Tuesday 30 July 2013

Customer going bust - the incremental sales impact!

Yesterday, the administrator announced that lenders and suppliers to toy and model retailer ModelZone face losing up to £11m after it collapsed into administration. Of this, the company owed more than £9m to the secured creditors Lloyds Banking Group, leaving approximately £1.5m to the suppliers, the unsecured creditors.

In other words, the suppliers will receive nothing - the anticipated £4m from the stocks sell-off will go the bank - meaning that suppliers will need to recover their losses via incremental sales elsewhere, whilst their ModelZone stocks end up competing with them in the markets at 50% or more discount….. a double whammy?

Getting it in perspective
£1.5m seems a small amount by comparison with the £9m owed to the secured lenders- a dangerous idea that could prevent us from appreciating the significance of the loss.

In the same way, we have somehow become so accustomed to ‘a trillion here, a trillion there, soon we’ll be talking about real money’ in the global financial crisis that it no longer seems like a joke…  In other words the big numbers appear to have raised the bar on financial pain for suppliers and customers.

How the NAM can break through the apathy
Because of this ‘insensitivity’ to ‘mere millions’ it is vital for the NAM to find a way of expressing loss in a way that is not necessarily alarmist, but yet causes the organisation to take the issue seriously. For instance, a supplier on a net profit of 5% needs incremental sales of £30m to recover from a loss of £1.5m, in the current climate (!), competing against its own liquidated stock selling at ‘50% off’ in the marketplace…

Now do I have your attention?

In the same way, NAMs have to impress upon their colleagues the importance of
- making credit worthiness a top KPI and not just a job for the credit control department
- picking up and communicating every delay in payment, instead of regarding it as a ’one-off’ glitch
- delivery drivers noting stock-gaps of key lines in the customer’s depot
- merchandising colleagues reporting on store-staff morale and on-shelf availability

The carrier of the can
But the main focus should be on the NAM’s ability to read the situation at the supplier-retailer interface, via a combination of updated analysis of the customer’s latest published accounts and the constant realisation that the NAM will have to pick up and implement the incremental-sales-tab in the event of a misjudgement….

Incidentally, using the same ‘incremental sales’ approach, the GSCOP Adjudicator might make more impact by referring to the potential £1bn fine for bullying suppliers not in absolute terms, but as the incremental sales of £20bn required by a retailer making a net profit of 5%, or are we back in the land of funny money?

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