Monday 18 July 2016

Post-Brexit opportunity: deck clearance vs. re-arrangement of deckchairs?

Governments’ pre-occupation with maintaining the ‘status quo’ provides us all with a temporary window where clarity of vision and a  modicum of decisiveness can help us to conduct a fundamental clear-out  of anything that does not contribute directly to business goal achievement.

In practice, this means getting back to basics, big time, while others still try to make sense of what is happening…

Essentially, despite the unprecedented Post-Brexit market conditions, in business we survive by driving sales or cutting costs, or a realistic combination of both. As we try to come to terms with Brexit fall-out, resulting in increasingly savvy consumers ‘making do’ and postponing purchase, thereby taking demand from the market, all growth will have to be achieved at the expense of competitors. In other words, we need to meet consumer needs better than the other guy, with tin contents always exceeding what it says on the label, whilst all costs that do not directly contribute to satisfying market need, have to be cut, to prevent others doing it for us…

1. Clarifying consumer and retailer needs

Despite our familiarity with the brand and an inclination not to try fixing what seems to be ‘working’, latest annual reports from both supplier and retailer show that companies are generating inadequate rewards for risk in the post-Brexit climate.

In fact, low or even negative interest rates – read between lines of Bank of England announcements – are causing companies to take false comfort from lower returns ‘in common with others in the same boat’…

In unprecedented times, random cut-backs can represent unacceptable risk. For this reason, consumer need has to be a starting point in establishing the real fit of our brand with the market, better than alternatives available, at both functional and emotional levels.

It is also crucial to keep in mind that consumers will increasingly buy easier, faster, closer, and more often, continuing to cause structural change in the retail market. In other words, given that the discounters are growing at the expense of brands, we all need to find ways of working profitably with Aldi and Lidl.

Similarly, our trade package comprising Product (brand performance) Prices and Terms, Presentation (how the offering is expressed) and Place (supply-demand chain and in-store logic) needs to be really tailored to individual customers, and demonstrably so. All excess will need to be trimmed back to release resources to augment inadequacies elsewhere, and not simply supplement margin.

Again, a cursory analysis of a customer’s latest annual report will indicate how our offering should be recast in order to show how it directly impacts and drives ROCE improvement. The fact that the buyer never mentions ROCE is not to say it is irrelevant, even in Post-Brexit times. In fact ROCE performance drives the entire business process. Those in doubt should reflect on the fate of companies that ignored this principle, even in the good times…!

2. Buying Mix Analysis – optimising competitive appeal

Our trade and consumer offerings are meaningless unless placed in a realistic market context of available alternatives, meaning related to other offerings to which retailers and consumers have access. Buying Mix Analysis can help

3. Driving Sales

Having identified degrees of competitive appeal above, a supplier is in a position to seek ways of driving sales. Again there are only four alternatives:
  • Encouraging customers to sell more of our current lines via full availability, adequate facings, tailored promotions and optimising shopper marketing, better than the competition
  • Selling our new products to current users, building on the trust established in our current products
  • Attracting new shoppers of similar profile to our brand-consumers to the store and offering them our current brands
  • ...and even selling our new brands to new traffic, who knows?
4. Cutting costs

While driving sales, knowing our competitive appeal and using customer/shopper need as the ultimate benchmark, we need to eliminate any redundant attributes of the offering, anything that is not actively contributing to customer and brand profitability. We thereby strip away anything that will not jeopardise the appeal of the offering, but will reduce cost…

In practice, this means reducing manufacturing, packaging and distribution costs by sourcing locally, lowering ATL expenditure to match actual consumer usage of media and redeploying where necessary. It also means communicating one-to-one with actual and potential users, and eliminating anything that is not fit for that purpose. In the same way, all trade terms and investment need to be related to expected performance via 100% compliance, with partners that adhere to the spirit rather than just the letter of the regulations, with trust as the essential ingredient…

5. Driving retailer ROCE

Using the output from 1-4 above, all moves should be incorporated into the retailer’s ROCE model, demonstrating how the brand is increasing net margin and improving capital rotation, taking overall ROCE from latest Annual Reports to where it needs to be (In spite of near zero interest rates, ROCE 15%, Net Margin 5%, Stockturn to 20 times/annum and Gearing 30% or below) without jeopardising the supplier’s own ROCE, in order to preserve their autonomy for both companies, better than the competition.

Post-Brexit survival will allow for nothing less…

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