Tesco Dark Stores – a boost to their reality-store business?

With 48% share of the UK online grocery market, Tesco’s critical mass allows it to increase efficiencies via a pivotal distribution centre just opened in North London.   

The 115,000 square foot facility in Enfield is not only Tesco's fourth so-called customer-free "dark store", but is also its most automated to date, which enables staff to pick twice as many products an hour as the existing three virtual stores.

The latest site in Enfield provides a much higher level of automation, with conveyor belts dispatching trays to pickers, who have handheld devices strapped to their arms, to fulfil orders from 178 stations. In the other dark stores, pickers move around with a trolley.

Full assortment

Another difference is that the Enfield facility delivers all of Tesco's 26,000 groceries, as well as a full range of prepared foods, such as sliced cheese and meat, from its deli counters.

Less well-known is that the dark stores, such as the one at Enfield, also help to increase sales in the big stores in surrounding areas, as customers prefer less staff picking in the aisles.

Issues for suppliers?

However the new 'dark stores' raise a couple of issues for suppliers:

1. POS (Tesco spokesman: '…not the same point-of-sale advertising…' This means there could be some other form of product-prompts in the aisle, (in cases of Out-Of-Stocks?) and how might it differ from normal store POS? One idea might be to colour code shelf-edge price labels to reflect (darkness permitting!) gross margin or favoured suppliers…?

2. Role of Brand: if the brand is meant to attract the customer into the store, there to be confronted by the private label equivalent (better/cheaper than brand) and the possibility of a switch-sale, the supplier's use of shopper-marketing in the aisle can help to reduce the odds on losing a sale to a private label. The dark-store environment removes that facility…

This suggests that suppliers need to find a way of opening a 'dark-store dialogue' with Tesco in order to attempt to maintain the status quo as the business shifts online... 
This means gathering evidence via store visits.

One way might be to sneak into the store under cover of darkness?

Deductions, an Opportunity for All?

Yesterday’s NamNews report of Tesco and Waitrose allegedly charging suppliers for missed or late deliveries raises a number of issues, especially the ‘ownership’ of risk in business.

Retailers achieve average stockturns of 20-25 time a year by integrating supplier-retailer logistics systems, utilising smaller, more frequent deliveries to produce predictable on-shelf availability performances at minimal instore stock-levels. Partnership at this level is dependent upon contractual agreements (really think GSCOP had gone away?) between the parties that have built-in KPIs and penalties for non-compliance. This allows deduction-parameters and penalties to be negotiated upfront thus preventing ‘surprises’ later.
It can also facilitate a fair-share apportionment of risk in the relationship.

Why bother? 

Given that deductions can represent 7-10% of a supplier’s sales, and as net margins continue to fall, then any improvement in deductions management will not only have a significant impact upon cashflow and profitability, but will also have a major impact upon the equivalent incremental sales-profit relationship.

The numbers count

As always, adding the numbers will help to communicate the issues, internally and externally. 

For instance, for a supplier making 6% net profit before tax, on a sales turnover of £50m, reducing deductions by £1m will impact the bottom line with the equivalent of an incremental sales increase of over £16m…a 32% uplift in sales!

Why deductions occur

Essentially, the management of deductions is complicated by the lack of direct ownership, in that departments such as sales, marketing, logistics, category management and finance all have an influence in terms of cause and effect upon the level of deductions made by customers. Despite the fact that many deductions are preventable, deduction resolution is still regarded as a low status, ‘negative’ activity and in a time of cut-backs, tends to be under-resourced in terms of people, systems-support and relevant information.

Reducing preventable deductions

Leaving aside unauthorised and authorised deductions, suppliers have most to gain by focusing upon reducing preventable deductions, and given that these are mainly caused by the supplier’s ability to adhere to the retailer’s compliance process, the solution lies in the supplier’s willingness and ability to tailor their systems ‘front-end’ to the customer’s requirements, a given with invest-level trade partners committed to joint value creation. Also, given their overall responsibility for the entire multilevel-multifunctional supplier-customer relationship, it is obvious that the NAMs should be regarded as a key driver in fusing the often disparate parts of the interface.

Removing incompatibilities and 'disconnects' 

Essentially, this means leading the search for incompatibilities that cause ‘disconnects’ between the two companies’ systems, selling the solutions in terms of compliance KPIs internally and externally, and incorporating these within overall trade strategies and annual negotiated settlements between the parties.

Payoff

A key payoff resulting from faster deduction resolution for the NAM will be the ability to set promotion strategies based upon real-time performance feedback. As a result, all departments will benefit from better integration within realistic trade strategies that use supply-side and demand-side joint KPIs to move the business forward with greater degrees of transparency and defensibility. 

Board-level involvement

At a higher level, there is a need for board members of supplier and retailer organisations to drive compliance standards across the trade and facilitate the communication and acknowledgement of customer compliance requirements within their companies.

Finally, given that most deductions queries are cleared in favour of the customer, it is hopefully obvious that deductions also represent a major opportunity for retailers to ensure supplier compliance and grow their bottom line at the expense of less organised suppliers distracted by other, more exciting priorities….

For a free copy of our KamTips checklist on Deduction Reduction email me on bmoore@namnews.com

Working around 'bankrupt' customers

With the news that high street shop closure rate hit 14 a day in 2011, merely confirming the evidence of our own eyes, pragmatic account managers need to leave re-invention of redundant business models to politicians and the taxpayer, and instead focus upon how to work around customers’ on the brink of insolvency, whilst attempting to maintain their own solvency…

If your customer goes bust

Bearing in mind that if a customer owing £150k to a supplier on a 5% net margin goes bust, then the supplier needs incremental sales of £3m to recover the loss, it is obviously in NAMs’ interest to improve their ability to recognise the signs of a customer in financial distress and take adequate precautions. How to spot the signs

Stress-auditing your customer-portfolio

In practice, this means assessing the financial health of the customer portfolio and conducting ‘what-ifs’ on possible casualties.  If replacement sales cannot be found via the stronger players or alternative channels, then the company will need to reduce forecasts and make appropriate budget adjustments.

For realistic NAMs, this unprecedented environment whilst painful, is simply another market scenario, and business is about being able to perform as well as, or better than competitors operating in the same market conditions.

Need for an 'opportunity-attitude'

Despite the fact that confronting ‘doom and gloom’ may be seen as demotivating, we sincerely believe that in the current climate, the NAM role in 2012 is about being able to face up to and optimise reality, failing which someone will do it on their behalf.  It is about being able to perform as well as, or better than, equivalent companies in the marketplace, whatever the circumstances…

As always, business survival and success is about achieving a balance of risk and reward, measured in terms of achieving an adequate profit on the money put at risk in a business.  In other words, being able to achieve at least 15% return on capital employed.  This is driven by net margin and rate of capital turn.  As you know, businesses are either high margin coupled with relatively slow stockturn (cosmetics) or narrow margin and fast stockturn (dairy products), and the key for NAMs is to understand their business model and drive it appropriately.  Incidentally, comparisons with equivalent companies in supply and retail can be made via Companies House or other open domain data.

Working realistically with business reality 

Either way, it is crucial that suppliers find ways of working around the problem of dealing with companies on the brink of liquidation.  The resultant mind-focus will make NAMs very decisive in terms of realistic assessment of customer risk, more sparing in their application of trade funding, more conscious of the incremental sales required to recover investment in their customers and ruthless in their demands for demonstrable compliance in a fair-share partnership.

In other words, if you can make it in this environment, nothing, repeat nothing, will ever be more challenging….or satisfying

Pound Shop Innovation - Moves to the Mainstream?

Given that Marks & Spencer started as a ‘pound shop’ (Penny Bazaar, 1894) and Woolworths followed as a ‘sixpenny store’, it is perhaps valuable to seek signs of innovative pound shop retailing as a pointer for the future, and perhaps move this emerging sector closer to our core trade strategies?   

Key pound shop moves include:

-       Pound shop launches door-to-door home deliveries for a pound a trip

-       Mobile Pound shop sets up stall at local events, offering to recycle ‘your old £10 + £20 notes for something you can use’! Also have a flourishing online pound site 

-       Pound shop van travelling to outlying villages (see pic above)

-       Around A Pound (Newry, N.I.) have a pound shop on eBay and sponsor motorcycle racing

-       East Hull Community transport offering transport at £1 a trip   

-       Amazon offering Super Saver Delivery Filler Items (around a pound)   

Time for someone to ignore the numbers, try a BOGOF and really stop the whole process in its tracks?

For a detailed treatment of the rise of pound shops see Kamcity Library   

Incidentally, we found a number of independent pound shops branding themselves as ‘Around A Pound’. Branding experts will foresee some issues here in that the label will either become generic, or may lead to possible passing-off charges being levelled at rivals.

In which case, this may cause some enterprising legal firms to combat ‘Tesco law’ by offering cut-price legal advice at a pound-a-pop?

Have a legal pig-flying weekend, from the NamNews Team!

Making the 'Size of Deal on the Table' Count in Negotiation?

Given the current financial pressures in the market, no deal with a customer can/should be regarded as ‘one-off’. In fact, all arrangements with a buyer have a knock-on effect and should be factored into the total business performance for each party. By placing the deal in a proper market context, it is easier to add value on completion and ensure a greater degree of compliance.  

In practice it means making the following upfront calculations:

Customer’s share of the category (£,%)

Establishing the customer’s share of the category allows us to allocate an appropriate level of preparation and investment, with a realistic view of both upside potential and consequences of getting it wrong…

Customer’s share of our business (£, %)

Again, knowing that a customer accounts for 15%, rather than 1% of our business has to help us to prioritise all aspects of the relationship and quantify the impact on our sales and net profit, for the whole team...

Our share of their business (£, %)

Realising that we account for less than 0.001% of the customer's business can explain some of the issues with getting appointments, and difficulties in making the buyer listen, but can help to reduce  arrogance-levels on the part of strong branded manufacturers attempting to break into a new channel...

Our share of their category (£, %)

However, when we have 20+% of a customer’s definition of a category, it is obviously useful to move the conversation quickly from share of business to share of category in order to restore our confidence and buyer-appeal.

Size of the deal for them (Sales, Gross Profit)

Only at this stage is it appropriate to calculate specific dimensions of the deal in terms of sales and gross profit. In other words, if a customer is buying £200,000 from us and resells for £250,000, making a 20% gross profit, this £50k limits on the size of the buyer’s potential concessions available for negotiation.

Size of the deal for us (Sales, Gross Profit)

Knowing that our ex-factory cost is 50% of the £200,000 sold to the buyer, tells us that we have a maximum pool of £100k in discretionary funds from which to make concessions, and can provide a basis for fair-share negotiation...  

If the above process still seems over-the-top for a ‘one-off’ deal, then going in blind will probably result in a ‘one-off’ outcome, adding to our overall uncertainty/stress-levels, and doing little to optimise the relationship in these already uncertain times.

As always, your call….

Definition of an expert

My definition of an expert in any field is a person who knows enough about what's really going on to be scared. 

PJ Plauger

For dog’s ears only: TV ‘Viewer’ involvement…

The advert for Baker’s dog food using an ultra high-pitched soundtrack got its UK premiere on 13 February, during Emmerdale. The Beeb monitored the reactions of two mixed-breed C1 viewers at their home at Hayes in Middlesex. The first 10 seconds threatened to be a complete let down, but then barking and mild snarling began to engulf the sitting room. Initial post-advert sales results are not yet available…

Caution: A pet-food marketing pal of mine Ray Wilsmer tried this idea many years ago using a Great Dane lying asleep on a couch in front of the TV. Ray crouched behind the TV with a high-pitched dog-whistle which he blew several times during screening, without managing to awaken the dog…

Eventually Ray crept behind the couch, leaned over, positioned the whistle on the dog’s ear and blew with such vigour that the dog committed a massive social indiscretion all over the couch…

.

Working with Love-blindness, a question of context?

A psychology book on How Pleasure Works reveals that most people won't notice the difference between paté and dog food, so long as the latter is suitably presented with the right sort of garnish. And as for our ability to discriminate wine, even experts may confuse a white wine with a red when it is served at room temperature in a dark glass. And we'll enjoy soggy old potato crisps, it turns out, if our chewing is accompanied (over head phones) by the satisfying sound of crunching. In the same way it is difficult to tell the difference between holding hands with someone we love and holding hands with a stranger, unless we can see them.

The importance of context

Obviously, context matters, and so do our attitudes and expectations, and all can be coloured by analysis…

So too a so-called ‘one-off’ deal with a customer. Given the unknown consequences of any agreement with even the most appealing buyer, it is important to convert uncertainty (unknown) into risk (a question of odds) by placing all deals in the context of the overall market i.e. understand and compare the profitability of the customer with other customers, starting with the major multiples. 

Only with this ‘big picture context can we remove the blindfold, explore the implications, and quantify the risk of exchanging values with the beloved buyer.  

All else is detail….