Extreme Medicine?

Great leaps in productivity often come from bankruptcy - one of the very rare moments when companies are forced into a fundamental rethink, with little time to spare…

The current recession represents a similar Threat, or Opportunity!
These extremes allow us the political freedom to jettison most of the baggage, make a fundamental review of all of the business basics, from a totally fresh point of view, and starting at the right place:

Opportunities: only four ways to grow a business (See Ansoff Matrix above)
1. Selling more of the current product to current consumers/customers
2. Selling new product to current consumers/customers
3. Selling current product to new consumers/customers
4. Selling new products to new consumers/customers

(No need to waste time looking for additional ways)

Threats: apart from recession, the potential constraints on your business include
- Regulatory/Legal/Political developments
- Cultural/Social change
- Technological change
- Trade concentration/power/internationalisation
- Competition (innovation/substitution/wealth/risk-policy)

Strengths: How good are you vs competition in consumer/customer eyes, on
- Brands
- Money and financial backing
- Marketing Personnel
- Sales Personnel
- Production facilities
- Research & Development
- Logistics facilities (outsourced help)
- Agency network
- Back-up systems and tools

Weaknesses are simply 'negative' strengths that dilute your ability to capitalise on the opportunities...

Nothing else matters, at all…..

Prompt Payment Code - the great misnomer!

News that Primark have joined Asda, Tesco and John Lewis in signing up to the Prompt Payment Code misses the essential point of the current use of supplier credit as a free source of Working Capital by the major multiples. Apparently Sainsburys, Morrisons and Boots all appear to agree with the code, but are considering their options…
As you know, the prompt payment code specifies that retailers should pay their suppliers within the credit period agreed between the two parties.
Any business failing to pay within terms agreed with suppliers would be in breach of the code and would risk being struck from the list….a good idea going nowhere!

How about Fair Payment Code?
In the fast-moving UK grocery & nonfood industries, with daily deliveries and average supplier credit-periods of 30 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods.
More importantly, 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. 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, 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 off 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...

(For those who need it spelling out, which major multiples do you think will get the blame for all the supplier bankruptcies arising from the current recession, as the government and the public cast about for a scapegoat in the coming months…?)

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.

When the buyer won't listen….

Find yourself batting against a brick wall, with buyers pre-occupied or even very-occupied with margin and sales growth, regardless of companies failing over financial precipices all around them…?
Deep down the buyer wants an answer to 'whats in it for me?' within a few seconds of your opening gambit, or else…
In fact, the recession has simply caused them to up the ante ref their demands for more of the same…

Essentially, most buyers have to be fixated on margin and sales increment, and are generally satisfied with the status quo i.e. the current methods of meeting those needs via your competitors' solutions, they just want more.

Only two ways of breaking into their thinking, and making a buyer listen…fright or curiosity
Fright: means making them face up to shortfalls in their own business performance, usually financial i.e. Tesco, Asda, Sainsburys, Morrisons and Boots are producing ROCE performances low enough to have had buyers fired a couple of years ago. Since ROCE drives share price and most buyers are on share options, this approach can be of interest!
Curiosity: means helping the buyer see that they could be missing a trick that other retailers are benefitting from. A NAM/KAM is in a position to survey the whole retail environment (buyers are essentially in depth specialists in their own environment, and gross margin and sales obsession does not help). A NAM/KAM should identify what makes the buyer's rival retailer better, translate this into ROCE impact, and sell the solution, tailored to the buyer's reality.

Incidentally, used effectively, fright-curiosity will certainly make the buyer listen, the real problem is being able to deliver a solution that matches the extent of status-quo destabilisation…in other words, when you finally get 'em listening, you better be good!

Getting more from a healthcare brand

Ever wondered how building brand loyalty and maintaining distribution somehow seemed easier in the old days?
See how Cocaine, Heroin, and Opium were used to make a real difference in treating domestic aches and pains, when going to the pharmacist really was fun?


Lloyd Cocaine Toothache Drops

In the US, cocaine was sold over the counter until 1914 and was commonly found in products like toothache drops, dandruff remedies and medicinal tonics.

See 27 Medicine adverts from the 1890s+ (Source: Andrew Sullivan Blog)

Have an old-fashioned weekend, from the Namnews Team!

The Pub-tie and fair-share negotiation

Last month a parliamentary inquiry called for the Competition Commission to launch an investigation into the “tied” business model used by pub companies such as Punch Taverns and Enterprise Inns.
See free 84-page report on Pub-companies business model

This week's resulting gut-reaction by Pubcos promising self-regulation is already too little, too late in a lopsided power-battle…
As the grocery sector is well aware, by the time market-imbalance attracts the attention of government, the issue has developed momentum that cannot easily be diverted, and leads to the inevitable 3-year distraction from the day-to-day survival strategy currently required, especially in the pub business.
Essentially, pub-companies appear to have fallen into the old power-trap where acquiesence is mistaken for whole-hearted agreement. Many of us who have stood at a bar entertain fantasies that we could do a lot better than 'mine host' in optimising the public house model.
Unfortunately, some amateurs actually make it to a tenancy arrangement with a brewery or pub-company. This usually involves negotiation of rentals related to tied beer-supply, support materials/services and agreed barrelage-related KPIs. This is a complex package, and is not easily compared like-with-like with alternative supplies, especially for those lacking experience of the pub-business. The inevitable crude comparison with supermarket beer prices, coupled with lack of transparency can make the contract seem indefensible, eventually resulting in government intervention.
The need for Fair-share negotiation has arisen from the same supplier-retailer imbalance in the grocery sector, and could represent a way forward for the beer-tie relationship…

Tesco's DVD vending deal, a stepping-stone to the long-tail?

A British movie-vending company has agreed a deal with Tesco that will see its rental kiosks placed in three of the retailer's Irish stores this week on a trial basis.
This could morph into a grab for the more lucrative long-tail* of home entertainment demand…
A key driver in grocery is space. Tesco currently generate approx £1,000 per sq. ft. p.a., but will not want to provide the full home entertainment repertoire, because of the negative impact on their profit per sq. ft. objectives.
This will eventually drive Tesco to adopt auto-download of all digital movies,albums and games, and deliver the revenue of an 8,000 sq. ft. specialist shop from a 20 sq. ft. space, or even a kiosk…? Then they will compete on price across whole catalogue, with everyone, everywhere.

* The Long-tail 98% Rule: In a digital world of almost zero packaging cost and instant access to almost all content, consumers look at almost everything. This results in 98% of the 10,000 albums available on digital jukeboxes selling at least one track per quarter, profitably.
(The Long Tail, by Chris Anderson)

Maintaining Customer Asset Value

Following this weeks write-down of its 50% stake in Alliance Boots by KKR, suppliers may be wondering how this impacts their business with Alliance Boots.
Realistically, the ultimate judge will be the stockmarket when the company is re-floated in 5 years time to provide KKR with a profitable exit route.
Successful re-flotation means achieving ROCE levels of 15%+, Net margins of 6%+, Capital rotation of 25+ times per annum, and gearing levels of less than 30%... all by the year 2012, allowing two years to 2014 to provide a good record at those levels to support a good price (market value) on re-flotation. KKR's write-down simply adds to the pressure to perform at these levels, in this timeframe. Alliance Boots need global scale, significant diversification, both wholesale and retail to achieve this, making them a major customer and potential trading partner for many suppliers, in the medium term.
Meanwhile, as manager of the long term health of the customer business unit, the KAM is in a unique position both to determine and help in the achievement of optimum value of Alliance Boots to the business. This has to be a priority for the supplier.
Treating Alliance Boots as a valuable asset will facilitate the process:

1 A first step is to ensure that the company assigns a realistic value for AB, based upon a determination of market potential for the company’s brands within each relevant category. This means taking into account the brand’s consumer profile penetration within the customer, relative competitive advantage of both brand and customer within the marketplace, all related to the company’s ability to maintain the necessary support package and service levels
2 Clarification of the strategic role of each relevant category within AB can help at this stage. Specifically, this means assessing the AB's ‘fair share’ of each relevant category, benchmarked against industry and channel averages, and then measuring specific brand performance against its ‘fair share’ within the customer. An objective assessment of the brand’s competitive position within the category, from the point of view of customer and consumer, can then be made. This analysis can help to validate the strategic classification of the customer as Invest/Maintain or Divest within the overall trade strategy .

3 Next must be assessed AB's actual performance in order to determine the scope for improvement as more of the potential is realised (see Z-Graph method to simplify the tracking and forecasting). Three-year forecasts of sales, gross margin and net profit before tax and resultant cash flows are then made, all discounted to present day values, using Discounted Cash Flow techniques. This will enable realistic comparisons to be made with alternative cash flow projections within the business.

4 Sensitivity Analysis can then be used to assess the extent to which the forecasts are certain, and their key dependencies can be explored. A Risk Analysis completes the forward view by systematically identifying all that could go wrong, the chance of occurring (High, Medium or Low), together with the likely impact of each event upon the business (High, Medium or Low). The combination of Chance and Impact will facilitate the application of a contingency plan where appropriate.

5 An additional way to reflect future uncertainties is to apply a realistic depreciation factor to future business with AB, and five years is recommended. This means writing down existing business by 20% per year, thereby forcing the company to aggressively apply new business development techniques in order to neutralise the effect on projections. Completion of a Customer Account Profitability Analysis, using ABC techniques, will help in calculating a realistic Return on Investment projection.

6 It is now possible to formulate a realistic customer strategy, within an agreed channel strategy incorporating the above elements. The approval of the strategy document provides the KAM with the authority necessary for implementation.

7 All promotional investments should be subjected to rigorous post-promotion evaluation in order to optimise learnings and maintain personal credibility within company and customer. Systematic maintenance of all data relating to the customer in a Customer Data-file will simplify the process of keeping comprehensive details up to date in the long term, and allow easier ongoing comparison between customers.

The main purpose of the above approach is to help the company identify and focus upon potential as a key driver within major customers, and AB in particular. For this reason the KAM should not regard Asset-based Account Management as an extension of the bureaucracy and, instead, view it as a systematic way of adding value and developing new business.

The alternative is to follow a history-based approach downwards, managing a rapidly depreciating asset and missing a real opportunity in the process………

See Kamcity Shop for all the necessary tools

A Larger Slice of a Smaller Cake?

If the recession is about absorbing slack or excess that has built up in the system over the past 15 years, then this will have to be absorbed before 'green shoots' will be close enough to the surface to be able to emerge into the new world…hence the probablility of a three year 'flat' period first.
This means that the cake is now smaller, 'fair share' will be smaller, and any increase will be at the expense of much healthier competition remaining to serve an increasingly savvy consumer.
In practice, companies are currently experiencing a change in demand within their product portfolios as consumers trade down to middle market offerings, but with upmarket tastes.

Long term, the real issue is whether the consumer will revert to pre-recession behaviour in the 'upturn', but given the financial , economic and political compromises resulting in the current crisis, holding one's breath simply adds an additional, unneeded pressure…

Best way forward is to work in the current 'normal' environment, *re-evaluate everything (assume you are launching a totally new product, in a new market, to new customers and consumers via a new company) and leave pursuit of the 'upturn' to others…
*See Kamshop for the tools!