Showing posts with label share price. Show all posts
Showing posts with label share price. Show all posts

Wednesday 18 March 2015

Sainsbury's '3%' Net Margin going forward - the 'new' role for NAMs?

If Mike Coupe is acknowledging the end of 5% net margins in UK grocery margins, and implying a more likely 3% going forward, the issues for suppliers have to be:

- Can 3% Net Margins work?
- How can my brand help?

Essentially, as you know, the driver of share price increases is ROCE, and given that ROCE is a multiple of Return/Sales and Sales/Capital Employed i.e. Net Margin x Capital Rotation, then it matters little whether a business chooses to operate a high margin, low rotation, or a low margin, high rotation business model.

It is the combination that counts, and 15% ROCE provides an acceptable reward for risk...

Therefore, if 3% Net Margin is the retail 'norm' going forward, then the multiples need to focus on increasing their capital rotation - with the help of suppliers - in order to compensate for the lower margin in producing an 'acceptable' 15% ROCE.

Increasing Capital rotation i.e. Sales/Capital Employed i.e. increasing Sales and/or reducing Capital Employed

Given that the retailers are already doing everything possible to drive sales, we shall focus on ways of increasing capital rotation, a less costly option for NAMs:

As you know, Capital Employed = Fixed Assets + Current Assets - Current Liabilities

Fixed Asset optimisation:
Fixed Assets in retail means sales space, and helping the retailer to increase space productivity - i.e. sales/sq. ft. - has to be a way forward in making their Fixed Assets more productive, using £1,000/sq. ft. per annum as a benchmark.

This means increasing basket size, and trading up the shopper. This is where in-store theatre, and shopper marketing can play a role. It also means de-listing of any overlap and de-duplicating within the assortment in order to simplify the offering to increase its shopper-appeal.  This is what Dave Lewis doing via the 30% product cull...

Incidentally, all retailers will pursue this approach to a point where they begin to sell off unproductive outlets, or risk becoming uncompetitive. Hence the store culls in the pipeline...

Current Asset optimisation:
Currents Assets = Stock + Debtors + Cash
Here the emphasis has to be on Stock optimisation i.e. increasing stockturns, without compromising on-shelf availability. This means smaller, more frequent deliveries to produce annual retail stockturns of 20+ i.e. 18+ days stock. For a retailer, this results in less capital tied up in stock, less wastage/shrink, and faster throughput.

Current Liabilities optimisation:
Current Liabilities = Bank Overdraft + Creditors
As Current Liabilities are a negative, retailers should try to increase Bank Overdraft and take longer to pay suppliers, in order to increase their Current Liabilities. However, since the global financial crisis, retailers have been trying to pay down debt and reduce exposure, thereby closing off this option

Meanwhile, taking increasing amounts of free credit from suppliers has breached politically acceptable limits, and will probably be progressively reduced in the future, thus closing off another option for retailers.

Thus the NAM needs to focus on space and stock optimisation.

In other words, doing a little more of what you are already doing, but relating it more to the top-of-mind concerns of the buyer in the future, in terms of its direct impact on the retailer's ROCE and thus the share price...

...while others turn up the volume on their traditional selling points, as they await a return to normal...

Tuesday 2 September 2014

Tesco's fall in share price - why should NAMs bother?

Market capitalisation i.e. value of the company in the open market falls and impacts all stakeholders, including NAMs. For instance in early February, Tesco was valued at £23.58bn whereas today it is valued at £18.23bn…a fall of 22.7% in 7 months!

Why does it matter?
Senior management on share options suffer a direct impact on their personal wealth. Employees on performance-related bonuses via shares become demotivated and begin to consider their options...
In extreme cases (!), there is a negative impact on company reputation i.e. good guys leave, good guys not attracted, while the less-able remain less able… 

Shareholders may force change like splitting the company, replacing board members, etc.

Meanwhile the cost of financing rises
- Loans from banks become more expensive via higher interest rates
- Rights issues i.e. the proceeds and ease of raising new money from shareholders obviously depends
  upon the share price

The growing threat of takeover becomes distracting, at least, and/or may even amplify the above effects..

Impact on suppliers
The resulting bad press can unsettle conservative suppliers, and their shareholders, resulting in pressure to re-balance the customer portfolio (in which case, think also re Sainsbury’s and Morrisons falls in share price?)

Suppliers then reconsider their options and may reclassify the retailer in terms of invest/maintain/divest criteria, ideally following a fundamental re-think…

Meanwhile, given the increased risk:
- A 44 day credit period looks increasingly vulnerable…and even a 2.5+% settlement discount
  seems cheap…
- Trade investment of up to 20% of turnover requires more justification
- 100% compliance becomes a ‘must-get’
- Deductions become challengeable...

Still think a retailer’s share price is simply something for the institutional shareholders?

In other words, Tesco is now in a position to appreciate the benefits of dealing with strong, profitable brands that can help them restore their profitability, and share value..

All it takes is for NAMs to be able to calculate the costs of their offering and demonstrate its value to Tesco’s Balance Sheet and P&L….fast