When £1 morphs into £2 – the Poundland acquisition of 99p Stores

This morning’s announcement was an inevitable consequence of post-financial crisis pressures driving shoppers to the bottom layer of the squeezed middle.

But the real issue is trade consolidation.

What started as a raggle-taggle novelty retailing initiative based on suppliers and retailers finding a way of making money on a £1 version of brands, might have struggled had inflation been maintained at ‘normal’ levels.

However, pro-longed flatline demand, combined with low inflation, allowed the pound shop to flourish, but as usual, some more than others.

Suppliers' enthusiastic development of a strategic approach to the £1 channel has now made it possible for pound shops to enter the mainstream...  Mergers/takeovers will be inevitable, causing the usual issues of prices and terms dis-harmonies, just because these smaller 1-off customers were interesting, but too small to matter when it came to ensuring the national integrity of our pricing and terms model..

Impact of the Tesco-cull
Given what could be a SKU-shakeout of 30% of the range arising from the Tesco-cull, suppliers now need to reassess and optimise alternative routes to consumer, and make appropriate changes to their marketing strategies, especially as the increasingly fragmented world of TV and press advertising causes advertisers and the savvy target audience/s to embrace online/social media.

Taking the mainstream pound shops even more seriously, might help… 

Onshelf price discounts, Moscow-style

                                                                                                                           pic: Business Insider

With inflation in Russia running at 11.4%, maintaining the retail price represents a discount!

Meanwhile, in deflationary Western Europe, holding the price steady indicates a price increase!

Fortunately, in each case, the consumer is savvy, and understands these subtleties!

More on Russian pricing here at Business Insider

The Two Aldis - Some concerns for the future? - and a lot more anecdotal detail..

For decades the Albrechts, the billionaire dynasty behind the Aldi retail empire, have lived by two golden rules: live modestly and avoid publicity. Aldi founders Karl and Theo Albrecht were also as obsessive about thrift as privacy.

Having been accustomed to having access to far greater degrees of personal and business background re our other major customers, we have all watched the growth of Aldi with a mix of curiosity and frustration at the lack of anecdotal coverage to provide insight.

For this reason alone it may be worth a glance at this Irish Times article, revealing that Aldi are now just like most other family businesses, and perhaps a little easier to understand…

The Tesco 30% product cull: key issues arising

News first reported in The Grocer on Friday 30th January, of a cull of up to 30% of SKUs stocked by Tesco raises important issues for NAMs.

Given Dave Lewis marketing background, and an outside agency, Boston Consulting Group working to a brief, the starting point has to be the needs of the consumer-shopper.

Possible candidates for culling have to include:
- Obvious over-laps by function, and undifferentiated me-toos
- Products that are in the assortment because of back margin, rather than consumer demand
- Slow-yielding 'experimental' products outside the core Tesco offering

However, given the 30% culling target, it is unlikely that the above steps would generate sufficient numbers of discontinued SKUs, so it will probably be necessary to eliminate entire sub-categories to achieve the numbers...

In which case, candidates could include any sub-category that fails to reach Tesco's 25% average Gross Margins and ideal Net Margins of 5%. Other criteria could include minimum space productivity levels of 1,000/sq ft /annum. Finally, as regular store checks of Tesco Extra will reveal, those sub-categories that have been progressively reduced over the past three years in terms of instore presence, such as home entertainment software (CDs, DVDs, and games) and books, have to be due for re-assessment...

Also, if we add the idea of the long product tail in large space retail, accounting for insufficient sales levels, redundant space in-store arising from the onset of the 'squeezed middle', and reputed to be of the order of 20% of the selling area, any culling of assortment could generate additional redundancies in store space...

Private label - a special case?
Again, given the brand-marketing background of Dave Lewis, and the help of an agency tasked with meeting consumer-shopper need, profitably, we  would suggest that Tesco's private label will be granted no special privileges in the culling process. Accordingly, private label SKUs will have to fight their corner vs. established brands in order to justify their on-shelf facings...

Finally, given the presence of independent consultants, and the 'non-involvement' of buyers, NAMs will not be able to use the traditional supplier-buyer relationship to directly influence the process...

Accordingly, it will be necessary for NAMs to revert to the satisfaction of fundamental consumer demand within core Tesco traffic as a criterion for justifying their brand's presence in the assortment.

In practice, this means making an objective re-assessment of the appeal of their brand vs. alternatives available to the target consumer within the Tesco environment.

In addition, given Lewis' shift in emphasis from Back to Front margin, it is vital to re-assess and re-engineer their trade offering in order to optimise the appeal of the total offering vs. available alternatives, as viewed through the new Tesco lens..

Then find a way of getting the revised offering onto the Tesco table, before the cull shortlist is finalised...

In other words, an unprecedented set of assortment decisions is being made by Tesco using commercial logic based on demonstrable consumer demand and aimed at providing a simple choice for the consumer-shopper.

Suppliers would be well advised to adopt a similar approach... 

Argos-Sainsbury's Digital store test - an opportunity for two-pronged shopping missions?

News of Sainsbury’s addition to its concession portfolio (30 firms including Timpson, Jessops, Virgin Holidays and Thomas Cook) by opening ten pilot digital Argos stores in Sainsbury's that will aim to offer a broad range of general merchandise, in a combination of in-store purchase and click & collect.

The concessions route has to be a no-brainer for Sainsbury’s (or any other over-spaced squeezed middle player) especially as the quality of the partnership can be optimised using the old Kwik Save formula of a basic rent + a percentage of sales…

Whilst this is another way in which Sainsbury’s can optimise the 6% underutilised space in larger stores and add to its general merchandise offering, the real advantage for suppliers has to be the opportunities and scope for joint promotions that link Sainsbury’s and appropriate concessions in a multifaceted shopping mission.

Depending upon the category, promotions that lead on either the concession or Sainsbury’s products have to result in synergies and therefore increase their appeal for both retailers..

Other Sainsbury’s concession partners include Centre for Dentistry, Bupa, Johnsons Dry Cleaners, Explore Learning, Starbucks, RAC, and AA. Details on Sainsbury’s concession deal here

'Amazon Calling' - a new email delivery service to wake up corporate providers

News that Amazon have launched an email and calendar management service could be a surprise, but not a shock for wide-awake NAMs...

Aimed at the corporate sector in competition with Google and Microsoft, this has to be another example of Amazon checking through categories where complacency and the resulting pricing may provide an opportunity for simplicity and efficiency to gain a toe-hold.

Whilst we used to say that the major mults would eventually provide a means of satisfying our every need, Amazon are actually making it happen...

Apart from early adopters that may like to check out Amazon's Workmail now, the real issue for NAMs is where will Amazon strike next...?

In other words, why not check out if your, as yet untouched, category exhibits any of the Amazon-appeal criteria like complacency, inefficiency and the resulting pricing that may raise its profile with this 'virtual conglomerate'...and prepare for the inevitable...  

Unilever chief executive slams short-term profit mentality - the options for NAMs...

News that Paul Polman has criticised the traditional City benchmark of shareholder value raises important issues for NAMs.

As you know, 'shareholder value' is the value delivered to shareholders because of management's ability to grow earnings, dividends and share price, all driven by wise investment decisions and a healthy return on invested capital.

In practice, this means generating a steady ROCE of 15% per annum, a level that gives a company autonomy, freedom to make longer term decisions, and 'independence' of the City, who are essentially in the reward-for-risk business. The City will tend to leave successful companies alone to 'get on with the good work'...

'Acceptable' Returns
When it comes to type of business, branded suppliers need to generate between 5-10% Net Profit, and retailers 3-5% Net Profit, and because retailers rotate much of their capital (i.e. stock) faster than suppliers, both types of companies can deliver ROCE's of 15%+, all things being equal.

The problem has been the global financial crisis driving down net profits below these levels, and in turn the ROCE and thence the share price. This means greater pressure from the City to increase the bottom line, fast. And all in an increasingly high risk environment.

As you know, profit can be increased either by driving sales or cutting costs, or a mix of both, with cost-cutting being the fastest route in the short term. Hence the product content reductions/compromises, range rationalisations, sell-off of brands and properties, savings in working capital via extended trade credit, pulling forward commercial income and all the other issues that have come to haunt us all in recent times...

The ideal formula
The City are a vital source of funding and will only be encouraged to back off if the ROCE reaches, and is maintained at, acceptable levels.

Polman is right in that the starting point has to be the (savvy) consumer, via a combination of Product, Price, Presentation and Place that is demonstrably better than alternatives, made available to them however, whenever and wherever they choose to buy, resulting in a degree of satisfaction that causes them to willingly return for more and hopefully tell their friends... And all at a level of profit that satisfies the money men...

NAM action
However, in the short term, NAMs need to work in the here and now. They need to reassess their own finances - and those of the competition- but especially the financial health of their customers, in order to try to appreciate the degree of City pressure on all stakeholders.

Within this commercial reality, make an assessment of their relative competitive appeal to retailer and consumer, and strip out anything redundant.

Then check the cost to the business of each element of the offering and translate it into the incremental sales each represents to the retailer in terms of value. Then go in and make every pound count...

Alternatively, why not try asking the City to politely get out of the way...? 

The 120-day trade credit norm – an eventual turnoff for the consumer?

As Diageo become the latest major company to extend the credit taken from their suppliers to between 90 and 120 days, the law of unintended consequences begins to kick in...

Passing extended credit burdens back up the pipeline can be regarded as a way a supplier can attempt to neutralise the cost of the credit they have to give their customers. However, as you know, a high added value company can never hope to fully pass on to their suppliers the cost of credit they give their customers.

This is because, in the case of a supplier where bought-in ingredients represent say 10% of their £75 trade price, when their customer on a trade margin of 25% delays payment of that trade price, the supplier would have to delay payment of their suppliers by ten times to cover the cost of the customer’s credit.

The key issue here is not just the pain they inflict upon a trade partner who cannot afford to pass on the cost to their supplier, if any.

What really matters is that, as 120 days becomes 'a common industry norm', so too the major retailers will be tempted to extend their credit periods to 120 days, 150 days or even 180 days, with payment every six months becoming a possible settling point...until the major suppliers attempt to catch up.

When even a savvy consumer accepts that credit over 30 days (itself an abuse of power when value can be exchanged in five days) is unacceptable, and eventually results in higher prices on shelf, they will attempt to exercise their ‘walkaway’ option, probably en masse…

In the way consumers are becoming increasingly critical of global companies finding locally legal ways of side-stepping their tax obligations, so too they will eventually make a connection between supply chain abuse and what they have to pay on shelf, and begin to boycott both brands and retailers...

Meanwhile, the only answer for a supplier faced with excessive credit demands in this generic world is to offer a package so unique and of such value that one earns the ability to deal a ‘walk-away’ card onto the table, and mean it….

Tesco's New Supplier Network - some opportunities to miss?

Tesco’s interactive online supplier-collaboration platform is a step that could easily be converted into a leap forward.

How about Tesco becoming the first really transparent retailer, revealing aspects of the UK business that are usually kept hidden ‘because of commercial sensitivities’…?

Think what productive use suppliers could make of the following:

• UK Credit periods: average days, and proportional split of payments in advance, on delivery, and 20, 30, 45 and 45+ days… (+ rationale)
• Brand/Private-label split, overall and by category
• Sales/sq. ft. by category
• Gross & Net Margin split, by category
• Trade investment/Commercial Income: Tesco definitions of each bucket, their purpose, KPIs and method of accounting
• Split of back & front margin

Tesco have begun a refurbishment of their supplier-relationships, in what will continue to be a challenging and distracting environment (SFO fall-out, increasing consumer sensitivity to David-Goliath corporate relationships…). 

Instead, why not go for a fundamental fact-based renewal of those relationships, via a unique context of openness that will allow and encourage suppliers to design and deliver proposals that will directly address the fundamentals of the supplier-retailer partnership?

Naïve? Of course it is naïve, as with any leap in the dark…
...a darkness where suppliers currently operate, building in +/- buffers to cope with best guesses on key retailer drivers and measures, instead of being able to fine-tune proposals that are tailored to help trade partners to optimise ROCE, in the interest of meeting consumer-shopper need, a primary driver for both parties…    

Supermarket sales volumes up for the first time in 18 months - but how was it for you?

Latest data from Nielsen showing  that sales volumes in the UK’s leading supermarkets increased 0.6% during the four weeks ending 3 January 2015 produced a collective sigh of relief, and possibly a feeling to the effect that 'it’s all over now, back to business as usual'.

However, suppliers that have never had a better year, and are hoping that no-one, least of all the ‘down-to-us’ retailers, has noticed, will have realised that it is always ‘business as usual’, with success coming to those that can factor any market conditions into customer strategies, and maintain growth.

For them, structural changes are simply a re-balancing of demand on the way to what will probably end up as Tesco 25%, Sainsbury’s, Asda and Morrisons sharing 40%, with the remainder going to the middle-squeezers…

Meanwhile, those suppliers that are still shell-shocked following seven - yes seven - years of flatline demand, having cut to the bone, are licking their wounds, yet hopefully finding time to continually run the numbers on every aspect of the trade investment package, in a constant search for ways of optimising cost and value..

Despite the punishment, they need to summon the energy to dig into the Nielsen data in order to compare category volume growth with customer equivalent and ideally confirm their fair-share of any improvement in sales.

Then comes a re-assessment of their competitive appeal vs. other category players, as a basis of re-engineering their entire trade investment package, by customer.

Given the forensic intensity of the trade investment spotlight (SFO), coupled with the need for high-intensity price-cutting by the mults, it is vital for suppliers to anticipate significant shifts from back to front margin, everywhere…

Only then can we assume that we are ‘back to normal’ in supplier-retailer trading relationships…in anticipation of mults' claims that, having dealt away the increases in front margins via price-cutting, there is now a need for 'a little extra to create some excitement in store' ... 

Busting to win custom - the real fall-out in price-wars

News that the supermarket price war could force more than 100 food suppliers out of business was not news to key stake-holding NAMs...

In fact, anyone with a half-open eye on the UK retail trade will know that a package comprising Trade investment of 20%+ of supplier sales, Trade Credit of 45+ days and Deductions of 7% - all contributing to lower-cost food wastage in the home - can have only one conclusion…

Whilst Begbies Traynor, a corporate rescue and recovery practice, understate this via ‘experiencing financial distress’, being driven into liquidation, or ‘forced into going bust’ probably describes the situation in a way to which NAMs can more easily relate.

Given the price-cutting turmoil in the market, the key issue for NAMs is to establish the state of their own company’s finances, compare with other players in the category, and then find ways of taking remedial action.

In practice, this means accessing Companies House web-check service (online @ £1/company) and downloading your latest annual report.
Remembering that this is the version that the buyer sees, it helps to conduct the analysis from that perspective. In other words, the customer is not interested in the extent to which you are being driven towards the edge, but is more concerned with the resultant impact on continuity/availability… 

You, meanwhile, will have the added benefit of category and customer insight from a supplier perspective.

As you check through YOY Sales and Net Margin, compare these with your performance with individual customers.

Next calculate average trade credit and compare with individual customers to discover the sources of your growing stress/anger...

Assuming that your ex-factory prices are - or should be - 50% of your prices to the trade, you can then calculate the impact of your trade investment  on your net margins, on average, and using your detailed inside-knowledge, assess the extent of ‘fair shares’ incorporated into your individual trade partnerships.

A quick check on the open-domain finances of your category competitors will further confirm the fair-share splits by individual customers.

Finally, a checking of the customers’ finances will then point at key beneficiaries of the monies being squeezed out of your trade partnerships to benefit the consumer…

You are then in a position to ensure that - using open domain-fueled insight, and every tool in the bag - your company is going to survive...

After all, why go bust because your customer does not understand fair-play, or finance...?

Tesco gets new junk status credit rating, proving that the 'first cuts were not the deepest...'

Last week's Tesco moves that included shutting 43 stores, moving the head office and ending its pension program, along with the sale of the Blinkbox movie-streaming unit, price cuts and £250m of cost savings, were judged insufficient to prevent S&P downgrading their credit rating from investment grade to junk status.

Following on from Moody's equivalent downgrade last week, it now remains to be seen whether the third major agency, Fitch Ratings, will follow suit.

What is a 'junk bond'?
Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. As you know, junk bonds are so called because of their higher default risk in relation to investment-grade bonds. In other words, the rating is used by the market to assess the degree of risk for those prepared to engage with a company via purchase of its bonds, investment in its shares, or extending them credit.

In return for the perceived risk, the company will usually have to pay more for the assistance, in terms of interest, or offer earlier payment. This means that the cost of running the business will rise, thereby impacting the bottom line...

What does it mean for Tesco?
Given that the above ratings were given after the announcement of the turnaround plans, it means that the ratings agencies believe that Tesco are not taking sufficient steps to deal with the structural changes in the market, and the discounters in particular...

Action for Tesco?
Tesco now have to add extra moves to the action-list in order to attempt to reverse the junk ratings, ideally before Fitch follow S&P and Moody's.

Possible options include:

• Extension of the headline 'up to 25%' price-cuts on 380 branded products to perhaps an extra 400 brands to fully replicate Discounter product portfolios
• Acceleration of asset sales (Tesco Bank, SE Asia interests, perhaps an additional 40+ store closures) in order to pay down debt and reduce the interest burden
• Searching for, say, an extra £250m in cost savings within the business

NB. the moves have to be sustainable and 'spectacular' in order to counteract the junk ratings, and neutralise the increased costs of doing business.

'Ignoring' the ratings would probably result in additional pressure on the share price.

The Tesco moves also have to be translated into bottom-line KPIs, spelling out how each move will impact net margin, and ROCE, minimum... And all of this in the shadow of the ongoing SFO investigation.

What it means for NAMs?
For speed and clarity, Tesco have to shift the emphasis from back to front margin in order to impact the consumer-shopper.

In order to avoid much of their trade investment ending up in front margin buckets, NAMs need to reassess their competitive appeal relative to other brands/products available to the consumer, in terms of Product, Price, Presentation and Place.

A couple of 'what-ifs' re the impact of a 25% price cut on their brand - or a competitor - in terms of  relative competitive appeal within the category, might help in kick-starting colleagues' focus on the issue...

Next, each element of the investment package should be re-assessed in terms cost to the business and value to the customer, in order to help Tesco to see and quantify the link between brand investment and bottom line impact...

Anything less may be seen as simply another potential cost-saving in a transactional relationship... 

Dalton Philips - a casualty of a time-warp breakout?

Appointed to pull Morrisons into the 21st Century via an injection of IT, global vision and democracy, Philips managed the five-year programme of heavy lifting, but was undone by the middle-squeezing impact of Waitrose and the discounters, at a time when a return to basics was required in retail…

In the interim, with his down-to-earth, common-sense approach, Andrew Higginson will reduce the Morrisons’ message to basics and go for growth via a shift from back to front margin, a focus on pricing and a search for a like-minded replacement CEO.

The new team will build on Philips’ improvement in operating systems, and moves into convenience and online.

Within the business, the new chairman and CEO will sound and feel like Ken Morrison, which will not only provide internal reassurance, but will also ensure a couple of years’ silent tolerance from at least one key shareholder…

Back to the future for Morrisons?
Meanwhile, NAMs need to anticipate a return to the old Morrisons, but manage a retailer that is super-charged with the benefits of a visit to the future… 

The Hungarian Revolution in retail competition legislation - Why this matters to the UK NAM...

Following on from yesterday morning's post re the new trade law in Hungary re closure of unprofitable supermarkets (below), it is obvious that the Hungarian competition authorities have evolved a very effective way of neutralising some of the scale-power of major retailers.

A new model in the management of anticompetitive behaviour
Unlike more 'sophisticated' markets where a set of rules is established, and transgression is detected, proven and penalised, the Hungarian authorities have identified the ways in which large companies can exercise scale-power and are taxing such uses in order to neutralise their impact on smaller players, fast.

This is a much simpler process that does not need the help of whistle-blowers to make a case.
Details are given in the posting below of the steps already taken in taxing large companies' ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and forbidding the sale of some categories (tobacco).

Application of the process to trade credit abuse
It follows that when they come to the issue of trade credit, the Hungarian authorities will not - unlike UK legislators - miss the point of trade credit abuse by penalising breaches in 'on time' payment of invoices i.e. the customer is entitled to negotiate a period of their choice -  45 to 90+ days on a 'take it or leave it basis' and be in breach only if the agreed time period is breached.

Instead, if they follow their current approach, the Hungarian authorities will calculate a method based on transfer of value time-period, plus say 5 days handling to allow for banking system 'efficiencies' which in the case of  weekly deliveries would work out at approximately 15 days from date of delivery.

The authorities would then simply apply a commercial rate of tax - say 5% minimum p/a - on any period in excess of 15 days, thus neutralising the scale power of the customer re credit period. Monies collected in this way could be then re-cycled to subsidise smaller players...

Credit period was never intended to morph from covering the gap between receipt of goods and payment by the customer's customer, to becoming  a source of free credit or working capital, at the expense of a supplier too powerless to object...

Hungarian Lawmakers Pass Law On Banning Unprofitable Supermarkets, in the name of fair competition

According to Xpatloop, lawmakers have approved a government law on banning from 2018 supermarkets and hypermarkets that fail to make a profit for two consecutive years.

Given that the new law was this morning cited by Tesco, Hungary's biggest supermarket chain and third-biggest employer, as the reason why they will close 13 shops in Hungary in order to remain profitable for the long term, it can be seen that the new legislation is being taken seriously.... 

The government makes the moves as part of a policy to eliminate of factors that enable large supermarket chains to abuse their preeminent positions. Steps already include a 15-fold rise in the so-called food supervisory fee, the recently introduced advertisement tax, and the ban on tobacco shops in some big supermarkets.

It can thus be seen that the Hungarian government have gone farther than other countries in attempting to combat unfair competition, in that they have reached to the heart of how large companies exercise scale-power and focused on what they regard as root causes of unfair advantage, namely the ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and the sale of some categories (tobacco).

In other words, these moves should be seen as a progression towards ensuring fair dealings by large retailers and suppliers in an attempt to reduce anti-competitive pressure on medium and smaller trade partners.

It remains to be seen how soon competition authorities in other countries take similar steps, in the search for fair dealings for all...

Meanwhile, time for UK suppliers and retailers to anticipate the inevitable, vis appropriate 'what-ifs'?