Thursday 25 September 2014

Retailers' Commercial Income - a cloudy window emerges for suppliers?

As the Tesco profit-overstatement issue builds, it would appear that advance booking of supplier investment will be challenged in terms of the degree of judgement involved and the resulting scope for interpretation…

The FT goes into the detail re the complexity involved in auditing retailer accounts that are based on high-volume, low-value transactions. This means that auditors tend to focus on the systems, controls and processes. 

The article also adds some gems re the audit-techniques used such as examining a sample of agreements between supplier and retailer for accuracy, and may even contact the supplier for validation…

This retrospective analysis of all commercial income, combined with the legal presence and potential shareholder class-action moves in the US, has to result in increasing clarification and classification of the monies paid by suppliers including:
- Rental of space
- Price support
- Promo-support
- Over-riders
- % split between commercial income and operating profit/sales
- And more…(think shopper-marketing, for starters…)

As the ‘revelations’ enter the public domain, other major retailers will need to explain how their systems and process are different/better, or suffer hits to their share prices… In the same way, brand owners will need to anticipate and defend their use of trade investment to ‘encourage’ consumer demand….

Clarifying the opportunity window
However, as the smoke begins to clear, the real opportunity for suppliers lies in the fact that a move to results-based reward, paid retrospectively, would solve many of the problems caused by advance booking  of commercial income. Measurement against clear and unambiguous KPIs would reduce the judgement-element, and booking of the income could be tied down to actual sales performance in given periods of the financial year, or a conservative estimate agreed and used where necessary…

The resulting issue for retailers would be the negative impact on cashflow of moving from payment-in-advance to after-the-event remuneration…

Here a courageous supplier might try to point out that credit periods were always intended to bridge the gap between supply of goods to the retailer and receipt of payment from the shopper.

However, with average credit periods at 40 days+ on supplies that can include best-selling SKUs being delivered daily, but an average stockturn in retail of 15 times p.a., i.e. 24 days stock, it could be said that there is already some surplus in the cashflow pipeline..

Or is supplier credit perhaps the next financial crisis ticking away in the background?

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