BOGOF: A fair share of the losses?

Persuading your customer to forego their retail margin on the free item can help, but you both lose money!

This example shows where a retailer and a supplier decide to jointly fund the BOGOF promotion. This means the supplier will supply the free item ‘free of charge’ to the retailer, who in turn offers ‘buy one, get one free’ to the shopper for £10. The supplier makes a normal gross margin of 50% (in other words they can manufacture the product for 50% of the price to the trade). The supplier also makes a normal net profit of 10% on normal sales.

Meanwhile, the retailer makes a normal trade margin of 25% of shelf prices, ex VAT, has handling costs 0f 10% and overheads of 10%, leaving 5% net profit. As you know, state-of-art retailers normally have a net profit of 5% of sales, ex VAT.

In this example, where the retailer gives up his gross margin on the free item, and the supplier provides the free item free-of-charge to the retailer, it can be seen that the retailer loses £0.75 per item, or £1.50 per BOGOF and the supplier loses £1.50 per item, or £3 per BOGOF sold.

Obviously, this means that both parties will lose money on every BOGOF promotion!

Fairshare negotiation can help…

See yesterday's post below for when the retailer refuses to forego the retail margin!

BOGOF losers?

A BOGOF sold for £10, with a supplier Gross Margin of 50% and Net Margin of 10%, refunding the retailer's margin, can lose the supplier £5.50 per BOGOF !

See example above, where the supplier has agreed to replace the retailer’s margin on the free item in a BOGOF.

Here it can be seen that the retailer continues to make his normal margin (say 25% Gross, 5% Net) on the free item.
However, because the supplier has to refund the retail margin, it can be seen that the supplier loses £2.75 on every item, or £5.50 on every BOGOF sold on promotion.
Sure, the promotion will create excitement in store, but will not only damage brand equity, it will also lose money…

P.S. If you want to discuss the BOGOF application to your trading termstion, drop me a line on bmoore@namnews.com

...but I don't need Authority!

Powerless President job-interview (divine inspiration)

Pic: Reuters/ Jason Reed

Walmart - The ultimate destination-category?

News that Walmart are attempting to complete the cradle-to-grave loop by becoming a category-killer via the provision of coffins and other funeral requisites is bound to cause grave concern to the traditional trade, who will apparently rely upon 'the personal touch' (seems like a stable-door job, given the state of the user?) to bridge the price-gap between their services and the Walmart Way....

Have a lively weekend, from the Namnews Team!

Tesco Bank - no contest?

Just picking on points in a Guardian article yesterday (a compelling template!), shows why traditional banks are going to experience a major wake-up call, and will be forced to 'get it' by a customer-focused shopkeeper, doing everything they don't…

• 'We do not need (Northern Rock's customers or brand)'
• plans to build a new full-service bank offering current accounts, mortgages and, in time, small business banking facilities
• it is likely to charge a small monthly current account fee and offer Clubcard loyalty points for those using its debit cards
• "We have a great brand and a great relationship with our customers"
• "we have stores where there are lots of people"
• (Tesco) could cash in on the upheaval coming to the bank sector as customers reassess what they want
• "Our competitors will be busy looking inwards when we are looking outwards."
• "There is a real gap in the market to look after customers in a simple straightforward way and reward their loyalty,"
• "In financial services, being simple and straightforward is not common"
• What bank customers want is "to be treated like grown-ups"
• "We have got to make money, but let's do it in a transparent way."
• (Tesco) do not want to punish account holders who "make the odd mistake" and go overdrawn by accident
• Neither do they want to copy the traditional banks' "sneaky ways of imposing charges"
• The retailer intends to mine the information it holds on its Clubcard database to pull in new customers for the bank
• "When we have the UK established, we will try and do financial services in all our markets"

In other words, if Tesco even get this half right, combined with their 'boxes' efficiencies, then traditional banking had better be afraid, very afraid….

Government extension of the Trade Credit* top-up

As you know, when insurers began to withdraw credit insurance for troubled retailers in April 2008, the government introduced in the April 09 Budget a top-up insurance scheme to restore full insurance cover to retailers that had had insurance reduced or withdrawn. They backdated this to October 1st 2008, meaning it applied to those retailers getting into trouble after that date. However, retailers want the cover extended back to April 08 in order to include retailers that suffered from credit insurance withdrawal from that date.

While the politicians and retailers negotiate a 'win-win' vote-retrieval solution, suppliers need to explore the extent of their credit risk by calculating the incremental sales required in the event of one or all of such retailers going bust…see www.kamcity.com/namcalc for details, but a back-of-envelope job will reveal that a supplier making 10% net profit on a retailer that goes bust owing £150k will need incremental sales of £1.5m (in this market!) to recover the lost profit. If you deal via wholesalers, and their retail customer goes bust, they need incremental sales of £15m....

* Credit insurance or trade credit insurance (also known as business credit insurance) is an insurance policy and risk management product that covers the payment risk resulting from the delivery of goods or services. Credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The costs (called a "premium") for this are usually charged monthly, and are calculated as a percentage of sales of that month or as a percentage of all outstanding receivables.

Credit insurance insures the payment risk of companies. Policy holders require a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate is usually low and reflects the average credit risk of the insured portfolio of buyers.

US Paper Seeks Pot Correspondent

News that a US newspaper has received well over 100 applications for the post of retail marijuana critic, many of them offering to work for free (!), makes one realise why the retail press carries so few adverts for Marijuana NAMs and KAMs…a job in a lifetime, where large size of territory can be a virtue, with its longer trips a bonus, store-checks a delight, competitor cross-check/sampling a must-have, sales target achievement positively addictive, and minimal problems with over-stocking, buyer appointments, brand loyalty and repeat purchase….

Only problem is the need to complete the 'paperwork' before amnesia kicks in…

Seriously, fourteen US states now allow the sale of some sort of medical cannabis. States like Colorado and California, where medical use is legal, have seen an explosion in the number of pot shops - ranging from upmarket clinics to dingy drugs dens.

The dispensaries sell more than a dozen varieties, from White Widow to the less expensive Afghan Gold Seal. Some cost up to $130 (£78) an ounce. But the marijuana critic is expected to focus on the dispensaries, not the drugs.

"Compensation will be meagre," says the posting. It says the paper can't pay for marijuana purchases, "although that would be pretty cool."

Have a dreamy weekend, from the Namnews Team!

Pack size reductions and the consumer, the short-change perception….

Recent press reports re pack-size reductions whilst maintaining shelf-prices raises several issues:

• By the time mainstream media pick up the problem the damage has been done…
• Consumers' criticise-praise ratio remains 10-1, when 'telling a friend'
• Never underestimate the consumer's ability to spot a downsize of a regular purchase
• 'Healthy eating' Telling them that content-reduction without price reduction is in the interest of healthier eating insults the intelligence of a savvy consumer, and can alienate the junk-food shopper...
• Consumer need: Telling the consumer that 'content reduction without price reduction' meets their need ignores the fact that a given-quantity-for-a-given-price represents the consumer's view of 'value for money'. Anything less for the same price, especially without explanation, can represent 'short-changing'...
• Consumers do not distinguish between imported vs. locally produced goods, unless importation is offered as a cause of higher prices...
• Perception, rather than fact remains a major driver of purchasing, especially in FMCG marketing
• When an explanation is required (like from day one), why not refer to the fact that 4 years of rising costs without a shelf-price increase has forced suppliers to reduce pack size to maintain shelf prices?

Cynical? Then think what the consumer has gone through in the past couple of years, from all sides……