Aldi to apply a 5% Cut In Suppliers' Prices from 1st August 2009 - the knock-on effect

The cost to you: the incremental sales required to restore your cash profit

A supplier making a 10% net profit, needs an incremental sales increase of 100% to restore cash profit.

Two questions:

1. Is it likely that you could double your Aldi sales?
2. What impact would increased scale have on your costs? (say for 10%, 20%, 30% sales increments)

(If you are currently achieving a net profit of less than 10%, the position gets progressively worse {to work out the figures, see NamCalc}. If your Net Profit is currently less than 5%, bye, bye…

The value to Aldi: the incremental sales required by Aldi to generate the same benefit via the bottom line:
With gross margins of say 15% on 2008 UK sales of £2.15bn, Aldi could generate £90m, if all suppliers complied.
Assuming a UK net profit margin of 2%, Aldi would need incremental sales of £4.5bn to generate £90m.

Every little helps…

The fall-out for branded goods suppliers
This is not about Aldi. Aldi are simply attempting to raise funds to optimise share growth potential in the current climate. However, a 'one-sided' change in the supply 'contract' is really a fundamental issue that goes to the core of the supplier-retailer ' fair-share' relationship, particularly for their non-branded suppliers (Aldi's relatively few branded products are by definition category leaders, usually limited to 1/2 SKUs and their suppliers have the strength to refuse).

The real problem is that other multiples, already under pressure from Aldi's growing share, could use this move as a precedent, and try to take equivalent steps with their branded suppliers…With more branded choice, the other multiples could afford to lose key brands, replacing them with competitor equivalents…

UK: Aldi Calls On Suppliers For 5% Cut In Prices
The Grocer reports that Aldi is facing a revolt by its suppliers after telling them it will pay 5% less for their products from the end of this month. Suppliers are said to have received a letter from Aldi’s MD of Buying, Tony Baines, telling them it required “a 5% cost reduction on the range of products you supply.” In the report by the trade magazine, one supplier described the tactics as “bullying” with several companies said to be threatening to stop supplying the discounter as a result. Aldi said it deserved better prices because it was offering suppliers increased volumes and a chance to share in its growth. “We are looking to improve our cost base to support our activity and that will benefit all our suppliers,” Baines told The Grocer.
Namnews - Tuesday 14th July 2009

" Spotlight on German Retail", a new English Blog by Mike Dawson

Starting this week Lebensmittel Zeitung launched a new English Blog, written by international editor Mike Dawson.
Well worth a visit.
For instance see his interesting interview with Bart Becht, CEO Reckitt Benckiser
If you have any questions/feedback, email Mike at mike.dawson@lz-net.de

Thought for Today: “Can we really afford this green legislation?”

‘It’s one of the few good things to come out of this recession,’ says Professor Ian Plimer. ‘People are starting to ask themselves: “Can we really afford this green legislation?”’
Professor Ian Plimer, the Australian geologist, whose new book Heaven And Earth shows that ‘anthropogenic global warming’ is a dangerous, ruinously expensive fiction, a ‘first-world luxury’ with no basis in scientific fact.
Reading Plimer’s Heaven And Earth is at once an enlightening and terrifying experience. Enlightening because, after 500 pages of heavily annotated prose (the fruit of five years’ research), you are left in no doubt that man’s contribution to the thing they now call ‘climate change’ was, is and probably always will be negligible. Terrifying, because you cannot but be appalled by how much money has been wasted, how much unnecessary regulation drafted because of a ‘problem’ that doesn’t actually exist.
For the rest of this fascinating Spectator interview with Professor Plimer see current issue of the magazine

(worth a thought about how your bottom-line would look without the Green burden….)

Ian Plimer’s Heaven And Earth: Global Warming — the Missing Science is published by Quartet (£25).

How the KAM can 'Educate' Supply Chain Colleagues in a recessionary environment

Because of the importance of each supply chain member’s contribution to the total package of consumer satisfaction via the customer, it is essential that the KAM shares customer insight and helps colleagues focus their collective output on meeting consumer, customer and company needs, in harmony.

Given the changes in consumer-shopper need-sets arising from a maturing recession, the KAM as the overall co-ordinator of the company/customer interface, with a deep knowledge (?) of the joint-consumer profile, is in a unique position to help both companies optimise the use of supply chain resources.

The KAM can begin by helping brand colleagues ‘recognise’ their consumer within the in-store traffic flow. This means accessing the growing wealth of consumer buying behaviour insights via loyalty-card data analysis, and encouraging brand managers to integrate the results with their knowledge of consumers’ consumption behaviour. This combination can then be fed back into both ends of the supply chain to provide an enriched view of new consumer needs and a focus for demand management.

By establishing clear criteria and working parameters, and relying upon finely-tuned political sensitivity, the KAM can ensure that other functions are not inadvertently compromised by arrangements made between company/customer partners. Moreover, as company/customer co-ordinator, the KAM can and should ensure that the learnings from these mini-partnerships are shared throughout the company.

Where marketing colleagues are concerned, the KAM needs to develop a deep understanding of the brand, its positioning and consumer profile. In turn, the brand team needs to be persuaded that consumer trust in the brand will not be transferred to the store, and thence to the store brand.

Here the KAM’s knowledge of the decision-making process within both companies can help to ensure that both teams appreciate the value of consumer insight, its importance in enabling differentiation (brand and store) and the need for rapid response to preserve the balance of power.

Within these constraints, suppliers are finding that there still exists sufficient benefit in collaboration with the right partner in the search for increased influence over the joint-consumer in releasing the demand side potential of ECR.

The KAM can be part of that process, but needs to provide and communicate the overall plot......

What if the Mults can fill the distressed-gaps?

News that the leading supermarkets are allegedly buying empty high-street shops and pubs for new stores suggests that landlords, the multiples and the Government could have found a politically correct way of growing the multiples' share of trade without being in breach of competition legislation…
Essentially, according to the Observer, Tesco and Asda are committed to opening 2.5m sq. ft. of new space this year, while Sainsbury's wants to add 2.5m sq. ft. - 15% of its floorspace - by March 2011. Morrisons is on track to open 1m sq. ft. by January 2011.
If these increases in retail space are achieved, I believe that the multiples' relative balance of power/share will be relatively unaffected, which means there will be little issue for the Competition authorities.
Meanwhile, landlords will have received a 'good' price for distressed properties, and the government will have avoided a permanent High Street reminder of recession-reality for voters....
And all of this increase in trade concentration at the expense of those inefficient smaller retailers that couldn't stand the pace….with additional competition for those that have 'survived'
Think about it:
The above ambitions add up to 8.5m sq ft and at say 15,000 sq ft per outlet, this means approx 560 additional multiples' stores, maximum.
Time for a couple of what-ifs on a little extra buying power, combined with a little less distribution in niche categories?

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!