Thursday 2 April 2015

Tesco's Margin Objectives: Going from Back to Front to go Back to Basics

Given that Tesco plans to reduce the negotiating elements of Back Margin from 24 to just three, it may be useful for NAMs to work this through in terms of the financial impact on their Tesco relationship.

Essentially, it is probable that the total Tesco take from your brand will remain the same i.e. they are unlikely to surrender any income currently coming from Back Margin; a proportion of this will simply move into Front Margin.

In other words, say the current 20% of trade price represented by trade investment will translate into 15% of ex VAT shelf price, assuming a 25% retail margin.

Only issues are 
-   What will happen to shelf price if Tesco want to drive sales really hard via a 15% price cut?
-   Will scale discounts be large enough to satisfy Tesco (i.e. their January price-cut test appeared to be profit-neutral)?    

However, on balance, Tesco’s move on Back to Front Margin represents a quantum leap for suppliers in that their front margin will be a direct result of sales made and will be paid in arrears

BTW, it might be wise to hold a bit back in case a change of management at some stage concludes that your category’s in-store presence needs a little ‘livening-up’ via an additional injection of trade investment…  

No comments: