Monday 11 March 2013

Discounts for ‘investment in joint growth’ - how to say 'no'…

With retailers hoping to recoup trading losses via additional discounts on agreed invoice prices, it is vital to refuse. This is not only because of the profit implications, but also as a matter of principle.
How you say it can determine the future relationship.

S:    I think I must have missed something. You are asking for a 4% discount on the prices we agreed 7 months ago? …and you want to apply the reduction to all deliveries made since that date?
B:    Correct!
S:    So, the agreement you and I made was unauthorised? Should I be seeing someone else to agree price increases?
B:    No, I have full authority
S:    Therefore, if I can show you why we cannot roll back the agreed price increase, the original agreement stands?
B:    No, this is an order from on high, it over-rides all agreements…
S:    Obviously your call, but it seems like your board is now doing the buying…..perhaps I can provide you with some outside rationale that you and your colleagues can use internally?
B:    I’m listening…
S:    First, your request is unique, no one else is asking for retro-reductions, so me and my colleagues have to assume that we have robust agreements with all other customers, companies that stand by their decisions. If we gave in to your request, we could de-stabilise the rest of our trading relationships.
B:    This is just you and me, the others need never know…
S:    Wrong, nothing is ever just you and I. Your demand means that, as an ethical company, I have to walk away.
B:    So be it
S:    Before I go, let me explain the size of your potential loss.   As you know, in our part of your category, we represent of £840k of your annual sales, ex VAT.
B:    How do you know that?
S:    Easy. With a 27% retail margin our annual sales to you of  £605k translates into £850k sales out, ex VAT, apart from trade funding and credit. Now, given our precise fit with your target shopper, the loss of our business would obviously be possible but a bit of unnecessary hassle to replace. Besides you and your colleague-buyers will most likely come up against similar resistance to going back on agreements in the market place.
B:    That’s our business
S:    Right. Now let me explain why we have to walk. We make a Net Margin of 6.7% on your business. From our published accounts, you can see we sell £7.5m per annum in the UK, on a Net Margin of 9%. This means you are already diluting our UK profitability. Also if we gave in to you, as an ethical company, we would have to offer the same deal to other customers.
B:    Just because they cannot buy properly is no reason to penalise us…
S:    No, think about it. If we reduced our overall Net Margin to 6.7% we would reduce our net profit by £172.5k   ( 9% of £7.5m = £675k, 6.7% of £7.5m = £502.5k, difference is £172.5k)   This means we would need incremental UK sales of £2.6m if we gave in to your demands. (£172.5/6.7 x 100 = £2.6m)  So you can see it’s not going to happen.
B:    I still need the money….
S:    You obviously know your bosses better than I, but are you saying you need the reduction in principle, or the money it represents?
B:    I think the money would do it for now…
S:    OK let’s talk about what’s involved if we count a 4% reduction on 7 months purchases.  (£605k/12  x 7 x 0.04 = £14k)  So you want an extra £14k from us
B:    I hadn’t realised it was so little…

SuperNAM:    Depends on how you look at it. With your net margin of 3.2%, it represents incremental sales of £437.5k… What we need is a bit more support instore for our additional £14k. How about an extra  couple of facings that currently cost £7k each, with a couple thrown in, free-of-charge so we can share the possible over-facing risk?
Buyer:           You reckon you can generate incrementals of … ?
Adventures of SuperNAM (16)

No comments: