Tesco - playing the waiting game

Given the amount of uncertainty in the Tesco pipeline - Product cull, SFO Commercial Income investigation and GSCOP checkout - it is tempting for certainty-seeking NAMs to await the output from each initiative before incorporating the results into their trade strategies...

This is almost as dangerous as ignoring their existence and ploughing on regardless, using the tools and skills that were designed to work - and did so effectively - when markets grew steadily at 5% in real terms!

But five years of flatline demand was never anticipated or budgeted for...

Pragmatic NAMs don't need to wait for inevitable conclusions - they take informed guesses at what will affect them and act now. They thus gain while others sit and wait.
OK, perhaps others stand and wait - looks better, but is no more productive.

Informed guesswork:

- The Tesco Product Cull - a mix of surplus products and sub-categories of up to 30,000 SKUs, eliminating those items that do not represent a sufficient point-of-difference to justify a place in the slimmed-down Tesco portfolio. If you have any doubt, consider it out...

But even if your brand is on the plus-side of marginal, consider whether it is worth trying to break through to the guys making the cull-recommendations, or is it best to devote your energies to establishing alternative distribution, before the lanes get jammed with other NAMs' cars...

- SFO Investigation - a long drawn out exercise that will hopefully result in a set of clear definitions of trade investment buckets, their purpose, their time-of-value transfer (to allow for defensible booking and auditing), and - without doubt - paid on results and in arrears...

Meanwhile, busy buyers will be tempted to pull these payments into front margin and possibly fund deep-cut prices with the 'surplus' profit.

- GCA Investigation: This will focus on Tesco's compliance with GSCOP in two areas:
Part 4 (paragraph 5) of the Code: No delay in Payments;
Part 5 (paragraph 12) of the Code: No Payments for better positioning of goods unless in relation to Promotions.

Whilst it is possible that Tesco may have been moving so fast in recent years that inadvertent breaches may have occurred, the GCA is still reliant on hard evidence of non-compliance with the letter of the Code, in order to pursue a case against a retailer.

Only when retailers and suppliers can be persuaded to define and comply with the fair-play spirit of GSCOP will the CODE become a day-to-day working tool* in the supplier-retailer relationship. The reference in Part 4 (paragraph 5) to 'payment within a reasonable time after the date of the supplier's invoice' goes part of the way, but 'on time' payment - whatever period has been 'agreed' - is still the 'letter-of-law' guiding principle for retailers...

KAMtip:
Assume that the three initiatives have panned out as indicated above, and take appropriate action now

* Making GSCOP a workable tool in the day-job for suppliers and retailers:
Why not submit your ideas to the GCA Team on what would make the Code represent fair-play? 
This would represent no 'whistle-blower risk' but could help in establishing a basis for a Mark 2 Code that might better reflect the realities of joint-partnership, with willing compliance a given....  

David Potts completes the 4-man solution to Morrisons rebirth

The combination of Higginson, Strain and Potts with hopefully silent partner Morrison, sharing a philosophy of down-to-earth common-sense retailing and their Tesco-in-common experience, constitute a grounded team that is hopefully well poised to implement Dalton Philips’ breakthrough strategy…

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 pragmatic approach, Andrew Higginson has reduced the Morrisons’ message to basics and will probably go for growth via a shift from back to front margin, a focus on pricing and optimisation of his familiar like-minded CEO.

The new team will build on Philips’ improvement in operating systems, and moves into convenience and online (with possibly a re-assessment of the small-print of the 25-year Ocado contract...).

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 a future that was found to be not all bullshit….

The Tesco Cull - where does this leave product innovation?

Time was when getting a new product listed had to overcome the ‘we don’t have rubber-shelves’ barrier, allowing us to put forward a magnanimous offer to cull one of our current lines that was patently well past sell-by…

The key difference now is that the shelf is also being ‘shortened’…by up to 30%, to be precise…

This puts us in a whole new ball-park, given that one part of Tesco (via a third party) is busy finding ways of eliminating current lines /categories, seemingly without buyer intervention, whilst the buying team are presumably attempting to operate in a ‘business as usual’ environment..?

In other words, a new product now needs to represent a spectacular leap forward, in order to make a real difference. Moreover, given that the emphasis in Tesco will be on front margin, the usual trade investment package will carry less weight.

This means that the product will probably have to succeed elsewhere, i.e. via one of the other mults, proving that it deserves a place in the market, in order to enhance its Tesco-appeal, but at the same time denying our No 1 retailer the traditional innovator’s advantage… 

Hopefully, these mental gymnastics will help NAMs to think fundamentally about the meeting of real consumer need, better than available competition, and allow them to refine a bespoke trade package that really stands out in the marketplace, and proves it in practice…

Allan, key to the Tesco fine-tune?

If we assume that much of the heavy lifting has been completed at Tesco (???), then the appointment of John Allan has to be about tightening the bolts on the Tesco rebuild.

True, the SFO and GCA issues are still in the pipeline, but if the broad procedures anticipating their inevitable outputs are not already in place, then we are all in trouble...

Moreover, pro-active suppliers will already have anticipated the outcome of the Tesco product-cull (think obvious over-laps by function, undifferentiated me-toos, products that are in the assortment because of back margin, rather than consumer demand, and slow-yielding 'experimental' products outside the core Tesco offering) and pushed on half-open doors elsewhere...

So that leaves John Allan's probable MO:

Taking some key features of an Allen-key might provide some pointers:

• The tool is simple, small and light: an essential requirement in fine-tuning...
• The contact surfaces of the screw or bolt are protected from external damage: See Contract of Employment 
• There are six contact surfaces between bolt and driver: Having ensured driver-bolt fit, little scope for slippage in addressing problems
• Torque is constrained by the length and size of the key: Hopefully, given the retail experience, little danger of over-doing the treatment
• Very small bolt heads can be accommodated: Even minor issues will receive attention, just-in-case...
• The tool can be manufactured very cheaply, so one is often included with products requiring end-user assembly: "If the tool is right, don't ask the price..."
• Either end of the tool can be used to take advantage of reach or torque: A need to bend over backwards for sensitive issues?
• The tool is L-shaped: Perfect for current flat-line environment (An L-shaped recovery involves a sharp decline in key metrics followed by a long period of flat or stagnant growth).

Finally, remembering that we are still talking about Tesco, with a variety of heritage problems that may resist first attempts, the tool can be reconditioned using an electric grinder by removing the worn-out part, and then works like new...

* Apologies to the Allen Manufacturing Company of Hartford, Connecticut...

YouTube 10th Anniversary: How the Video Streaming Site Changed your Audience Gateways..., hopefully?

On St Valentine's Day, 10 years ago, Chad Hurley, Steve Chen, and Jawed Karim, three former employees of PayPal, registered a new company devised around a simple idea: that there should be one website where people can upload and watch videos.

In an era of increasing media fragmentation, amidst falling TV viewing figures, well-targeted YouTube content provides an unprecedented means of engagement for marketers everywhere.

According to The Atlantic, YouTube is now the third most viewed website in the world, boasting over one million viewers who watch more than six billion hours of footage each month. Each minute, users upload 300 hours of video to YouTube's servers.

Whilst amateurs strike lucky with worrying frequency, it can be a relief to NAMs to realise that 29 of the site's 30 most watched clips are professionally produced music videos.

In other words, the access process is easy, but getting attention requires skillful, creative targeting and professional execution...leading the consumer to NAM-engineered fulfillment at point-of-sale...

Getting it wrong upfront will not matter, in that your YouTube output, if it even floats, will quickly sink without trace. The real pain results from seeing a competitor that has managed to strip their offering down to the bare essentials, and succeeded in touching a consumer-nerve more effectively than available alternatives, race off the shelves....

In an ocean of distracting content, in unprecedented times, the consumer wants simplicity, clarity and a way of buying optimally, with all excess removed...

What else do you think is happening at Tesco?

St Valentine’s Day passing of Nutella-man

Saturday saw the death of Italy’s richest man, Nutella billionaire Michele Ferrero (89).

His father Pietro’s great idea in the scarce post-war years was to create a chocolate-like sweet using cheaper hazelnuts, which were abundant in the countryside around Alba, instead of expensive cocoa.

He is alleged  to have been so excited at the discovery of the successful recipe that he woke up his wife at midnight - she was sleeping - and he made her taste it with spoons….

No record exists re what happened next (!), except to say that his idea resulted in a new blend where a kilo of so-called “pasta gianduja” cost the equivalent of 30 cents in today’s money compared with €1.50 for a kilo of chocolate.

Michele Ferrero’s privately-owned firm is now famous for Nutella spread, Ferrero Rocher chocolates, Kinder eggs and Tic Tac sweets, turning over €8.1bn in 2013.

‘Never patronise a child,’
Ferrero’s greatest skill was knowing what children want, and never talking down to them, a strategy that anyone with savvy grandchildren will endorse…. Ferrero started in the family business when he was 20 and was leading it by 32, growing by undercutting the fine chocolates market with products that boasted “more milk, less chocolate”.

A simple idea, consistently applied and value that is obvious to all...

A template for re-newing Tesco?

A Friday thought: Walgreens Boots Alliance = Boots Global?

Given that Alliance Boots = 1/3 WBA, it would seem that Boots is an important but unequal part of WBA.

However, the combination of AB’s global experience vs. Walgreens’ US-centricity, the fact that four of the five divisions of WBA are run by Boots management, and noting that the acting-CEO has a major 16% shareholding backing up his global vision, might cause us to conclude that we are witnessing the emergence of the only truly global H&B player in the world.

Moreover, a key objective has to be the use of Boots UK Ltd impressive results (ROCE: 26.1% and Net Margin BT: 8%), as a financial target for the £74bn group.

Besides, the more pragmatic among us might conclude that on balance, given these unprecedented times, it is probably better to have Mr. P operating inside, rather than outside the WBA tent…

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….