However, whilst robust calculating methods can often reveal usable insights (see NamCalc), the confidence and ability to lead a reluctant buyer to ‘obvious’ financial conclusions requires a little more… Working confidently at the financial-edge requires a constant willingness to reduce issues and situations to numbers, to the point that the resulting moves seem instinctive. This means building up a repertoire of calculating-tools that can be adapted to most aspects of a trading relationship, and by continuous application, internally and with the customer, a level of confidence and credibility is built up over time. 

Essentially, optimising the supplier-retailer relationship is about working towards and maintaining a fair balance of relative risk and reward between trade partners. It is crucial to understand both supplier and retailer business models in the current climate in terms of how money works within each organisation, using open domain accounts as a basis for comparison.

This means isolating every type of financial transaction with the customer, calculating its cost to the supplier, and then its value to the customer based on respective business models, and net margins. In other words, a supplier making a net profit of 9% (remember when?) has to achieve incremental sales of £11,1k for every £1k ‘invested’ with the customer. Realistically, suppliers nowadays are lucky to make half that, so in practice a supplier has to generate £22k for every £1k investment.

Meanwhile, a retailer making a net profit of 3.5% has to generate incremental sales of £28.6k to generate that same £1k received from the supplier. In other words, suppliers and retailers have more in common in this low margin environment. However, in case you have not looked lately, retail net margins have collapsed in the past nine years…

Taking latest accounts, it can be seen that a £1k investment by supplier is ‘less valuable’ to Sainsbury’s (net profit 1.9%, £1k = incremental sales of £52k) than to Tesco, with its net profit of 0.1% (£1k = incremental sales £1m!). BTW, are you getting a feel for the real pressures on the guys in Cheshunt…?). Seeing business life in terms of incremental sales thereby requires differing levels of emphasis and support in negotiation.

In this way it is possible to use incremental sales as a measure of the value of trade investment to the retailer, thereby impacting two important buyer KPIs, margin and sales growth. In practice, the buyer is measured on gross margin, but is increasingly affected by the resulting net margin as a driver of ROCE and ultimately share price. 

Apart from helping in day-to-day negotiation, working the numbers at the supplier-retailer interface is really about identifying relative risk in the total pipeline, and allocating rewards appropriately to all members of the demand-supply chain. Because of a reluctance or inability on the part of the NAM to factor in different parts of the relative remuneration package over the past nine years, the risk-reward balance has become tilted in favour of the retailer.

In spite of this advantage, the continuing price wars have diluted net margins in retail, as a result of which retailers are now heavily dependent on their excessive terms packages to maintain profitability… As a consequence, for instance, current credit periods in no way reflect improvements in delivery frequency over the past nine years.

This additional insight added to average payment periods of over 20 days, coupled with daily delivery, means that eventually, an indefensible and politically damaging position will emerge, as more suppliers go to the wall…

The resulting ‘exposure’ will probably cause more damage to retailers’ share prices than the cost to the major multiples of voluntarily reducing retail net margins to say 2.5% and payment periods to say 5 days, before being forced to make these ‘obvious’ moves by government and especially public opinion.

Retail prices could also be reduced slightly to satisfy the public, and the margin savings passed back to suppliers on a fair-share basis, thereby increasing their margins without a massive distorting of the market.

Counting the numbers could help in spreading the pain… 

No comments: