Showing posts with label ROCE. Show all posts
Showing posts with label ROCE. Show all posts

Wednesday, 25 November 2015

Online acceleration and Big Space redundancy – the twin dilemmas of UK Retailing

Essentially, in the current climate, major retailers are faced with two significant drains on profitability. First, the high cost of fulfilment compared with B&M retailing makes online business dilutive of overall profit. Secondly, as consumers shop smaller, faster, closer, this makes 20% of out-of-town big space redundant, thus depressing outlet productivity, or rate of rotation of the store asset.

In other words, this results in negative impacts on Net Margin i.e. Return on Sales, and Capital rotation, or Sales/Capital Employed, the two components of ROCE (Return On Capital Employed). 

Understanding how it works in practice will help you appreciate, and resist, excessive demands by your customer, and also show you how best to help, on a fair-share basis.

Essentially, as you know, ROCE = Return/Sales x Sales/Capital Employed.
If ROCE meets stock market expectations, the share price goes up, reducing the cost of borrowing, and can make it less expensive to acquire other retailers via a combination of shares and cash. However, more importantly, a good ROCE increases the value of buyers’ share options and autonomy in running the business.  As the share price falls in response to diminishing levels of ROCE, the opposite occurs.

This may explain why supplier-retailer relationships are becoming more fraught and increasingly personal as B&M retailers begin to understand the real profitability of online fulfillment coupled with the growing problem of large space redundancy on overall company profitability…

Online as profit dilutor
Given that it is one of the only real growth areas in retail, major retailers cannot afford not to optimise the full online potential of their brand. However, compared with the relative simplicity of serving a customer instore, meeting a consumer’s online needs means additional fulfillment costs including picking, packing, shipping and handling returns.

Online grocery is even more complex in that a typical online shopping basket contains more low value and bulky items, reducing the number of orders per van and thus dilutes van productivity. In addition, consumers are generally unwilling to pay for delivery.

As a result, given that a home delivery costs £20, and that the consumer is unwilling to pay more than £5 per order, the retailer loses £15 per drop, only partly recovered via the margin on the goods delivered. Incidentally, those retailers hoping to improve online profitability by shifting their emphasis onto more lucrative categories (i.e. bigger margin non-foods), then pick up the additional profit-dilutor of online returns, where shoppers send back goods at four times the rate of returns made to B&M stores…

As B&M retailing can be more profitable than online, it follows that, as a retailer grows their online business faster than their B&M sales, the overall profitability of their business will be diluted.

Big space redundancy
In ideal times, B&M retailing can be more profitable than online. However, given the structural changes taking place in UK retailing, with discounters and local convenience stores growing at the expense of large space out-of-town players in a flat-line market, so the scale advantages of the major mults are diminishing.

In other words, large space retailers are finding that at least 20% of the store space is redundant, meaning that whereas it was possible to generate £1,000/sq. ft./annum, these sales have to be spread over a greater sales area.

For example: Say a retailer sells £1k/sq. ft. in a 120,000 sq. ft. outlet = £120m sales/annum. With 20% space now underutilised, the store sales become £96m i.e. 95,000 effective space @ £1k, reducing the sales productivity to £800/sq. ft./annum on the 120,000 sq. ft. store, with an equivalent impact on net margin and store utilisation or capital rotation.

Moreover, having conducted range culls to eliminate overlap and duplication, retailers are finding that 80% of sales are generated by 20% of the SKUs, resulting in a ‘long tail’ sales profile, whilst at the same time reducing product choice via the cull.

However, given that space - and its cost - are irrelevant online, in that a product tail can be as long as the number of products available, albeit selling less than one item per quarter, a B&M retailer can be even more tempted to develop their online offering in order to offer the consumer more choice, thus leading to more profit dilution via the fulfilment costs…

On balance UK B&M retailers are heading towards a future of permanent net margins of 2.5% or less, having grown - and built their share prices - on the basis of 5% + net profit before tax…  It is impossible to increase prices, or significantly reduce operational costs, thus leaving the supplier as the main source of help…

Wednesday, 8 October 2014

Commercial Income - the driver for large space retailing?

                                                                                      Shopper-density map Herb Sorensen

The current controversy ref retailers’ advance booking of commercial income and its impact on profit forecasts will be the subject of increasing press coverage in the coming months, especially as other major retailers feel the need to reassess and explain how their procedures differ…

In the meantime, Shopper-scientist Herb Sorensen, in his work The Problem: "Parked" Capital, and his use of shopper-density maps of retail stores, questions retailers’ use of large space.

The above extract is an accurate map of the time shoppers spend in the store. All those blue, and especially the dark blue areas, represent what he calls ‘parked capital’, defined as money tied up in real estate and inventory.

The data and map above are relevant to both inefficient use of floor space capital, but are also directly related to the massive unmoving inventory on most stores' shelves.

Sorensen goes on to suggest that the building of larger and larger stores has been driven more by the desire to offer more inventory - requiring more space - on behalf of the brand suppliers, who are paying for the space and other marketing services, than consumer need.

In other words, large space is NOT needed to accommodate the demands of the crowds of shoppers.

If this is the case, then following the UK's ‘re-audit’ of Commercial Income, redundant space may not be the only casualty…

Hat-tip to Mike Anthony for the pointer

Friday, 8 August 2014

Tesco share-price plunge - a new opportunity for NAMs?

News of yesterday’s plunge in Tesco’s share-price to a 10-year low of 243.8p represents an opportunity for those suppliers prepared to re-interpret their Tesco strategies in terms of having a direct impact on share-price improvement, surely a top-of-agenda item for both the share-optioned Tesco team and the incoming Dave Lewis.

If share price is driven by ROCE, in turn driven by net margin and rate of capital turnover, then a supplier-template for helping an increasingly receptive Tesco emerges…

Essentially, Tesco’s ROCE has dropped over the years to 8.2% and its Net Margin to 3.6%, whilst Walmart’s performance has remained at a steady ROCE 18.2% and Net Margin 5.2%, despite the global financial crisis and its aftermath.

Therefore, to restore its historic share-price, Tesco needs to raise its financial performance to Walmart levels

Suppliers can help in two areas: improving Tesco’s Net Margin and improving its capital rotation as follows:

Net Margin improvement:
Reducing Operational Costs
- Better delivery arrangements
- Easier, more economic process
- Less damaged or defective stock
- Easier handling
- More economic use of labour
- More economic use of space

Reducing Administration Costs
- EDI
- Less time spent on administration
- Fewer administration tasks
- Better payment terms
- Simpler stock and order systems

Capital rotation improvement: 
Sales Volume or Value Increase
- Driving traffic and basket size
- Increasing Tesco yield i.e. sales/sq ft
- Improving quality of yield i.e. trading up

Asset Reduction
- Less capital tied up in stocks
- Less space required to stock
- Faster throughput
- Better use of spare cash
- Better use of fitments and space
- Fewer staff required

In fact, everything you are already doing, but expressed as a direct contribution to Tesco's ROCE and thereby share-price enhancement...

This direct focus on issues for a  customer currently pre-occupied with share-price performance has to represent a new opportunity to demonstrate the value of your trade initiatives and support in a way that connects directly with the buyer’s needs and wants, like never before…

...and why not throw in the fact that every £10k you invest in Tesco is worth £277k in incremental sales, based on their 3.6% margin!

Tuesday, 22 July 2014

The NAM as cash manager - how Working Capital works...


Given the pressures on sales and profits, major suppliers have turned to improved management of their working capital as a source of cash in the business.

According to the latest  EY 2014 Analysis of Working Capital Management, reported in The Grocer, the world's nine biggest food and drink companies, improved their 'cash-to-cash' days by 15% in 2013.

As manager of the supplier-retailer interface, the NAM is in a position that impacts, and is impacted materially by, improvements in the use of working capital.

Essentially, as can be seen in the diagram, working capital is a combination of Current Assets - Current Liabilities, and ideally should be kept as low as possible in order to improve the ROCE.

A NAM can influence the amount of working capital by better forecasting and promo-planning, resulting in lower stockholding, and negotiating better payment terms to reduce the DSOs, all without jeopardising the business. 

Finally, the full EY Report gives a 13-point Action checklist for optimising Working Capital (more detail here) and I have highlighted those affected by the NAM.

EY 13 initiatives to drive working capital excellence:
  1. Further streamlining of manufacturing and supply chains
  2. Closer collaboration with customers and suppliers, enabling enhanced demand and supply visibility, improved forecasting accuracy and better supply chain reliability
  3. Better coordination between supply, planning, manufacturing, procurement and logistics functions and processes
  4. Improvements in billing and cash collections
  5. More effective management of payment terms for customers and suppliers, including renegotiation of terms
  6. Intensification of spend consolidation and standardization
  7. Implementation of a larger, more unified shared-services organization
  8. Increased use of VMI practices, enabling better ordering, production and delivery planning and scheduling for the supplier, and reduced inventory levels and risk of stock-outs for the customer
  9. Alignment of business processes and information systems up and down the value chain to share real-time and accurate supply and demand information
  10. Increase use of financing solutions as a way to provide attractive and flexible alternatives to customers and suppliers
  11. Active management of the trade-offs between cash, cost, service levels and risks (choosing, for example, between customer payment terms and sales price rebates, supplier payment terms and early payment discounts, or inventory levels for consignment stock arrangements and customer service levels) that are sometimes required with various WC strategies
  12. Implementation of more robust supply chain risk management policies,
  13. Tracking and monitoring WC metrics
By the way, if you need pointers on optimising Working Capital, check out your major customers where, being a cash business, shoppers pay them in cash, whilst the retailer pays suppliers in 40+ days... In other words, retailers use negative working capital i.e. at any time they can have as little as £10 available to pay every £100 they owe...

Tuesday, 29 April 2014

Major Customer market capitalisation - what the stock market really makes of the current line-up…

                                                                                                                                 mkt cap 29-04-2014
Given the turmoil in the retail trade, it can be useful to take a City view of the key players via the value placed on their shares…

In other words, whilst most of us merely buy and sell in the retail environment and are mainly concerned with being paid, shareholders have the experience to weigh up all factors in evaluating the real worth of a retail business and are prepared to back that evaluation by investing their (and our) money in the business….

The latest market capitalisation thus represents the market’s best guess as to the value of the business. However, as NAMs are in the comparison business, at least in terms of allocating trade investment funds, it can be useful to compare the major customers on this metric.

Relating the market capitalisation to the retailer’s sales then gives a relative measure of the stock market’s opinion of the company i.e. the greater the Mkt. Cap/sales % the more attractive the company.

For instance, re. the above slide, it can be seen with one exception,at 52.3%, Walmart (and by implication Asda), is head of the table, given its high ROCE and Net Margin performance. At 38.2%, Tesco, despite its current troubles, is still rated No. 2 globally, way ahead of Sainsbury's and Morrisons.

But take a look at Amazon, for a view of the real future...

NB. For UK NAMs: Obviously Waitose/JLP is not a public company so NAMs need a best-guess on how its market cap would compare if it were on the stockmarket (my money is on 38%+). Likewise, the Co-op is not listed, so think south of 25%....

Where next?
Your job is to help the customer increase its market cap by improving its ROCE, in turn driven by net margin and capital rotation...

Application to the day-job? the buyer is a shareholder...

All else is detail...

Friday, 13 December 2013

Return On CONVENIENCE Employed - the real reason for the Big 4 switch to convenience?

With small local stores offering higher Returns On Capital Employed - leasing rather than owning means less capital employed – allows major retailers to compensate for the diminishing ROCEs on their traditional estates. Following the global financial crisis Big 4 ROCEs have reached 10-12%, while Walmart still turn in 19%+ per annum…and as you know, ROCE drives share price performance…

Mintel forecasts Britain's convenience sector sales will grow 5 percent to £43.3bn in 2013 and jump to £54.1bn by 2018. Since the economic downturn, careful consumers now prefer to buy little and often and do so in the shop around the corner rather than out of town superstores, to save on the rising cost of petrol.

Recognising that small local convenience stores, along with the internet, will be the main driver of future sales growth, the Big 4 are all prioritising investment there.

Both convenience and online business require relatively little capital compared to developing large supermarket spaces. But crucially, while the profitability of online grocery is not yet proven, the returns from convenience stores can be, albeit without the benefits of scale economies in terms of running costs….

Apart from the obvious gains in terms of profitability and meeting more shopper-needs, this business shift, combined with supply chain efficiencies making two facings do the work of four in large space retail, has to mean increased space-redundancy in the Big 4’s larger outlets…

In practice, whilst the move to online and convenience will compensate in the short term, unless the major retailers find alternative uses for some larger outlets, overall ROCEs - and share prices - will continue to fall…

In the meantime, NAMs can help by emphasising ways in which their brands can be used to drive retail ROCEs in both formats, but this time with a ‘guarantee’ of a more attentive, share-owning buyer…

Tuesday, 5 November 2013

The Customer's P&L - A road-map for your business?

Despite the fact that using a customer's latest P&L for guidance can be a little like driving via the rear-view mirror, five years after the global financial crisis, the effects are now truly evident in most retailer's Annual Accounts.

For instance, where retailers were producing ROCEs of 15+%, Net Margins of 5+% and Stockturns of 20 times per annum, latest results are showing performances of half these levels, or worse...

With one exception: Walmart, the retail elephant in the room.

This global player, on a low-price platform, continues to generate an ROCE of 19.6%, a Net Margin of 5.5% and a Stockturn of 10.7 times/annum, thereby demonstrating that it is still possible to achieve these results in retail... 

(incidentally, for those with an eye for detail, Walmart's 'low' stockturn reflects their mix of categories and the geographical scale of the US. When and if Walmart ever comes under ROCE pressure, they can simply insist on smaller, more frequent deliveries from 'eager-to-jump' suppliers...)

In turn, Walmart's performance puts pressure on other retailer's to revert at least to their pre-crisis performance levels in order to support their share prices.

...and as you know, a low share price encourages takeover bids, even in well-ordered, 'growing' economies...

In other words, retailers need suppliers, more than ever before.

In turn, NAMs need to be able to cost out each element of the remuneration package - margin, terms, trade-investment and deductions - and demonstrate each element's impact on the retailer's P&L and Balance Sheet, using the supplier's own P&L to measure progress...

Hopefully a little more engaging than making endless excuses ref inadequate trade investment funds...? 

(For a focused discussion on how this can work in your case, pls give me a call +44 (0)7977 273409)

Friday, 16 August 2013

Helping Amazon make a profit - what will make a difference?

Graham Ruddick writes in The Telegraph that Amazon is Britain's most influential retailer, and quotes predictions that the company will be the ninth-biggest retailer in the world by 2018, despite having no stores and little profit.

This very useful and detailed article points out that the mighty Tesco has been forced to admit its biggest hypermarkets are outdated and overhaul its non-food range, Comet and HMV have fallen into administration, newsagents have installed lockers where shoppers can collect Amazon orders, and people are now reading books on their Amazon-made Kindles.

Even those retailers operating in sectors where Amazon has made little impact – such as food and fashion – are worried about what happens when it begins to take their categories seriously....

And yet, Amazon makes little or no profit, and will eventually run out of stockmarket patience… In other words, Amazon will have to meet City/Wall Street expectations in terms of ROCE, Net Margin, Stockturn and Gearing, in order to preserve its current share price.

Obviously from a NAM point-of-view, the key issues in terms of Amazon profitability are:
- Where are Amazon now?
- Where do they need to be?
- How soon?
- How can suppliers help?

Where are Amazon now?
Based on their latest accounts, Amazon key ratios are: ROCE: 4%, Net Margin: 0.9%, Stockturn: 8.6 times p.a. & Gearing: 65.4%

Where do they need to be?
Based on most other global retailers, they need: ROCE: 10%, Net Margin: 2.5%, Stockturn: 12 times p.a. & Gearing: 40%

How soon?
Whilst Amazon are obviously racing for scale and spread of categories, given global uncertainties, we would be surprised if the stockmarket did not ‘punish’ Amazon via the share price unless they show signs of delivering the above ratios in the next two years..
This means they are currently in the market for help from suppliers in driving ROCE. 

How can suppliers help?
See detailed approach here in Kamcity Library

NB. If Amazon really want to scale the dizzy heights, they need to aim at the Walmart ratios:
ROCE: 19.6%, Net Margin: 5.5%, Stockturn: 10.7 times p.a. & Gearing: 55.3%

NBNB. If you feel that these unprecedented times require a little more emphasis on demonstrating your financial impact on your major customer, why not email me on bmoore@namnews.com and find out how? 


Tuesday, 5 February 2013

Trade-spend Responsibility – a move to the Finance Department?

Having grown from a sales-department ‘slush-fund’ of  5%  of turnover to over 20% of  a typical supplier’s sales, trade-spend is now greater than cost-of-goods in many cases.

The global financial crisis having caused consumers and businesses to ‘deleverage’ by paying down debt, means there is less money available to spend, resulting in flat-line demand for the next five years, in most markets…

This situation was becoming unsustainable leading up to 2007, but the global financial crisis has changed the game fundamentally…  The sums and the stakes involved are now so high that companies have to consider applying all of the disciplines of capital investment and the law of contract to the allocation of trade funds, or risk devaluation of the share price by investors, or worse….

In other words, trade-spend, this key selling tool, has become too important to be left to the sales department…

However, it should be kept in mind that NAMs are closer to the customer and as a result are better placed than most to take a commercial view of the ‘cause and effect’ of promotional expenditure.
Above all, the NAM should by definition be a good integrator of company and customer interests in ensuring that trade promotions meet joint objectives.

The key is to be able to converse with individuals in their own language, framing all requests in terms of meeting their needs via the NAM’s initiatives, with the corporate goal-in-common expressed in financial terms, the common language, and Return On Capital Employed the key driver. .

By incorporating the principles of Capital Investment to trade spend management, including the financial impact on both parties P&L, NAMs will echo the finance department approach to making financial investment decisions and will thus make trade-spend feel more comfortable in Sales’ hands…

More on ‘How’ for NamNews subscribers in the February edition.
Free trial available here 

Tuesday, 22 January 2013

Customer in trouble - your call?

'The big ones hit the headlines, but when you see them all in a list....'

Given the cost of recovering lost profits when a customer goes bust, it is obviously vital that suppliers watch for the signs of trouble and act faster than the other guy. Obviously the finance department are equipped to pick up the signals in a customer’s annual report, but this merely gives a historical view.

Why the NAM view is crucial
However, when combined with a NAM’s daily experience of being in the market, continuously being exposed to a mix of weak and relatively healthy customers, understanding the effect of business pressures on interpersonal relationships, being subject to all the stress-symptoms of a customer drifting to the edge, and usually tasked with the job of filling the supplier’s profit-gap via incremental sales, it is more important that early warnings detection and signs of possible recovery be built into the NAM role.

This means NAM’s should familiarise themselves with the key financial indicators (see above) and couple this with any signs of a stress-driven deterioration in their dealings with the buyer and other functions within the business, and hot-line their findings to their finance colleagues…

It goes without saying that NAMs should then be part of any decision to modify (application of credit limit, withholding supplies etc) any aspect of the trading relationship, given that the NAM will have to communicate the decision to the customer, handle any flack arising and have to find the appropriate incremental sales elsewhere…

Anyone having issues ref pulling the plug should remind themselves that if their net profit is 5%, and a customer goes bust owing £150k, then the incremental sales required for recovery of profits are £3m….

More here & here

Wednesday, 24 October 2012

Premier Foods - joining up the dots in retrospect...

As you may remember, as long ago as the 5th October 2012, KamBlog analysed Premier Foods options and advised you to watch this space to see the dots joining up in retrospect… (Steve Jobs warned that you can't connect the dots in life by going forwards, it's only in retrospect that you begin to make sense of the bigger picture..)

Walking away from a £75m bread contract
Premier Foods’ decision not to renew their £75m own label bread contract with one of the major mults is all part of a move to reassess each part of its business and sell/walk-away when the figures don’t add up. This in turn is driven by a need to drive up the share price by improving its Return On Capital Employed (see KamBlog – Premier Foods).

Next moves
In a low margin, high overhead category, Premier now have to place the £75m with another mult on better terms, or suffer an increased overhead burden, probably resulting in sell-off of bread-related assets to restore profitability.

Meanwhile, by demonstrating  their willingness to walk away from unprofitable deals with retailers, Premier have done a favour for other suppliers, besides causing their share price to rise 4¾ - 6pc - to 83½p, yesterday.. voila!

Going back to the future
The key idea here is that these moves were obvious on the 5th October, to those NAMs that were prepared to explore the greater business context, and then attempt to anticipate the implications for their category and customer relationship. Running the what-if numbers then reveals the urgency…

As Steve Jobs proved many times, by using historical dot-joining to establish the big picture (including the numbers) he was able to anticipate future consumer needs and design accordingly…

Apple’s resulting output provides the evidence all around you...