Thursday 11 June 2015

Back-margin funding of deeper price-cut by the Big 4?

The Telegraph today highlights a new report from Moody’s that says Tesco, Sainsbury's and Morrisons 'can't afford more price cuts', with sales and profits set to fall for another 12 to 18 months…

In other words, there has been some retrieval of customers, but the cost has resulted in margins being reduced by half since fiscal 2013/4....

However, this assumes that supplier trade investment has been used for the purpose intended i.e. in-store motivation of the shopper.

What if the retailer decides to switch a significant amount of back margin into price-cutting?

In practice this could work out as follows: Say suppliers contribute trade investment amounting to 20% of their turnover, to a retailer on 25% retail margin. This translates into 15% of net shelf price.

If the retailer decides to allocate say 5% for ‘back margin’ purposes, this frees up 10% of net sales that could be used for a combination of further price cuts and supplementing the bottom line….

This raises a number of issues for suppliers:
  • Would you even know it had happened? i.e. Have you got updated T&Cs in place for each Back Margin bucket, along with appropriate KPIs?
  • How ready are you to re-evaluate each element of your trade investment, confident in your ability to quantify the cost, and demonstrate the value to the buyer, using the retailer’s latest financials…?
These unprecedented times still have a bit to run, can you afford to sit it out?

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