Monday, 3 October 2022

Retailers Have Stocked Up On Festive Goodies, But Will Anyone Buy Them?

 Retailers were already feeling nervous before Liz Truss and Kwasi Kwarteng launched their mini-budget for growth – and sent the pound into freefall and mortgage rates soaring.





The industry may have bought its stock for the peak trading season, so the fall in the value of the pound will not affect prices or profits until next year.

The main short-term concern before Christmas, when most consumer industries make the majority of their profits, will be consumer sentiment and spending power.
See link in comments for full Guardian Article

NamNews Implications:

Taking some of the pressures on consumers:
- Mini-budget fiasco sending pound into freefall and mortgage rates soaring.
- A pause in house sales
- Domestic renters in fear of rent increases
- Benefit cuts
- Spending on expensive items down
- Skipping the little extras
- Trading down to supermarket own labels or Discounters
- Spare cash left after paying for essentials plummeted 10% in August for the average family
- Outstanding net credit card debt has risen on average by 0.9% per month since the start of the year
- (No one appears to be mentioning authorised and unauthorised overdrafts at 40%..)
- Autumn long-feared energy bills hit doormats
- Clothing, homewares, nights out and trips away must all be on the list of household budget cuts
- A general feeling of economic malaise and fear about the future
* Fancy some Christmas shopping...?
#HouseholdCutBacks #MiniBudget #FallingDemand #ChristmasShopping

Thursday, 29 September 2022

 Open Book Accounting: the ultimate in supplier-retailer working relationships.

A post-Lockdown necessity, but with the right partners  
#Trust #NewNorm #Lockdown #ProfitOptimisation #FairShare #JointProfitability


Open-Book Accounting, Post Lockdown – a NamNews view 22-9-2022

Brian Moore bmoore@namnews.com

UK Supermarkets agreeing to ‘Open Book’ deals with suppliers amid an energy crisis can be a step forward in terms of supplier-retailer collaboration. Patently the root cause/s of this development are far more complex and threatening than an unanticipated hike in the price of energy.

In fact what we are currently witnessing is the latest stage in a process that kicked off with the 2008 global financial crisis, when the cost of consumers bailing out ‘banks that were too big to fail’ began an era of low inflation and interest rates that was used in an effort to stimulate demand. The resulting and excessive ‘quantitative easing’ or printing of money caused a build-up of debt whereby a global shock was required to attempt to re-set global economies via a 2.5 year series of Lockdowns.

As markets recovered unevenly, imbalances of supply and demand resulted in soaring inflation affecting fuel/energy, supply shortages, and changes in shopping patterns, all causing chaos on shelf. 

Suppliers and retailers have now been pitched into each other’s arms with the aim of collaborating or die..

 

Open Book Accounting (OBA) is but one aspect of this new level of partnership.

 

In fact, NamNews quoted the Grocer in reporting recently that Industry experts are calling for supermarkets to work more closely with suppliers to prevent the energy crisis from causing food shortages.

 

Sources told The Grocer that some retailers were taking a collaborative approach and agreeing to so-called ‘open book’ deals. For instance, this enables both sides to track suppliers’ energy bills and take them into account during cost price increase negotiations.

 

At its simplest level OBA is a ‘safe’ business practice where a company shares key financial information with stakeholders such as funders, clients, suppliers, investors, or contractors.

However, whilst ‘opening the books’ can be a major cultural change for many companies, extreme times require extreme measures and when introduced in highly competitive retailer-supplier environments, there can be consequences…

 

Essentially an Open Book Accounting relationship embraces a mix of Commitment, Focus, Trust, Integrity, Effective Communication, and a determination to work collaboratively in solving problems-in common.  All in a highly stressed and uncertain environment where trust is paramount.   

 

Positive

On the plus side, benefits can include:

-        New levels of collaboration between retailer and supplier 

-        Resulting financial transparency improves performance 

-        Members of supply chains can benefit from less overlap and costly buffering

-        Working capital usage can be optimised by relating invoice settlement to shorter, more efficient order cycles  

-        Can provide a trustworthy basis of actual costings that reflect the true risk and effort for each party, minimising the need for second-guessing

 

One way of ensuring delivery of these benefits is for the partners to work to a P&L-in- common (see below)

 

Negative

However, potential downside impacts of Open Book Accounting can include:

-        OBA requires a massive cultural change in each organisation, top to bottom

-        Use of skills unavailable in-house e.g. independent auditors (cost, delays, objectivity)

-        Degree of detail required can be information and resource-intensive

-        Requires openness, trust and transparency that will takes time to develop

-        Increased job-mobility increases the risk of information-leakage

 

It is hopefully obvious that OBA depends on the establishment and maintenance of long term working  relationships, especially in an environment where retailers often see rapid buyer job-rotation, sometimes six-monthly, as a way of minimising the close NAM-Buyer working relationships that make it difficult to negotiate tough deals with people you like…

 

In terms of NAM and Buyer, Open Book Accounting obviously raises a number of issues for each party:

- A supplier has direct experience of their brand cost-structure in a given category...

- A retailer could have access to all brand costs of all category members (i.e. optimum methods of production, methods and ingredients combination

- Risk of incremental growth of Own label at expense of brands, via use of brand-production insights

- Global suppliers and retailers will have access to differences in fuel/energy prices/increases in different countries (distraction at local level especially given relative lack of pointers in mainstream media)

 

Ways of optimising an OBA relationship in practice:

Open Book Accounting needs high degrees of trust and collaboration in supplier-retailer relationships, given that its effectiveness requires that partners share data and financial information about costs incurred in every part of the supply chain.  Both parties can use this insight to ensure that costs are kept low, without compromising other aspects of the joint supply-chain.

Confidentiality is a must-have, but realistically, if both parties continue to derive more  benefits from collaboration than the quick hit of exploiting business secrets, there is a reasonable chance that leakages will be kept at manageable levels. Nevertheless, pragmatists on either side are unlikely to forget who is on the other side of the table…

 

Also, in most organisations there will be ‘trade secrets’ that will never be opened up to anyone, even the company’s local management, let alone second or third parties… This can often take the form of the ‘Magic ingredient’, a formula handed down from the owner’s great grandparent and now securely locked in a bank-vault overseas, often in a low-tax environment like Switzerland. This vital ingredient, with a transfer-price designed to syphon off profits from overseas subsidiaries ensures that corporation tax obligations are kept  manageable, even in unprecedented times...

 

In terms of day-to-day negotiation, given the benefit of OBA and their ‘open’ access to much detail in the joint supplier-retailer business, time normally spent on Adding Value to  concessions, Devaluing concessions from the other party, and explaining/excusing  our inability to comply with impossible requests or enter no-go areas, energies can be redirected to joint exploration of mutual gain.  Using real data, with less time needing to be spent on validation, results can be tracked via the joint P&L. In other words, Buyer-NAM time can be more productively spent on the ‘How?’ rather than Why? of dealing with joint trading issues, hopefully to more effect.…

 

Moreover, in terms of individual negotiation sessions, the Size of the Deal on the Table  can be quantified quickly, allowing a joint placing of the session in context using real data:

        Customer’s share of the category?

        Private label share of category?

        Our share of their business (£, %)

        Our share of their category (£, %)

        Size of the deal for them  (£,%)

        Size of the deal for us (£, %)

 

Choosing the right partner

Given the risk of OBA going wrong, especially in the current climate, it is vital that extreme care is taken in choosing the right Invest customer. In other words, OBA should only be considered for customers meeting the following criteria:

u       Potential
(Immediate importance, life-cycle, market share)

u       Partnership
(Strategic alignment, relationship possibility, cultural fit, consumer match)

u       Profit
(Share of profit Vs share of sales)

u       Performance
(Relative competitive advantage within the customer, share of category)

 

 

The results of this new level of risk-taking needs to be captured in an enhanced customer account management tool, as follows:

 

Customer Account Profitability impact

A P&L-in-common, sharing the Net Profit Before Tax in proportion to Relative Risk

Given current crisis conditions in the market, desperate measures like Open Book Accounting are required… Obviously it cannot and will not be applied to all customers but it can be a very effective basis for deeper relationships with Invest partners…

 

We are going to have to share what has always been confidential, and as you know it is always easier to be truthful than to add  the extra pressure of having to lie consistently..

Providing we take normal business precautions and a customer meets the other criteria for Invest-Customer status outlined above, it may be worth considering this ultimate step in measuring the financial relationship, a P&L-in-common….

 

Essentially, this means extending our Customer Account  Profitability model to use Shelf Price as the starting point, then adding in all retail costs, to arrive at the supplier selling price, less all manufacturing and distribution costs, a percentage of National Advertising  & Promotion related to size of customer, and itemising all trade investment/funding for this customer, including Retail Media.

This leaves a joint Net Profit before Tax to be split between supplier and retailer according to negotiated agreement of relative risk for the two parties.   

 

The joint P&L thus represents a final measure of each party’s trust in the costs and value of the amounts involved, the ultimate measure of fair share!

 

OBA represents a major breakthrough in supplier-retailer relationships, with trust as an essential bedrock, but in the new norm, there are few other real options..

 

Unless you prefer to return to the good old days of Them and Us…?

 

 

Brian Moore bmoore@namnews.com

 

 


Sterling-Dollar Exchange rate in perspective:

 Sterling-Dollar Exchange rate in perspective:

Given this morning's fall in Sterling to near parity with the dollar, some of the Linkedin community with longer memories may remember in the 1940's people used to refer to a Half Crown (2 shillings & 6 pence ) as a "Half Dollar" i.e. an exchange rate of $4 =£1.
"The times they are a changing.."
#ExchangeRate #Dollar #Pound #Value

Profits Slide At Aldi But Pledges To Prioritise Lower Prices Over Short-Term Gains

 Profits Slide At Aldi But Pledges To Prioritise Lower Prices Over Short-Term Gains


Aldi saw its profits slump significantly last year due to rising costs and investment in pricing. However, the discounter stated today that it was willing to sacrifice margin to maintain its focus on “providing the lowest grocery prices in the UK” amid the worsening cost-of-living crisis.

Over the year to 31 December 2021, Aldi’s operations in the UK and Ireland saw pre-tax profits fall 86.5% to £35.7m on sales up 0.9% to £13.65bn.

Aldi cited Covid-related costs, increasing staff pay and investment in prices. The small increase in sales came after the chain missed out on the online grocery boom during the pandemic.

“Preserving our price discount and rewarding our people will always be more important to us than short-term profit,” said Giles Hurley, CEO Aldi UK and Ireland. “Being privately owned means we can keep our promises even when times are tough.”

Aldi attracted 1.5 million extra customers over the past 12 weeks vs 2021 from supermarkets. This helped boost sales of the discounter’s Specially Selected own-label range by 29%.

Kantar showed sales growing at 18.7%, overtaking Morrisons to No 4

Aldi buying teams were “working tirelessly to counter the impact of inflation and maintain its discount against traditional full price supermarkets”.

Aldi has over 970 stores, plans 16 more in the UK by 2023, to its target of 1,200 by 2025.

Other investment – part of its ongoing £1.3bn two-year pledge – will include expanding/relocating dozens of existing stores + developing its distribution centres and technology infrastructure.

Re cost-of-living crisis, Hurley said: “It’s also a time when Aldi comes into its own. From our carefully selected range to our smaller format stores to our trademark efficiency, we can leverage our unique approach for the benefit of all of our customers.

“We will do whatever it takes to maintain our discount to the traditional full-price supermarkets and keep grocery prices as low as possible..”

Unlike the big gains by Discounters in 2008, Mults are price matching Discounter key lines and introducing expanded budget ranges.

Hurley said their private ownership allows a longer view and huge global buying power.

Also Aldi’s efficient business model can insulate customers vs rising prices across the food supply chain.
Re how much profit margin Aldi will sacrifice in 2022 to protect shoppers, Hurley said: “We always make value the cornerstone of our business. No matter what it takes.”

NamNews Implications:
* Aldi are able and willing to take a profit-hit to grow share…
* …as they continue to operate ‘on a roll’ in the UK.
* And given that they rarely sacrifice share gains…
* …not a bad strategy.
* Suppliers and retail rivals need to watch for Lidl pursuing similar policies.
* Aldi and Lidl can afford to run at a loss, supported by their global operations…
* …for as long as it takes!
#Aldi #DiscounterShare #CostOfLiving

New Owner Of Morrisons Asks Staff To Invest In The Business

 New Owner Of Morrisons Asks Staff To Invest In The Business


Over 800 staff at Morrisons – from store managers upwards – have reportedly been asked by the company’s new private equity owner to invest thousands of pounds of their own money in the struggling supermarket chain.

According to The Guardian, middle management level departmental heads had been asked by CD&R for £10,000 while the directors of departments had been asked for £25,000 each. The minimum investment required to participate is said to be £2,000.

The newspaper’s source said that while contributions were voluntary, some staff were annoyed about feeling pressed to make a contribution to the underperforming business at the time of a cost-of-living crisis. “People are used to being paid bonuses rather than asked to invest,” the source said.

However, those who have agreed to invest in shares in Morrisons were paid a special bonus, equivalent to 60% of the amount they were asked to invest.

A spokesperson for the retailer is quoted by The Guardian as saying: “The opportunity to invest in the future of Morrisons was incredibly popular throughout the business with over 800 colleagues, or more than 90% of those eligible, choosing to invest.”

One expert told the newspaper that it was common to ask staff to invest as part of private equity deals, with the stakes seen as an incentive to help the business grow.

He suggested that the wider-than-usual scope of the Morrisons scheme could be seen as a good thing, allowing more people to benefit from a potential return on their investment.

Morrisons, which was acquired in 2021 by the CD&R in a deal worth £7bn, has been losing sales amidst the tough trading conditions, with its market share slipping behind Aldi in recent months.

Surveys suggest its prices have become more expensive compared to key competitors in recent months, weakening its performance.
One industry insider is quoted by The Guardian as saying: “The numbers look grim. [The product] doesn’t look exciting and they have missed quite a lot of opportunities.”

The source suggested that suppliers were becoming disillusioned as volume of goods sold by the retailer fell back.

Following a competition regulators delay, Morrisons is fully controlled by its new owners.
After posting a fall in sales in June, CEO David Potts: “Now that the CMA process has concluded, we are looking forward to working more closely with CD&R as we continue to drive the key pillars of our strategy, focused on being a broader, stronger, popular and accessible business.”

NamNews Implications:
* By way of perspective, assuming that 800 staff invest an average £10k, means £8m invested.
* And assuming a 60% bonus on amount invested, a £10k investment would cost staff £4k…
* One way of getting skin in the game?
* Still, fingers crossed, we are all gambling now…
#Risk #Investment #SkinInGame