Relating retail business rates to sales performance - the unintended pay-off?

Over at The Telegraph, Graham Ruddick develops some good reasons for how local councils’ discretionary expenditure of retail business rates could transform the high street in terms of positive use of the funds at local level.

However, basing rates on sales achievement could result in even more positive benefits for the High Street...  By relating the business-rate to a retailer’s sales, rather than an out-of-date value of the property, the retailer could focus on driving business rather than covering overheads.

Even more importantly, the council could actually play an active role in helping business succeed…

As a stakeholder, the focus of the council could change, giving councillors a reason to make pro-active moves to help create an environment that meets the needs of all parties in the High Street.

This could bring a whole new purpose to maintaining building fabric, level and quality of domestic and retail occupancy, access and parking facilities, cleansing and lighting, and even some accountability…

These moves would eventually result in higher retail property values, but the council having a pro-active stake in thriving businesses, combined with the power to spend locally at their discretion, could get everyone there faster… 

Does Cadbury chocolate taste different in different countries?

Can international taste-harmonisation help?

The BBC have published a detailed study of consumer reaction to perceived differences - 37,000 petition signatures to boycott Hershey's! - in the versions of CDM as made in the UK and by Hershey's under licence in the US.

The article goes into a degree of detail that will prove compulsive to those in the 'candy' sector, but the key issues raised in terms of consumer expectation that global brands should taste the same in every country may have implications for brands in other categories.

For instance, Nescafé UK blend might seem weak to hard-core Mediterranean coffee users... 

Now whilst traditionally, such variations in local versions of brands might have been 'kept where they belong' by harmonising prices and terms, in a well-travelled world where every little helps, it might be necessary to find a way of harmonising taste..

Accordingly may we propose the use of Taste-corridors..?

In the 'worst-case' scenario, the brand owner decides that one taste will fit all and pulls all global variations 'down' (?) to a common formula, in which case it had better be good...

In the 'Recommended Scenario' the extreme versions are gradually merged into a corridor that provides sufficient variation to satisfy some needs, saves face in the marketing department, and probably goes unnoticed by the bulk of users...

...until you try....

St Patrick's morning-after shop closure, a Reason vs an Excuse...

                                                                                              Galway, source Joe.ie

Hopefully, this valid reason for achieving a worthwhile life-work balance can provide an excuse for Mick to move to self-service...thus avoiding any perceived drop in service level!

Sainsbury's '3%' Net Margin going forward - the 'new' role for NAMs?

If Mike Coupe is acknowledging the end of 5% net margins in UK grocery margins, and implying a more likely 3% going forward, the issues for suppliers have to be:

- Can 3% Net Margins work?
- How can my brand help?

Essentially, as you know, the driver of share price increases is ROCE, and given that ROCE is a multiple of Return/Sales and Sales/Capital Employed i.e. Net Margin x Capital Rotation, then it matters little whether a business chooses to operate a high margin, low rotation, or a low margin, high rotation business model.

It is the combination that counts, and 15% ROCE provides an acceptable reward for risk...

Therefore, if 3% Net Margin is the retail 'norm' going forward, then the multiples need to focus on increasing their capital rotation - with the help of suppliers - in order to compensate for the lower margin in producing an 'acceptable' 15% ROCE.

Increasing Capital rotation i.e. Sales/Capital Employed i.e. increasing Sales and/or reducing Capital Employed

Given that the retailers are already doing everything possible to drive sales, we shall focus on ways of increasing capital rotation, a less costly option for NAMs:

As you know, Capital Employed = Fixed Assets + Current Assets - Current Liabilities

Fixed Asset optimisation:
Fixed Assets in retail means sales space, and helping the retailer to increase space productivity - i.e. sales/sq. ft. - has to be a way forward in making their Fixed Assets more productive, using £1,000/sq. ft. per annum as a benchmark.

This means increasing basket size, and trading up the shopper. This is where in-store theatre, and shopper marketing can play a role. It also means de-listing of any overlap and de-duplicating within the assortment in order to simplify the offering to increase its shopper-appeal.  This is what Dave Lewis doing via the 30% product cull...

Incidentally, all retailers will pursue this approach to a point where they begin to sell off unproductive outlets, or risk becoming uncompetitive. Hence the store culls in the pipeline...

Current Asset optimisation:
Currents Assets = Stock + Debtors + Cash
Here the emphasis has to be on Stock optimisation i.e. increasing stockturns, without compromising on-shelf availability. This means smaller, more frequent deliveries to produce annual retail stockturns of 20+ i.e. 18+ days stock. For a retailer, this results in less capital tied up in stock, less wastage/shrink, and faster throughput.

Current Liabilities optimisation:
Current Liabilities = Bank Overdraft + Creditors
As Current Liabilities are a negative, retailers should try to increase Bank Overdraft and take longer to pay suppliers, in order to increase their Current Liabilities. However, since the global financial crisis, retailers have been trying to pay down debt and reduce exposure, thereby closing off this option

Meanwhile, taking increasing amounts of free credit from suppliers has breached politically acceptable limits, and will probably be progressively reduced in the future, thus closing off another option for retailers.

Thus the NAM needs to focus on space and stock optimisation.

In other words, doing a little more of what you are already doing, but relating it more to the top-of-mind concerns of the buyer in the future, in terms of its direct impact on the retailer's ROCE and thus the share price...

...while others turn up the volume on their traditional selling points, as they await a return to normal...

Diageo U-turn on threat to extend supplier payment times - a step on the way to fair-play?

According to The Telegraph, Diageo has reversed its intention to extend the number of days it takes to make payments from 60 days to 90 days on all new contracts and tenders. In doing so, they have reduced the likelihood of being quoted by retailers as an excuse to extend their payment terms to a new 'norm' of 90 days...

However, this move again highlights the inadequacies of the Prompt Payment Code.

Whilst ‘Prompt payment’ and ‘On-time payment’ can focus attention on the pressures caused by extended credit, I believe that these conditions miss the point in commercial relationships. The issues are the length of time taken to pay, and that suppliers are having to contribute to the working capital of a customer by giving free credit in excess of the time taken for the customer to convert their output into cash i.e. Trade credit was originally intended to bridge the gap between supply of a product to a retailer and payment by a shopper.

In the case of supplier-retailer relationships, a retailer is usually more powerful than its suppliers and often has access to a number of different sources of supply for the same type of product. This means that the retailer is usually in a position to dictate terms of payment on a ‘take it or leave it’ basis, i.e. 30, 60, 90 or even 120 days, if they prefer.

Whilst the Prompt Payment Code has recently been strengthened by introducing a 60 day maximum payment term, and enshrining a 30 day payment term as a norm for all signatories as standard practice, the fact remains that payment period should reflect the time taken between delivery and resale in order to qualify as 'fair-play' trade credit.

In other words, different categories should have different payment times, e.g. Perishables should be paid for more quickly i.e. say 5-10 days, whilst goods that have a retail stockturn of 12 times per annum - 30 days stock - should be paid in 35 days.

With UK Multiples holding an average of 20 days stock, their average payment periods should not exceed 25 days...

Inconvenient convenience at Morrisons - an iceberg tip in retail property revaluation?

Morrisons latest results indicating the likely closure of 23 convenience outlets, coupled with the 25% write-down of its property portfolio is simply an overt acknowledgement that Bricks & Mortar UK retail is over-spaced.

Essentially, this means that given the emergence of the squeezed-middle issue, coupled with the development of online, physical retail space - and large stores in particular - are now not as valuable as before the global financial crisis. In addition, given that there are no alternative uses that can deliver sales of £1k per sq. ft. per annum, then the property values have to be written down to market value, in order to satisfy the auditors.

However, if all mults placed their redundant properties on the market simultaneously, market values would be driven down. Therefore actual property sell-offs will be gradual.

Incidentally, this means that in the short to medium term the mults will be in the market for innovative use of their redundant space via productive in-store theatre...

In addition, retail net margins are unlikely to rise in the flat-line price-cut future...

Meanwhile, as far as the stockmarket is concerned, the mults' fixed asset base is over-valued, meaning that the reduced net margin vs. excessive capital employed relationship is driving down the ROCE, and with it the share price...

Morrisons is simply grasping this property write-down nettle now, partly in readiness for the arrival of Mr Potts, whilst Mr Higginson is allegedly departing for the beach, hopefully leaving his mobile switched on...

Finally, given their Tesco heritage, the Morrisons' team will not have missed the fact of Dave Lewis' radical-cull moves to eliminate product/people/property overlaps in simplifying the Tesco onshelf offer.

The results are already coming through via increased growth for Tesco, and other retailers not implementing similar programmes, could find themselves left at the station, as the post-modern retail train gathers pace...  

The Tesco-Schweppes Pricing Spat - really about ownership of the Consumer?

In my early days in marketing, I was always surprised that my UK colleagues agonised for hours re every shelf-price increase of a few pence, whilst my continental colleagues focused on back margin and hardly touched on shelf prices. The answer came in a negotiation session with a major French retailer when a reference to shelf-price impact was slapped down with ‘when we buy your product, the selling price is our business. Now tell me about the back margin’…

In this era of post-modern retail – think game-changing 2007 financial crisis, a new world of multiplicity, diversity, contingency, fragmentation and rupture which accepts that we now live in a state of perpetual incompleteness and the permanently unresolved – an era where the 4x4 consumer has morphed into a basket-carrying shopper searching out daily bargains, and consumer-ownership has become the issue.

In other words, Tesco – and later the other mults – are simply clearing the decks, simplifying the offering and taking control of the shelf, especially pricing.

In terms of the consumer, if ‘ownership’ is defined by extent of knowledge, then retailers combining Clubcard and scanning data to produce a shopper-profile that includes name, address, age, sex, family structure, income-level, state-of-health, recreations and travel, dietary habits, insurance, debt-profile and bank-balance, have to have a greater claim to ownership of the consumer than a marketer knowing that the consumer is probably grey-haired and living alone on the outskirts of Oxford, two children having left home… This was a battle for ownership that was lost way before 2008.

In other words, we now have to accept that a retailer in the midst of a 30% product cull, and in the rifle-sights of the SFO and GCA, is not going to take any prisoners, much less tolerate any interference re how they market to ‘their’ consumer-shopper...

In reality, however, the consumer is now ‘ownerless’, savvy, willing and able to shop around, and is determined to accept nothing less than demonstrable value for money…

Welcome to the new world of post-modern retail…

120 days credit - when the customer makes you an early payment 'offer you can't refuse'....

Given the possibility that 120 days credit may become the ‘norm’, and the likelihood that retailers may offer ‘easy invoice’ arrangements for suppliers in need of cash, it may be useful to explore the financial options in advance…

In other words, when the choice amounts to 120 days net, or ‘early’ payment @ x% off invoice, what financing are we talking about?

Assumptions:
Annual invoiced sales to the customer/annum = £9.5m
Customer wants to pay in 120 days
Supplier wants to be paid in 5 days (after all, little point in going back to your current 40 days if you need money now)
i.e. a 115-day reduction in payment period

At 120 days, customer pays 3 times per year i.e. 365/120          

At 5 days, supplier wants to be paid 73 times per year i.e. 365/5                          

Amount customer owes when paying in 120 days
                                                = £9.5m/3          = £3.17m
               
Amount customer owes when paying in 5 days
                                                = £9.5m/73         = £0.13m
                                                   
i.e. Cashflow saving = £3.17m - £0.13m
                                                  = £3.04m

Say the cost of borrowing is 10% interest per year
Then the cost of borrowing £3.04m for a year
                                                  = £0.304m

Which is equivalent to 3.2% of supplier sales to customer
                                          i.e. £0.304m/£9.5m x 100%
                                                     
Then any extra discount above 3.2% is more beneficial to the customer than investing the money at 10%.

A 3.2% discount off invoice seems reasonable?
If the above supplier is making a Net Profit margin of 5%, then the £0.304m discount represents incremental sales of £6.08m, a mere 64% increase in sales to the customer, to recover the discount…

NB. Best check the above application to your latest annual results with Finance, before leaving the building…