Monday 13 October 2014

Commercial Income fall-out: the open domain perspective?

The investigation of Tesco’s £250m overstatement issue by independent auditors and Tesco’s legal advisers has obviously impacted the share price and created considerable media coverage for a topic that is technically not in the open domain. The results of the review will need to be available to all, in order to attempt to reassure shareholders that the share price fall has ‘bottomed out’, corrective measures are in place and growth will be restored, under new management.

Any holding back in the interest of ‘commercial sensitivity’ will seem like a cover-up, resulting in shareholders acting with their feet…

In other words, all output is headed for the open domain.

Meanwhile shareholders, regulators, HMRC, retail competitors, media, suppliers and shoppers, await an explanation…

The issue is, what type of explanation will satisfy this diverse audience’s need for simplicity and clarity?

Any retrospective review of accounting procedure, with a combination of legal help and the benefit of hindsight, is bound to result in a call for unambiguous clarification of each element of Commercial Income.

‘Supply and Demand’ rewards could provide a useful basis for clarification.  In other words, classifying elements of commercial income as either facilitating supply economies, or optimising consumer demand, might help, but still leaves complexity....

Supply rewards could include:
- Central assortment & listing
- Timely and committed forecasts
- Central credit, settlement terms, and payment
- Returns/write-offs
- Deductions

Demand rewards could include:
- Listings
- 'Appropriate' range/assortment
- Category compliance: shelf space & level, fair-share facings
- Promotional compliance, price support, POS compliance, additional placements/displays
- Post-audit recovery
- Sales achievement

It can be seen that, over the years, what was once a fairly simple buying and reselling process, with a retail margin to cover the effort, and sufficient free credit to bridge the gap between receipt of goods and payment by the shopper, has evolved into the complex package we now call Commercial Income.

All stakeholders will now insist upon clarification of each element, including the precise contribution that commercial income makes to a retailer's profits.

This will inevitably result in new auditing procedures aimed at transparency, defensibility and like-with-like 'comparability' in dealing with Commercial Income in retail accounts.

Moreover, as it is unlikely that all retailers will have evolved a uniform definition and treatment of commercial income, so any output from the Tesco exercise will soon result in the need for parallel reviews of other retailers’ accounts, in order to satisfy all stakeholders…

Meanwhile, suppliers could usefully prepare for the inevitable by reassessing each element of their offering in terms of purpose, cost, value and result, before the open domain demands an explanation…

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