Tesco Ireland and the "law of unintended consequences"

The law of unintended consequences states that any purposeful action will produce some unintended consequences. Whilst this can lead to some positive outcome/s, (lower prices leading to increased share, stemming tide of cross-border shopping, political support…) it helps to keep in mind the negative or perverse effects (loss of share), and potential problems
In the Irish market we believe that Tesco faces the possibility of the following unintended consequences:
* Farming lobby resistance (see earlier blog)
* Irish agents of UK suppliers becoming non-viable (with EU penalties of up to 100% of an agent's annual purchases from the supplier in the case of early termination of contract)
* Irish economic fall-out: Tesco being blamed for Irish supplier/retailer business failures or closing of factories, everywhere
* Price-cuts eventually being insufficient to negate the above 'negatives'
* A Government awaiting the emergence of a scapegoat...
..and all of this in an environment dictated by Murphy's Law (anything that can go wrong, will) i.e. 'secret' reports, 'internal' documents…

Retail stalwarts expected to gain sales from fallen rivals

i.e betting on the upside…?
Trusted retailers are expected to gain the business lost via 100 rivals going bust since 2008. This means the big guys in many categories will get bigger (and tougher) as the market moves out of recession. This assumes that that demand returns to pre-recession levels, and consumers do not keep the 'making do' habits being adopted to survive in the short term….
It also assumes that multiple 'grocers' will resist the temptation to cherrypick the best parts of the non-food categories…
We feel that because of their efficiencies and speed of rotation, the mults will recover faster than non-food retailers, scoop up the best of the newly available 'busted business' and will then go for the traditional trusted retailers, big time…
Their low price, value-for-money approach will appeal to shoppers emerging from recession and thereby neutralise any resistance from those politicians that have not retired to spend more time with their expenses…

SWOT to OTSW?

With current financial pressures causing all businesses to conduct a fundamental re-think (i.e. if you feel you cannot spare time for a re-think in the current climate, then someone is already doing it for you…), the humble SWOT analysis can provide a short-cut, provided it is done completely differently…

Opportunities and Threats are outside the business, independent of it and transient. Three good reasons why O & T should be conducted before assessing Strengths and Weaknesses. Starting with Strengths and Weaknesses is simply doing more of what caused the current situation..

When Opportunities have been clearly identified and quantified, and possible Threats factored in, then 'Strengths' of the company should be evaluated against the Market-Opportunities, vs. other companies available to the market, that are capable of meeting those needs. Anything extra is by definition redundant, and therefore needs cutting off…
Weaknesses are negative versions of Strengths, and should be neutralised (elimination takes too much time!).
Finally, 'Transient' means little or no time.
Hence the brevity of this Blog, to allow you to get started right away..

Tesco Ireland Cross-border Pricing: Farmers upping the ante?

Joining up some of the farming dots…

Irish Farming interests represent a complex mix, contain very volatile ingredients, and have immense political influence…
Tesco's Irish price initiatives impact:
- 100 farmers block Tesco aisles with locked trolleys in Navan
- Thirty farmers force way into Tesco Management meeting in Ireland
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- ( Distribution Centre vulnerability i.e. possibility of blockade of Donabate Distribution Centre that supplies 106 stores…..? )
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Making more of less…

With less cash available to invest in the trade, it is essential to be able to add more value to existing funds, in order to justify more concessions from the customer.
Essentially, this means being able to identify and quantify the real cost of a concession to the supplier. The Incremental Sales required to cover the cost will help to place this in context (If you have a 10% net profit, you need incremental sales of £100k for every £10k invested in the customer).
Establishing the true value of the concession means being able to identify, measure and demonstrate (multi-functionally and at multilevels within the customer) the financial impact of the concession on the customer's bottom line, better than the competition…
All of this means understanding how the money now works in supply and retail, and being able to relate it to the current real-world financials of your company, the competition and the customer…
(Give us a call if you want to get there a bit faster! +44 (0)845 643 4481)

UK: Argos Terms change could mean supplier sales increase of 8% to restore cash margin

The Forum of Private Business (FPB) has attacked Argos for doubling the time it takes to pay suppliers. The catalogue chain’s suppliers are being forced to wait up to 60 days for invoices to be settled - compared with the previous limit of 30 days. The Home Retail owned chain has also said it will knock up to 4% off bills it pays within the new longer time limit.
This means a supplier could need an 8% increase in sales to restore its cash margin.
See why below.

Financial impact on Supplier:
1. Price discount of 4%, all costs remaining constant: Extra sales required
• On annual sales to the customer of £150k, the supplier currently makes a gross profit of 40% i.e.£60k on ex factory cost of £90k.
• Reducing prices by 4% means that sales to the customer are reduced to £144.0k, and assuming that ex factory cost remains at £90k, the new gross profit is £54.0k i.e.37.5% of sales.
• Then, New Sales x 0.375 = £60k
• Therefore, New Sales = £60k/0.375 = £160.0k
i.e. extra sales of 6.7% to restore supplier's cash margin

2. Cost of giving the customer 60 days credit
• Here the supplier is effectively giving the customer an interest free loan = 60 days sales
• On sales of £150k to the customer, a 60-day customer pays the supplier 365/60 times per year, i.e. 6.08 times per year.
• This means that the supplier is lending the customer £24.67k, interest free, permanently.
• Say the cost of borrowing is 10%, then the supplier is effectively borrowing £24.67k @ 10% i.e. £2.47k to give it to the customer, interest free.
• However, taking previous credit to the customer of 30 days, then 60 days represents an additional 30 days credit.
• Using the above calculation, this means that on 30 days extra @ 10% cost of money, the supplier is effectively giving the customer a discount of 0.82% on sales of £150k.
• Reducing prices by 0.82% means that sales to the customer are reduced to £148.767k, and assuming that ex factory cost remains at £90k, the new gross profit is £58.767k i.e. 39.50% of sales.
• Then New Sales x 0.3950 = £60k
• Therefore New Sales = £60k/0.3950 = £151.9k, i.e. a sales increase of 1.3% is required to restore supplier's cash margin.

In other words, if the customer asks for 30 days extra credit + a 4% discount off invoice, the supplier needs an 8% increase in sales to the customer, to restore the the supplier's cash margin

See Namcalc for additional 34 essential calculations
See Fair Share Negotiation for what you need in return...

“Legal services by supermarkets is as ridiculous as lawyers selling beans”. *

Working on the premise that all supply chains (even legal services) that have been protected by restrictive practice and/or price controls, may be carrying some surplus weight/inefficiencies, it is a no-brainer that supermarkets would eventually enter this sector, as soon as legislation permitted...

Any suggestion that well established retailers will risk any short-cuts in service-provision debasing the offering, is naïve...

It follows that the essential offering will aim to provide a service stripped of anything that does not provide demonstrable and transparent value for money to shoppers. The test will be repeat purchases by satisfied users, willing to pass on the good news to friends and relatives.

Welcome to the world of baked beans retailing…

The only real issue is how far they will extend the offer….

* Read the full article on The Times website

Keeping Check in Negotiation: Size of the Deal on the Table

Bearing in mind the need to avoid ‘piece-meal’ exchange of concessions in negotiation, it is essential to place all moves within a financial context at the planning stage.

Key preparation points include:
Calculating our share of the customer’s business (£ and %). This sobering exercise can help us to appreciate who needs whom, in the balance of power.
Calculating our share of the category can help to restore some of our self confidence – it can help if our category-definition corresponds with that of the buyer!

Calculating the customer’s share of our business (£ and %) can help us to explore the downside – a quick risk-analysis incorporating the impact and chance of delisting can help to moderate our attempts at devaluing the buyer’s concessions...
Calculating the results of a ‘perfect world’ scenario in terms of the buyer accepting our recommended quantities at list price can provide a base for assessing the impact of concessions on each side.

We can thus calculate the size of the deal on the table by working out the retailer’s sales of our offering in terms of R.S.P and gross margin, resulting in a potential pool of money (gross profit) for the retailer. i.e. If we want to supply 1,000 cases at £50 per case, before concessions, giving the customer a margin of 25%, then he could sell at £67,000, making a gross profit of £17,000 – his potential pool of money.

This same volume, at our sale price and gross margin of 50%, provides us with a corresponding pool of £25,000.
As the negotiation progresses, each party draws from their pool of potential money as they make a concession to the other party.
Accepting a concession obviously allows us to add to our money-pool and helps us to ensure the concessions exchanged are of comparable value. Any ‘shortfalls’ can be made up via adding value and devaluing techniques.
This process helps to measure each concession and facilitates the give-and-take of concession matching and trading.
Knowing the size of our potential pool allows us to establish negotiation limits and encourages us to add value in order to preserve and improve our bargaining power.
By the same token, our knowledge of the size of the customer’s ‘pool’ helps us to gauge the pressure on the buyer and thus the scope for devaluing the concessions with minimum risk.
In addition, keeping the overall size of the deal in mind throughout the session enables us to re-examine progress in financial terms and maintain overall control of the interview.
Negotiating by instinct without the figures means walking out on the ice with no knowledge of its thickness and relying upon the buyer as a source of ‘heat’.
Which would you prefer, numbness or numbers?

Adding Value to your Concessions

Even in the present climate with reduced demand and shortage of funds, reaching profitable agreement with the buyer is best achieved via a succession of concession exchanges, on a one-for-one basis.
Typical manufacturer concessions include delivering on Wednesday instead of Friday, granting an extra day’s credit, organising a special pallet configuration etc.
To strengthen your negotiation stance, it is useful to be able to distinguish between cost and value of a concession (low-level negotiators exchange costs, high-level negotiators exchange values).
In order to ensure that a worthwhile concession is obtained from the buyer, it is important that we offer a concession of comparable value.
As a first step, it is essential to be able to calculate the cost of making that concession.
Obviously (?) your system is capable of calculating the direct cost of any concession, but it is even more helpful if you can understand and appreciate the real cost impact on your company (and competitors) of making any such change to the standard way of doing things for the customer (i.e. a knowledge of Manufacturer Finance).
Ideally, your company will benefit in negotiation by offering those concessions which are cheap for you, but valuable to the customer.
This knowledge of cost and impact on the customer’s business (Retailer Finance) enables you to add value to your concessions by helping the buyer understand and appreciate the benefit to his company of receiving the concession.
Customer Account Profitability analysis should provide all the costs necessary to help you plan and conduct effective negotiation sessions in addition to enabling you to business-manage the account over the long term.
Essentially, the customer can be helped to add value to his business by selling branded goods, heavily advertised and promoted; reducing costs via improved supply chain management, better use of working capital via lower levels of stockholding and better payment terms.
Ways of adding value to your concessions include:
- Calculating and explaining the financial impact of the concession
- Building up and demonstrating the cost elements of making the concession
- Threatening to withdraw an ‘unwanted’ or ‘undervalued’ concession
- Timing the concession i.e. a 2% over-rider payment has more impact if paid at the customer’s financial year end.

The real benefit of adding value is in enabling you to trade a concession costing you £300, talking its value up to £500, thus allowing you to bargain for £500 in exchange.
Meanwhile, your competitor, even if his system is capable of providing the costs of concessions and lacking the ability to add value, has to settle for a £300 concession from the buyer in exchange for every £300 put forward.
More on how to make it work in practice (here)

Have a value-added weekend, from the Namnews Team!

How to Say "No" to the Buyer

During negotiation, especially in the current climate, the ‘give and take’ environment can make it difficult for the seller to say "no" to impossible requests (i.e. requests for over-rider, settlement discounts) if these are against company policy.
A simple refusal may set the negotiation session back and undo any progress already achieved.
On the other hand, any lack of decisiveness may be interpreted as providing scope for possible movement.
Signalling, both verbal and non-verbal (body-language), should be used to reinforce the message. The buyer may even be tempted to try to sidestep the KAM and open negotiations further up the organisation.
In this case, line management obviously needs to echo the KAM’s stance and direct the buyer back to the KAM as manager of the account. Again, any lack of decisiveness merely encourages the buyer to attempt to maintain a dialogue with sales management on a permanent basis.
In dealing with impossible requests, the basic approach is to say outright that no movement is possible, and then explain ‘why’. It is essential to make it clear via signalling that your willingness to explain should not be interpreted as possible flexibility.
Namnews subscribers can find some worked examples here.

Tesco Ireland launches a cross-border retail price war…

Tesco is battling against the renewed phenomenon of cross-border shopping by opening what could amount to the biggest shake-up ever in the retail grocery sector in Ireland. It hopes to stem some of the flow of southern shoppers travelling across the border to spend €550m a year on groceries in the north. They closed 11 border area shops and will open them today showing price reductions of possibly up to 20%, and plans to eventually extend the initiative to the rest of Ireland…
Think of the complications involved:
- VAT: Ireland 21.5%, UK 15%
- Euro/£ Exchange rate: €1=£0.89, possibly moving to parity as recession impacts UK economy
- Case-price variation Ireland vs UK
- Cost-to-serve greater in Ireland than UK (currently, subject to Irish Govt. investigation)
- Cost-of-production higher in Ireland than UK (scale, i.e. population differences 1:15 )
Etc, etc
Unlikely that Tesco will want to absorb these differences without help from suppliers in the medium and longer term..
In other words, time for international suppliers to harmonise prices and terms UK & Ireland?
Pro-active suppliers will also anticipate possible application to other border-areas where shelf-price differentials stimulate cross-border shopping…everywhere..