Dalton Philips - a casualty of a time-warp breakout?

Appointed to pull Morrisons into the 21st Century via an injection of IT, global vision and democracy, Philips managed the five-year programme of heavy lifting, but was undone by the middle-squeezing impact of Waitrose and the discounters, at a time when a return to basics was required in retail…

In the interim, with his down-to-earth, common-sense approach, Andrew Higginson will reduce the Morrisons’ message to basics and go for growth via a shift from back to front margin, a focus on pricing and a search for a like-minded replacement CEO.

The new team will build on Philips’ improvement in operating systems, and moves into convenience and online.

Within the business, the new chairman and CEO will sound and feel like Ken Morrison, which will not only provide internal reassurance, but will also ensure a couple of years’ silent tolerance from at least one key shareholder…

Back to the future for Morrisons?
Meanwhile, NAMs need to anticipate a return to the old Morrisons, but manage a retailer that is super-charged with the benefits of a visit to the future… 

The Hungarian Revolution in retail competition legislation - Why this matters to the UK NAM...

Following on from yesterday morning's post re the new trade law in Hungary re closure of unprofitable supermarkets (below), it is obvious that the Hungarian competition authorities have evolved a very effective way of neutralising some of the scale-power of major retailers.

A new model in the management of anticompetitive behaviour
Unlike more 'sophisticated' markets where a set of rules is established, and transgression is detected, proven and penalised, the Hungarian authorities have identified the ways in which large companies can exercise scale-power and are taxing such uses in order to neutralise their impact on smaller players, fast.

This is a much simpler process that does not need the help of whistle-blowers to make a case.
Details are given in the posting below of the steps already taken in taxing large companies' ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and forbidding the sale of some categories (tobacco).

Application of the process to trade credit abuse
It follows that when they come to the issue of trade credit, the Hungarian authorities will not - unlike UK legislators - miss the point of trade credit abuse by penalising breaches in 'on time' payment of invoices i.e. the customer is entitled to negotiate a period of their choice -  45 to 90+ days on a 'take it or leave it basis' and be in breach only if the agreed time period is breached.

Instead, if they follow their current approach, the Hungarian authorities will calculate a method based on transfer of value time-period, plus say 5 days handling to allow for banking system 'efficiencies' which in the case of  weekly deliveries would work out at approximately 15 days from date of delivery.

The authorities would then simply apply a commercial rate of tax - say 5% minimum p/a - on any period in excess of 15 days, thus neutralising the scale power of the customer re credit period. Monies collected in this way could be then re-cycled to subsidise smaller players...

Credit period was never intended to morph from covering the gap between receipt of goods and payment by the customer's customer, to becoming  a source of free credit or working capital, at the expense of a supplier too powerless to object...

Hungarian Lawmakers Pass Law On Banning Unprofitable Supermarkets, in the name of fair competition

According to Xpatloop, lawmakers have approved a government law on banning from 2018 supermarkets and hypermarkets that fail to make a profit for two consecutive years.

Given that the new law was this morning cited by Tesco, Hungary's biggest supermarket chain and third-biggest employer, as the reason why they will close 13 shops in Hungary in order to remain profitable for the long term, it can be seen that the new legislation is being taken seriously.... 

The government makes the moves as part of a policy to eliminate of factors that enable large supermarket chains to abuse their preeminent positions. Steps already include a 15-fold rise in the so-called food supervisory fee, the recently introduced advertisement tax, and the ban on tobacco shops in some big supermarkets.

It can thus be seen that the Hungarian government have gone farther than other countries in attempting to combat unfair competition, in that they have reached to the heart of how large companies exercise scale-power and focused on what they regard as root causes of unfair advantage, namely the ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and the sale of some categories (tobacco).

In other words, these moves should be seen as a progression towards ensuring fair dealings by large retailers and suppliers in an attempt to reduce anti-competitive pressure on medium and smaller trade partners.

It remains to be seen how soon competition authorities in other countries take similar steps, in the search for fair dealings for all...

Meanwhile, time for UK suppliers and retailers to anticipate the inevitable, vis appropriate 'what-ifs'? 

Tesco's Fightback Plans – a Live version for the guys that count

Whilst we bated our breath and crossed our fingers in anticipation of Tesco’s announcement yesterday, and thankfully had our natural optimism endorsed via a subsequent 15% surge in the share price, Dave Lewis greatest challenge was convincing a room full of City Analysts that he meant business.

This live session is now available online:
Watch the webcast here

The Presentation:
The real benefit for NAMs lies in the fact that the 1.5hr session gives a real demonstration of how Tesco has been dealing with the crisis. In a 60 minute presentation via 42 slides, Dave Lewis explains in some detail the key moves now reported in the media. 

However, as salesmen, NAMs have a special advantage in watching the man in action, with body-language providing additional insight and supplying the pieces of the perception-jigsaw that enables suppliers to enhance anecdotal learnings picked up in face-to-face encounters with the buyer.

The Q&A session:
Whilst it could be said that the opening presentation was rehearsed and fluent, the Q&A session (at approx. 55 mins into the webcast) reflected some of the more obvious issues affecting the audience, and this session gave the analysts (and the viewer-NAMs) access to CFO Alan Stewart and caused Tesco to think on their feet, another learning opportunity for NAMs…

With up to three questions per analyst, and careful observation of the manner in which the answers were handled, the 40 minute session has to yield some individual nuggets for perceptive NAMs.

The questions were mainly financial, reflecting the priorities of Tesco’s current situation, but the over-riding impression for observant NAMs is that whilst Tesco sees its issues and opportunities in terms of meeting consumer need, the key lens they will use will be risk-reward and cost vs. value relationships.

In other words, the numbers will count, big-time!

I could give you chapter and verse re the entire session, but nothing beats the value of finding 1.5 hours over the weekend for those NAMs prepared to invest a little 'leisure-time' in seeing how your career will pan out over the next few years.

Yesterday’s webcast showed the new Tesco culture in action, and if successful, a pointer for the future of UK retail…

Tesco Re-boot - Dave's work-in-progress...

Given the combination of store closures, asset disposals, capital investment cut-backs and appointment of Matt Davies as UK CEO, it is now obvious that baggage-free Dave Lewis means business.

However, these moves are being made in order to shore up the Balance Sheet and cover some of the Pension Fund deficit. Closing 43 loss-making stores and selling dunnhumby and Blinkbox will yield no more than £2.5bn.
Therefore it is best to see this morning’s announcement as part of an overall disposal programme that has to see the disposal of Tesco Bank, and their SE Asia interests in order to give Lewis sufficient elbow room to tackle the real agenda - The neutralisation of the discounters…

In fact, the announcement of up to 25% price-cuts on 380 branded products could be seen as ‘one for the multiple team’ aimed at using big-gun brands to impact Aldi and Lidl's equivalent surrogate-brands. Note that there was no attempt to make the price-cuts via Tesco private label…

It follows that the other mults will need to follow suit to avoid becoming side-dishes on the menu… 

Two issues remain:

• What discounter categories will Tesco tackle next via what brands, in order to address the full discounter portfolio?
• Given Dave’s generation, will this first cut be the deepest….?

Time for suppliers to run the numbers on the inevitable scenarios in order to anticipate and factor in Tesco’s obvious determination to meet their customers’ needs for “simpler, lower and more stable prices”?

Sainsbury's - Elephant-management in the main aisle...

With a less than expected fall in its third quarter, and confirmation of their convenience and quality credentials, there are many things right about Sainsbury’s.

Bearing in mind that the reported results reflect the whole of Sainsbury’s business, NAMs will have already compared their brands’ performance to check fair shares at category level.

However, in order to optimise opportunities, it is necessary for NAMs to go beyond Mike Coupe’s understated warning that "The outlook for the remainder of the financial year is set to remain challenging…” and explore possible issues and implications, ideally ahead of the competition.

Essentially, Sainsbury’s have to be considering the following:

Space redundancy
Like the other multiples, Sainsbury’s are probably occupying retail space that is 20% in excess of need, especially out-of-town. This means they will close and sell off some low-profit outlets. (See impact here )

However, this leaves some outlets that are too big for purpose in terms of the company’s current offering. These require re-engineering in terms of possibly franchising redundant space for complementary categories that might benefit from Sainsbury’s pulling power.

Meanwhile, there are instore theatre opportunities for suppliers in appropriate categories, providing that the resulting numbers exceed current-use performance…

Commercial Income
With Tesco re-negotiating its supplier contracts (see yesterday’s KamBlog below) it is likely that other multiples will have to follow suit.

This could mean that significant amounts of supplier trade investment will transfer into front margin, with a strong possibility (as you know, in current retail, only yesterday is certain!) that this will result in price-cuts sufficient to neutralise the discounters….

Whilst Sainsbury’s will probably edge upmarket to optimise their strengths at Waitrose end of the field, they will need to keep one foot firmly in mass retail and follow Tesco…

Meanwhile, the multiples and their suppliers need to re-assess their use of trade investment /commercial income as per the UK Financial Reporting Council (FRC) warning (see details).

Hopefully, proactive management of these two elephants will leave some time to deal with other distractions like food price deflation, flat-line demand and increasingly savvy consumers…

Tesco Supplier Contracts - a ‘back to front’ move in trade relationships?

On Thursday, Tesco is expected to announce that it is making major changes in supplier contracts by shifting its emphasis from back-margin to front-margin.

In practice, this has to mean that commercial income (trade investment) will be translated into sales-based reward, and presumably negotiated into trade margin and volume discounts. Given the sums involved, with trade investment running at 20% of their sales for many suppliers, and average trade margins at 25% of a retailer’s net sales, it is imperative that suppliers enter these re-negotiations, well prepared.

In effect, this means that a supplier has to be very clear about the actual cost to the business of each element of the supplier trade investment package, the purpose, the KPIs and the terms of compliance. Converting these sums into the incremental retail sales (ex VAT) that they represent, based on the retailer’s current net margin, will help in adding value in negotiation.

More importantly, it will remind the NAM that any transfer into front-margin has to be linked with appropriate levels of incremental sales.

In other words, as front-margin currently consists of a mix of the retailer’s trade margin and unconditional volume discounts (!) it is vital that any additional volume-based discounts should be made conditional upon specific initiatives hitting pre-agreed KPI targets, and paid in arrears – a reward for additional effort by the retail-partner, the original purpose of trade investment.

If Tesco manages to make this fundamental change in their supplier relationships, and unless suppliers are able to tie the incentives to specific in-store initiatives, it is probable that much of the monies will transfer into price support.

This means that other multiples will have to follow suit, or risk loss of market share.

Time for a fundamental re-assessment of the TOTAL support package your brand needs in making itself available to the consumer?

The Squeezed Middle - a surplus opportunity for 2015?

As we enter an unprecedented trading year, it is tempting to regard last year’s and 2015’s anticipated cut-backs as negative, and even causing some nervousness for those that are experiencing unprecedented sales growth, perhaps we should view the new market differently?

Instead of regarding the prolonged downturn in demand as a continuing spiral, how about regarding it as the elimination of surplus, with demand gradually working through the surplus that has resulted from 30 years of credit-fuelled growth?

In other words, in the way that post-Christmas dieting has already begun to yield results for some, so too the savvy consumer has spent the last year re-assessing and modifying their purchasing behaviour in the following ways:

• ‘Making do’ with existing food/non-food stocks and leftovers
• Food wastage being ’corrected’ by the weekly shop
• Less ‘wasteful’ car journeys to out-of-town superstores when a local shop can be more convenient, a source of exercise and helps to reduce car running costs...
• First-hand discovery that discounters are ok, that private label is worth including in the ‘making-do’ repertoire, and can even be ‘better than brands’ in some cases...

Where is this headed?
The above has combined with retailers’ discovery of the under-used tail in large-space retail, a fall in land-bank values, the inevitable closure of at least 20% of mult’s existing selling space, to point us at unprecedented cut-backs in consumer and retail demand in 2015, in order to absorb the now unwanted surplus. In the process, the retailers will rationalise ‘over-lapping’ brands in many categories, in order to simplify the retail offering at point-of-sale

How does it affect you?
‘…if you need to ask….’

What to do about it?
Patently, there is a need to reassess fundamental demand for your brand, vs available alternatives, and cut back obvious surplus, before the consumer/retailer does it on your behalf...

But keep in mind, we are talking about ‘surplus to demand’.

In other words, if we cannot make a case within the business for a real place for our brand, in a deal that is ‘obviously’ better that that available elsewhere, we are simply delaying the inevitable.

But, the consumer still needs our product. Now we need to help them re-appreciate our brand...

At long last we have reached a trading year that will eliminate the surplus and as a result, holds genuine opportunity for those that have the courage to go back to the fundamentals of consumer and trade need-management, faster and better than the other guys…

Coles ordered to pay $11.2m in penalties, legal fees for mistreating suppliers

According to reports in ABC Au News, the ACCC said the supermarket giant had set up the Active Retail Collaboration (ARC) program to make 200 small suppliers pay rebates to boost the company's profits. Details of specific charges here.

Even more importantly, the court used the word ‘unconscionable’ to describe Coles behaviour.
Unconscionable conduct is generally understood to mean conduct which is so harsh that it goes against good conscience. 

Under the Australian Consumer Law, businesses must not engage in unconscionable conduct, when dealing with other businesses or their customers, following a Federal Court decision to uphold an Australian Competition and Consumer Commission (ACCC) settlement over supplier mistreatment.

The ACCC used its compulsory information gathering powers, forcing suppliers and Coles to provide information about the claims.
.
Why this is serious
There are a number of factors an Au court will consider when assessing whether conduct in relation to the selling or supplying of goods and services to a customer, or to the supplying or acquiring of goods or services to or from a business, is unconscionable.

These include:
- the relative bargaining strength of the parties
- whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party
- whether the weaker party could understand the documentation used
- the use of undue influence, pressure or unfair tactics by the stronger party
- the requirements of applicable industry codes
- the willingness of the stronger party to negotiate
- the extent to which the parties acted in good faith.

This is not an exhaustive list and it should be noted that the court may also consider any other factor it thinks relevant.

The key idea is that the Au authorities are using legislation and language that will guarantee the wide publication of the details in consumer media, in terms of criticism of retailers for abuse of power, especially with regard to small suppliers.

Application to the UK
Despite a distance of 10,500 miles, the case has to set important precedents for UK authorities….

Apart from the obvious pointers for strengthening UK rules, the case clearly demonstrates the ‘teeth’ that have been given to Au competition authorities, meaning that UK will have re-assess all current supplier-retailer practices in anticipation of eventual application here.

The Tesco SFO investigation will provide a platform and act as a catalyst in defining and accelerating appropriate change in the UK.

The problem for UK retailers is that the combination of 45+ days credit, trade investment of 20+% of purchases, deductions of 5+% and price-cutting currently result in Net Profit margins of approximately 3%, meaning that retailers will be unable roll-back any of these sources of income without diluting their profits…

It remains to be seen how early in 2015 the pace of equivalent change will begin to accelerate in the UK…

See here for guidance on How to avoid becoming a victim of unconscionable conduct, How to avoid engaging in unconscionable conduct, Penalties and remedies, and links to appropriate Au law.

A Christmas message from the SFO to S Claus Enterprises Ltd. via NamNews

DOWNLOAD COPY

'Prompt' Payment - are we all missing something?

News that food giant 2 Sisters has been seeking more than four months to pay its bills, is but the latest in a growing line of companies that apparently see supplier credit as a free source of Working Capital…

Given that the interest-free credit period given by suppliers was originally intended to help a customer to bridge the gap between receipt of the goods and payment by its customers, then payment should be related to this time-frame.

How about replacing the 'Prompt' Payment Code with a Fair Payment Code?

In the fast-moving UK grocery & food industries, with daily deliveries and average supplier credit-periods of 30-45 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods in the industry.

Moreover, government belief that the Prompt Payment Code (i.e. compliance with negotiated terms) fixes the problem, is a misconception.

A supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.

If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper or customer. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?

In practice this means that fresh produce delivered daily to retailers, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system? Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.

Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis away from free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...

However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.

Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.

What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster. This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.

A real Christmas present for suppliers everywhere?

Abolishing Trade Investment by suppliers - the impact on brands

News that Tesco is allegedly planning to dismantle the system of using Commercial Income, or Trade Investment, as a source of cash from suppliers raises a number of issues for NAMs and competing retailers.

What does it mean financially?

Conclusions:

• Supplier cannot afford additional investment (in fact the calculation shows why so many suppliers are struggling profit-wise)
• Retailers are not going to surrender Trade Investment & Deductions as sources of income
• Retailers may try to negotiate Trade Investment into Margin, thus removing the issue of how it is booked in the business
• Trade Investment may be absorbed into retail running costs and price-cutting, with less available for in-store customer incentives
• Eventually, additionally funding may be requested in order to 'create a bit of excitement' in-store....

Still ok with your trade agreements for 2015?
(Why not substitute your brand's % in the above calculation and see what it is costing you to be onshelf...?)

Walgreens-Boots: Pessina to acting CEO, Wasson to retire

News just in confirms that following completion of the merger in Q1, 2015, Greg Wasson will retire and Stefano Pessina will become acting CEO.

Although Boots will represent 33% vs Walgreens 66%, the combination of Pessina’s personal shareholding of 16% and the acting CEO role has to give Boots the opportunity to punch way above its weight in 2015…

A happy New Year to NAMs everywhere!!

UK accounting watchdog warns retailers after Tesco scandal

Britain's Financial Reporting Council (FRC), which polices accountants and is examining how Tesco's error came about, said on Monday that the boards of all retailers and suppliers should provide investors with sufficient information on their accounting policies, especially Commercial Income (i.e. Trade investment).

This is particularly important for NAMs as the watchdog said it would focus on this area when it comes to reviewing audits for 2014 that will be published in 2015.

The FRC said there was no single accounting standard for such disclosures and there is an "absence of well-known industry norms", meaning that auditors have to resort to judgement in most cases.

Given the 20+ ‘buckets’ that suppliers use for trade funding, it might be useful if NAMs simplified and segregated their funding.

‘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
- EDI
- 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
- Minimalising post-audit recoveries
- Sales achievement

It is likely that the SFO-Tesco outcome will result in new auditing procedures aimed at transparency, defensibility and like-with-like 'comparability' in dealing with Commercial Income in retail accounts.

Meanwhile, suppliers can anticipate the changes and possibly avoid major retrospective overhauling of their trade funding process, by taking action to clarify their trade funding process now, while others await the inevitable… 

Tesco's Christmas' Surprise - a Final Shocker for the Market?

Today’s profit warning, indicating that February’s year-end profits will come in at £1.4bn, 25% lower than analysts’ expectations, had better be the final shock from Tesco…

Whilst the City will be relieved that no further scandals were revealed, this below-expectation profit guidance has to mean that analysts are still not reading Dave Lewis well enough, and will hopefully result in an over-reaction in terms of the share price…

In other words, the stock market will probably mark the shares down more than is warranted, just-in-case…

There is hopefully an element of ‘kitchen-sinking’ in the 2014-15 results in that we have to assume that all write-offs have been factored in, which, coupled with investments in price, availability and other improvements in its customer offer, lead us to expect that all future announcements will be defensible, transparent but above all, conservative….

We are obviously seeing only the surface impact of the changes being undergone in Tesco, as Dave Lewis’ new team revisits plans and strategies, implementing a new commercial approach that will underpin stronger long-term relationships with its suppliers to ensure that revenue recognition is transparent and appropriate, all in the shadow of an SFO investigation….

What it means for NAMs
• All commercial income will be redefined, quantified and where possible, retrospective
• All forecasts will be conservative, and ideally tied to clear KPI measures
• …However, in order to avoid missing out on unexpected demand, Tesco will expect a rapid response to sales surges...

The future conversation will be about demonstrable cost & value, as a base requirement.

In return, suppliers should insist on 100% compliance, and fair-share dealings, shock-proofed…

More on 'Tesco- the end of the beginning for a great retailer' here