Tesco's new trading terms - a fundamental step towards fair-share dealings?

In an issue-packed day where most delegates had cause to re-set their business priorities, and test the limits of their networking skills in a pool of 650+ potential contacts, the IGD’s Big Debate presented a fundamental opportunity to update suppliers’ UK market context with the help of speakers that were prepared to face up to market realities and indicate their ways forward….

Nothing beats hearing it live, but a good second best (apart from a lost networking opportunity) can be achieved via a combination of the IGD’s Events App and reports from a packed press gallery.

Although spoilt for issue-choice, for me a pivotal item was Dave Lewis announcement of Tesco’s new trading terms.

Full details here, but essentially, Tesco has pledged to deliver a simpler and “fairer” business model for suppliers, by standardising their payment terms and settling bills from small and medium-sized firms quicker. 

When you consider that Tesco’s average days credit period is 42 days, which at say 5% cost of money and trade creditors of £5,076m (end Feb 2015), is worth £253m per annum, you will appreciate the pain this represents, given this morning’s announcement of a 55% fall in profits to £354m.

Whilst the new terms represent a major step towards fair-share dealings for Tesco – and a pointer for other retailers? - this is hopefully but the first move in acknowledging that trade credit should not be regarded as a source of working capital, but merely a way of covering a cash-flow gap between supply of a product and receipt of cash from a shopper. 

If that is the case, then Tesco need to budget for an eventual move to approximately 5 days average trade credit…

If this initiative catches the imagination of the public and thereby contributes to Tesco’s recovery, then other retailers will have to follow suit, or suffer loss of share…

However, whilst this will undoubtedly help suppliers, the real consequence will be the public-opinion spotlight then turning on major suppliers’ use of up to 90 days free credit from their ingredients, packaging and services suppliers…

Time for all suppliers to anticipate the obvious and begin their profit re-sets now?

Still think Amazon can add little to fresh retail?

Tesco’s Carlsberg de-list – just another overcrowd inevitability?

Whilst both parties understandably remain silent on the specific reasons for de-listing most of the Carlsberg range, it seems obvious that the brand’s scale and importance required a carefully calculated decision.

We are patently not privy to the specifics, but here on the outside, NAMs need to explore possible rationale/scenarios as a basis for identifying the implications for their brands, and taking evasive action, where necessary...

Consumer need has to be a starting point
Logically, when compared with available alternatives, Carlsberg was deemed to have less relative appeal than other brands and own-label, from the perspective of Tesco shoppers.

In practice, this meant that Tesco shoppers believe that the brand’s combination of Product/performance, Price, Presentation/Promotion, and Place is less appealing than other members of the category.

Whilst the Carlsberg marketing team might beg to differ, the fact remains that their consumer-appeal message is not reaching Tesco, or did not survive the BCG assessment.

Retailer need comes next
Here Tesco must have assessed the brand’s combination of Product/on-shelf performance, Prices & Terms, Presentation (how well the offering is put across, at all levels) and Place/availability, all compared with available alternatives in making a decision based on relative competitive appeal.

Whilst this can be a relatively simple process, it has to be kept in mind that Tesco is changing radically in most aspects of its decision-making-process, with a different balance of traditional and new influencers in the mix, all operating under an intense City spotlight… 

At some stage, Tesco decided that Carlsberg was deficient, and made the de-list move.

Why this matters for NAMs
The issue for NAMs is not only the possibility of their brand becoming a casualty of the Tesco re-set, but also the inevitability of this culling process being applied by other retailers in an overcrowded, insufficiently differentiated market, as they strive to optimise their relative competitive appeal, with no facilities for taking prisoners.

The answer has to lie in making a fundamental assessment of your brand’s real pulling power with the consumer, and integrating this with an effectively communicated trade offering that emphasises your advantages, and eliminates anything that dilutes its appeal, before the buyer does the inevitable…   

Jet.com: the new 'Aldi' of eCommerce?

A new US-only website, launched in July, Jet.com is offering another option for price-sensitive online shoppers: simply visit its site and it will guarantee the lowest prices across some 10 million items.

The site also offers a variety of tricks Jet.com shoppers can use to save even more, including filtering by “smart/cheaper” items, opting for a different form of payment for extra savings, accepting combined packs, slower delivery, or even agreeing not to return an item in exchange for a discount.

In other words, Jet.com are aiming at Amazon's market, but betting that online shoppers will be willing to trade high service levels for lower prices...

The business model works on a combination of a $50/annum membership fee and a real-time trading system that suggests economies such as 'combinable' products, new shipping options and price updates - cheaper! - as the shopper packs the basket, all resulting in lower prices (can you imagine the impact on B&M shopping if this facility could be incorporated into self-scanning in the aisle?).

Incidentally, given that Mr O'Leary plans to make Ryanair the Amazon of travel, aspiring to go the Jet.com route might make a better fit, and represent less of a culture-shock!

More on Techcrunch

Where are the UK Mults headed in your portfolio?

With Mike Coupe reporting better than expected results (1.1% drop in Q2 sales, and profits 19.5% down on the previous year) for Sainsbury's, coupled with Morrisons 2.4% fall in like-for-like Q2 sales, Asda's 4.7% fall in Q1 underlying sales, and fingers crossed for next week's Tesco wheel-tightening, NAMs have to ask themselves where now for their four largest customers...

Having to struggle with a perfect storm of a fundamental shift in buying behaviour - smaller, cheaper, closer, more frequent - coupled with a war on waste, and cash-strapped consumers 'making do', the mults are barely holding their own, as they experience market share drift to the discounters, convenience and online...

However, it is the structural impact of increasingly redundant large space retailing that represents the main threat.

Given their inability to trade out of the problem, the mults will have to address the issue of increasingly excessive space by progressive sell-offs of redundant outlets, fast enough to reduce the capital base (improving ROCE) but slowly enough to avoid a collapse in market values..

Meanwhile, NAMs have to keep in mind that most discounter growth will come at the expense of brands, unless branded suppliers can find ways of optimising the discontinuous relationships required in dealing with Aldi and Lidl.

In addition, those that survive the Tesco product re-sets need to anticipate the inevitable knock-on removal of overlap in other retailers as they also attempt to simplify their offerings and shore up their balance sheets.

All of this means that all stakeholders need to go back to fundamentals, before someone does it on their behalf...

In practice this means stripping your offering down to the bare essentials that satisfy consumer need, make you better than available alternatives, and allow you to demonstrate a positive, but tailored contribution to each retail player, even the mults...

Aldi Online - a contra-move that breaks the discounter-rules?

News that Aldi are going online appears to be a complete break with its traditional platform:
- Limited range
- ‘Bare-bones’ shopping experience and service
- Resulting in no-frills prices that are 15% lower

Going online pits it not against Tesco and the mults, but in direct competition with the high-service, unlimited range standards set by Amazon:
- 1-click ordering
- Returns as easy as 1-click
- And dense local coverage that drives down delivery cost

All of these go against Aldi’s core strengths…

The Dandy Lab - a merging of retail and technology

On your next store-visit to Spitalfields, why not try something really different by dropping into Dandy Lab, a new tech-enabled menswear store that stocks a small and exclusive selection of 'Made in Britain' cult brands?

NAMs will not be fooled by the superficial similarity to an innovative 'mens' outfitters that includes a selection of floppy handkerchiefs and crafted cuff-links appealing to the 'Dandy' elements of our nature.

The 'Lab' is where things get a bit more interesting. There's the 'Story Wall' - an interactive display allowing you to scan a product, which in turn activates a video with information that helps you get inside the tin, revealing details of its provenance, performance capabilities and the craftsman who produced it. The Story Wall, coupled with photographic analysis of your needs, helps you achieve that integrated look. In addition the technology gives you an insight into the story behind the products, the amount of work that went into its production and where your money goes. See more, including slideshow at Timeout

Finally, as you leave the store, you can share the results, including your photograph, with colleagues and buyers via social media, thereby adding to the productivity of your store visit...

Seriously, the Dandy Lab appears to be a genuine attempt to elevate shopping experience to new tech-enabled levels. They have set themselves high hurdle-rates by focusing on our most resistant gender...on the assumption that male-conversion will make the winning over of time-scarce savvy females a push-over...

I wonder...

...a thousand words?

..a journey barely started...

Tesco scraps 24-hour opening at two large stores - portfolio lessons for NAMs?

In the way that companies portfolio-manage brands by developing a mix of established with new products, and NAMs manage a mix of embryo and mature customers, the strong carrying the weak, so too retailers tolerate varying store profitability providing the national totals of sales and net profits are acceptable.

Thus Tesco, faced with pressures on national performance are probably re-assessing store-level viability based on individual branch P&Ls.

Whilst the obvious short-falling branches have already closed, or are on the waiting-list, marginal cases are obviously being tweaked as a last chance move.

Opening hours reduction obviously provides such an opportunity.
Tesco's original strategy of opening 24/7 was always a better option than guessing in advance whether an area around a store was likely to yield sufficient night-time traffic, given the ease of reducing the opening hours to match demand, via first-hand pragmatism.

So there should be no surprises here.

The question is where this leads, in that it seems inevitable that, should the new opening-hours window not translate into sufficient  improvement in the  bottom line, the knives will be back, in terms of executing a store-portfolio 're-set'.

In other words, Tesco will again bite the redundant-space bullet, starting with store closures, and searching for alternative usage of instore space where the outlet is retained in the portfolio.

This means that Tesco have the courage to cut, and continue to cut, until a sufficiently healthy retailer remains...(ROCE 15%, NPBT 5%, Stockturn 20+...)

And this in turn has to be a way forward for suppliers that need to shore up their bottom lines via a vigorous re-assessment of brands' and customers' portfolios, re-labeling as invest, maintain or divest in recognition of stages of business unit life-cycle evolution, and investing accordingly.

The alternative has to be continuing as usual and relying on a new owner to do it on our behalf...

How to get above-average insights from managing averages, via data animation...

A key issue for action-driven NAMs in unprecedented times is how to derive meaningful and actionable insights from well-intended but over-simplistic averages currently produced by ‘internal’ research.

A major problem with this approach, and a great deal of business reporting in general, is that it presents senior management with a host of averages:

category average margin
average space in store
average basket size
average customer spend
average shelf life etc.

We know these are important measures - the buyer keeps reminding us - but as measures, they have gone too far. In other words, they are a starting point, but we need to find ways of getting behind the averages, and data animation can help.

Guy Cuthbert, of Atheonanalytics, in a fascinating article, starts with a retailer’s average gross profit margin and shows via exploration and visualisation of underlying data, how to discover and communicate far more about the richness of shoppers' buying behaviour, helping us move towards the goal of any commercial analytical exercise – the oft-requested “actionable insight.”

In his graph-by-graph process he drills down and visualises by Customer Segment, Product Category, Sub-Category, Individual Customer, and converts a 2-variable scatter-plot to a 3-variable bubble-chart. He then adds total Profit (or Loss), using colour for this fourth variable, to highlight the variability in cash impact of the customers.

We are then in a position to loop back to the original question posed by the buyer – “How can we improve profitability?” – via a simple visual explanation of profitability, which can be explored by Customer or Product, and a recommendation to review customer discounting policy in the light of long-term customer value.

In other words, the data animation process has helped us move away from Averages of Averages, and provides a reasonable balance between simplicity and complexity, yielding actionable and communicable insight, far better than the average....

Peanut Corporation of America owner sentenced to 28 years

The ex-peanut company mogul was convicted on counts of conspiracy, obstruction of justice, fraud and other crimes in relation to the 2008-2009 salmonella outbreak which caused death of nine people and sickened more than 700. The incident caused one of the largest food recalls in US history. The QC Manager received 5 years and a food broker, 20 years, as parties to the conspiracy.

The key issue here is the escalation of accountability to the highest level in a company, along with the key players involved, and appropriate levels of punishment.

This development has to cause other companies and their teams to re-visit responsibilities re legislation and impact, everywhere.

Whilst in this case there appears to be no doubt as to culpability, it would be a pity if it caused business leaders and their teams to be over-cautious in terms of innovation and optimising resources in the marketplace.

Success in business is still about responsible risk-taking, working within existing rules and regulations, and this success will result from playing within the full ball-park, in full knowledge and observance of the legal and moral limits, while competitors seize this excuse for risk-avoidance in the centre of the pitch…

UK mults maxed out on space, losing 1m sq ft, a first cut in a decade

According to Financial Mail On Sunday, this represents a 1% space reduction, a long over-due combination of close-downs and sell-offs, in response to structural changes in the market.

Eight years of falling profits and flatline sales, combined with increased online efficiencies and consumer insights, have caused major retailers to re-assess their assortments. They have realised that, whilst overlap and duplication can be tolerable sources of back margin in good times, these surpluses become liabilities in a persistent downturn…leading to major range re-sets such as Tesco’s 30% SKU cull, in turn revealing that in large stores, upwards of 20% of retail space can be surplus to requirements….

The same navel-gazing by major mults has revealed that 80% of sales are made by 20% of the range, with ‘20% of SKUs selling but one pack per week’ in some cases.

Why the hesitation in making the cuts?
‘Normal’ businesses faced with these excess space issues would quickly sell-off unprofitable stores, but UK retail is special. As you know, the price of prime retail space is driven by sales/sq. ft. but no other business (except global Apple @ £4k/sq. ft./annum) can sell £1,000/sq. ft./annum.

Moreover, by applying a 2% depreciation rate per annum to their stores, retailers are saying that their assets have a 50 year lifespan - a 50yr lock-in - all leading to the fact that any sell-off of spare space could be at a loss, or drive down property values…

Whilst in good times, assumptions of 50 years of unchanging market conditions was understandable and even re-assuring, with the benefit of 20/20 hindsight, the structural changes resulting from closer, smaller, faster and more frequent shopping can be seen as inevitable, fundamental, and permanent… (in City terms, anything longer than a year is ‘permanent’ i.e. see long term debtors in the balance sheet..).

Limited options for B&M retailers
Thus it can be seen that Bricks & Mortar retailers have limited options available in attempting to restore historic levels of profitability, making online development - a major and compelling route back to profitability for the mults - even more appealing. And besides,online, space is not an issue, a place where long tails are irrelevant, and selling 1SKU a week, even a month, is still ok…

All that matters is exceeding consumer expectations 24/7 in terms of availability, speed, accuracy and contents of the tin…

The clarity vs. accuracy trade-off...

Wrong, but perfectly understandable, like watching the Rugby World Cup on TV (with aids) vs. in the ground...
The London tube map is a design classic, relying on equal spacing between the stations. This recent edition - produced to help engineers plan Crossrail - is a geographically accurate map showing the distance between the stations.

So now you know, it's quicker to walk the (almost) 329 yards between Covent Garden and Leicester Square stations than it is to get on the train.

Mouth-money indicators for Mult's CEOs?

According to The Business Desk, CEO David Potts has increased his £800k stake by investing £500k in Morrisons shares following a 10% drop in share price.  This has to be a major show of confidence and evidence of commitment in his new role, especially if other members of the board and staff are encouraged to do likewise.

Nothing beats a stake in the business to focus the mind…

Scope for NAMs to follow suit?
Now there’s commitment!

Seriously, Potts' latest move is bound to put additional pressure on the Tesco Board, with recent reports of City disquiet in The Guardian for their holding unusually low numbers of shares in company, and CEO Dave Lewis yet to invest any of his own money in the company…

This is being regarded as an indication that the Tesco executives have not been willing to back their turnaround plan by putting their own money into the retailer.

…thereby begging the question re how much suppliers can reasonably be expected to invest via trade funding…?

Retailer P&Ls: why 'contexting' helps....

Given normal pressures in the NAM day-job, one of the problems with firefighting is its tendency to prevent us stepping back to think... and place our data in context...

Take Morrisons latest annual results, and focus on the Net profit margin, before tax 

NAM's internal monologue:
Morrisons 2014 NPBT = (4.7%)...."almost a 5% loss.. "
"Panic, send for another an extra fire-engine!"

"Hang on, how about the other mults?"

Sector context:

Mults Sector 2014/5:
Tesco             (10.2%)  "Probably write-downs, but Trading Profit showing 1.1%, still a problem.."
Asda               3.9%  "Asda is probably a blip, forget"
Sainsbury's     (0.3%)
"That's a relief, everybody's down..." 

"But wait, how about other players in the UK?"
UK context:
Co-op               1.7%  "Better than 'non-profit' I guess..."
Waitrose          5.4%
Aldi                  4.9%
"Oops, this could be a mults' problem! Asda still a niggle...but the 'squeezed middle & and fundamental structural change' now making some sense..."

"Time for a continental view?"
EU context:
Carrefour          2.6%
Metro               1.1%

"All EU players low, but were never great anyway, time for a global look?"
Global context:
Walmart           5.1%

"Wow! Walmart are demonstrating that even in unprecedented, post-global financial crisis times, it is still possible to make net profit margins of 5%!"

"I now understand why the stock market is piling the pressure on the UK mults' share prices..."

"(I can also see that Asda's results, although better than other UK mults are still diluting Walmart's performance...)"

"Now, how can I help Morrisons?"

In other words, placing your customer's results in as big a context as possible, does not add further distraction, but can provide actionable insight, even in fire-fighting conditions....
NamNews - for big context...