Grazing Shrinkers and the Grape-test…

A new study reported in The Retail Bulletin has found that almost £3 billion worth of items are stolen annually through 27% of shoppers 'grazing' in supermarkets, and stealing £4 each per week.

Shoppers ‘grazing’ on grapes as they shop the store, can add up to a significant shrinkage problem for the retailer.  However, the issue can be further complicated by the fact that a shopper may not regard unauthorised snacking as thieving.

This presents an opportunity for the retailer in that as the grazing shopper makes little attempt at concealment, the ‘thief’ can be more easily apprehended.  However, when challenged, shoppers have been known to claim that they deserve a reward for buying, in that a £50 grocery purchase entitles them to a treat or discount.  Besides, active sampling at the Deli counter, specialist shops encouraging tasting, and continuous in-store recipe demonstrations can add to the ambiguity of the issue.

In-store grazing ‘condoned’ by the retailer and left unchecked, can lead to an escalation of the problem.  Regular shoppers, encouraged by fellow grazers and a seemingly tolerant environment, can then graduate from loose grapes to individually wrapped sweets and confectionery, and then move on to bars or countlines.  From these humble beginnings, razor blades and batteries may not seem like a big step.  There are obviously problems with apprehending a grazer in the store, in that in the first place the retailer is accusing an ‘innocent’ thief, who happens to be a regular customer.  Moreover the grazer may be a customer’s child, and young children, especially female, pose problems for male security guards, inside or outside the store.

An added complication is that, in law, a suspected shop-lifter cannot be accused until they have left the store, and then two witnesses are required in order to successfully press charges.  Apart from the fact that much of the evidence is edible, coupled with the inconvenience and potential waste of staff time, the retailer can be reluctant to take the matter as far as the courts.  However, it is essential that the retailer be seen to press charges and prosecute shoplifters.  For instance, a retailer making 2% net profit has to make incremental sales of £250 in order to recover £5 stolen in-store.

In reality, most shoppers probably stop at the grapes stage…but those that graduate to confectionery can pose a problem.  First there is the issue of ownership of the problem in that a grazer moving from grapes to confectionery may cause the retailer to attempt to shift some of the ‘blame’ for this aspect of shrinkage to the supply chain, in effect penalising the supplier for producing a product that is susceptible to above-average shrinkage.

Whilst grape shrinkage will always be regarded as wastage, escalating shrinkage can seriously damage sales of impulse confectionery.  For the consumer, this can mean reduced opportunities to buy resulting from restricted access to the product at point of purchase.  Inaccurate stock-counts can cause reduced availability and challenges to data credibility and insight, which in turn may sour supplier-retailer relationships.  Incidentally, a quick fix via selling on consignment merely shifts the cost i.e. the supplier delivers £100 and invoices £98, reflecting 2% shrinkage as the product passes through the checkout.

Attempting to measure the scale of the problem has to be a first step in order to justify the work involved in overcoming the political barriers that have prevented action in the past.  This means re-examining goods in/out relationships for sensitive categories and attempting to distinguish ‘genuine’ wastage from shrinkage arising from grazing.  Here suppliers and retailers have a vested interest in sharing the measurement burden, in order to ensure that the problem and associated costs remain in the appropriate part of the supply chain.  This objective exposure of the extent of the problem will help to legitimise the steps necessary for its reduction.

In order to begin to deal with grazing-shrinkage, it is important that retailers clarify to staff and shoppers, the distinction between legitimate sampling in-store, and unauthorised piecemeal snacking on the way to the checkout.  Then begins the slow process of re-educating shoppers (and their offspring) to the realisation that taking products without paying is wrong and carries a penalty…

Alternatively, why not encourage them to become shareholders, hoping that they will then see shrinkage of any kind as a reduction in their own profits, and not another form of dividend…

Buying your new BMW Online Just Got a Whole Lot Easier

According to Newbusiness.co.uk, BMW have recently launched their new online ordering system, one that promises customers to be able to purchase a brand new car in around 10 minutes. Given that a new purchase used to require 4.5 visits to a car dealership, now 1.5 times.

Buying online represents 90% of the deal, with the messy business of practicing your buyer-side negotiation skills to complete the arrangement with a human representative of the shop floor at the dealership, reflecting BMW’s caution at going the final online mile.

And not forgetting to give you the opportunity to kick the tyres, just-in-case…

How long before Amazon simplify the process even more and even deliver the car to your home or office, perhaps by drone to avoid the cost of an extra driver…?

Time for practice-preaching?

Online acceleration and Big Space redundancy – the twin dilemmas of UK Retailing

Essentially, in the current climate, major retailers are faced with two significant drains on profitability. First, the high cost of fulfilment compared with B&M retailing makes online business dilutive of overall profit. Secondly, as consumers shop smaller, faster, closer, this makes 20% of out-of-town big space redundant, thus depressing outlet productivity, or rate of rotation of the store asset.

In other words, this results in negative impacts on Net Margin i.e. Return on Sales, and Capital rotation, or Sales/Capital Employed, the two components of ROCE (Return On Capital Employed). 

Understanding how it works in practice will help you appreciate, and resist, excessive demands by your customer, and also show you how best to help, on a fair-share basis.

Essentially, as you know, ROCE = Return/Sales x Sales/Capital Employed.
If ROCE meets stock market expectations, the share price goes up, reducing the cost of borrowing, and can make it less expensive to acquire other retailers via a combination of shares and cash. However, more importantly, a good ROCE increases the value of buyers’ share options and autonomy in running the business.  As the share price falls in response to diminishing levels of ROCE, the opposite occurs.

This may explain why supplier-retailer relationships are becoming more fraught and increasingly personal as B&M retailers begin to understand the real profitability of online fulfillment coupled with the growing problem of large space redundancy on overall company profitability…

Online as profit dilutor
Given that it is one of the only real growth areas in retail, major retailers cannot afford not to optimise the full online potential of their brand. However, compared with the relative simplicity of serving a customer instore, meeting a consumer’s online needs means additional fulfillment costs including picking, packing, shipping and handling returns.

Online grocery is even more complex in that a typical online shopping basket contains more low value and bulky items, reducing the number of orders per van and thus dilutes van productivity. In addition, consumers are generally unwilling to pay for delivery.

As a result, given that a home delivery costs £20, and that the consumer is unwilling to pay more than £5 per order, the retailer loses £15 per drop, only partly recovered via the margin on the goods delivered. Incidentally, those retailers hoping to improve online profitability by shifting their emphasis onto more lucrative categories (i.e. bigger margin non-foods), then pick up the additional profit-dilutor of online returns, where shoppers send back goods at four times the rate of returns made to B&M stores…

As B&M retailing can be more profitable than online, it follows that, as a retailer grows their online business faster than their B&M sales, the overall profitability of their business will be diluted.

Big space redundancy
In ideal times, B&M retailing can be more profitable than online. However, given the structural changes taking place in UK retailing, with discounters and local convenience stores growing at the expense of large space out-of-town players in a flat-line market, so the scale advantages of the major mults are diminishing.

In other words, large space retailers are finding that at least 20% of the store space is redundant, meaning that whereas it was possible to generate £1,000/sq. ft./annum, these sales have to be spread over a greater sales area.

For example: Say a retailer sells £1k/sq. ft. in a 120,000 sq. ft. outlet = £120m sales/annum. With 20% space now underutilised, the store sales become £96m i.e. 95,000 effective space @ £1k, reducing the sales productivity to £800/sq. ft./annum on the 120,000 sq. ft. store, with an equivalent impact on net margin and store utilisation or capital rotation.

Moreover, having conducted range culls to eliminate overlap and duplication, retailers are finding that 80% of sales are generated by 20% of the SKUs, resulting in a ‘long tail’ sales profile, whilst at the same time reducing product choice via the cull.

However, given that space - and its cost - are irrelevant online, in that a product tail can be as long as the number of products available, albeit selling less than one item per quarter, a B&M retailer can be even more tempted to develop their online offering in order to offer the consumer more choice, thus leading to more profit dilution via the fulfilment costs…

On balance UK B&M retailers are heading towards a future of permanent net margins of 2.5% or less, having grown - and built their share prices - on the basis of 5% + net profit before tax…  It is impossible to increase prices, or significantly reduce operational costs, thus leaving the supplier as the main source of help…

Debenhams alleged early payment discounts - what it can mean for suppliers

According to The Telegraph, Debenhams have allegedly asked its suppliers for a reduction between 1% and 2%, in return for payment between 30 and 60 days earlier than usual.

Whilst suppliers obviously have the option to walk away, it can be more productive to negotiate, using numbers based on the current business. One approach could be as follows, substituting your own figures as appropriate, and checking with your finance department:

Assumptions:
- Supplier annual sales to the customer: £2,500,000
- Current credit given to customer: 65 days
- Supplier’s cost of borrowing money: 5%

                                                                                        60-day reduction        30-day reduction    
Annual Invoiced sales to the Customer = £2,500,000

Customer currently pays in 65 days = 5.6 times/annum
                                                          i.e. 365/65

We want the customer to pay in                                        5 days
                                                                                       i.e. 73 times/annum

We want the customer to pay in                                                                                   35 days                                                                                                                                                i.e. 10.4 times/annum

Amount owing based on 65 days                                            £446k                               £446k
Amount owing based on 5 days                                              £34k i.e. £2.5m/73

Amount owing based on 35 days                                                                           £240k i.e. £2.5m/10.4

Cashflow saving for supplier                                                  £412k                           £206k
Cost of borrowing @ 5%/annum                                             £20.6k                          £10.3k
                                                                                          = 0.82% of sales             = 0.4% of sales

Supplier should resist giving a discount more than 0.8% on a payment made 60 days earlier, or 0.4% discount for 30 days earlier. i.e. any discount above 0.8% for 60 days or 0.4% for 30 days is greater than the supplier’s 5% borrowing cost

Again, substitute your figures in the above calculations to establish your negotiation parameters, and check with finance colleagues… 

Poundland's 26% profits slide, a looming lesson in volatility?

News of the steep fall in pre-tax profits, based partly on the peaking of the Loom bands craze - selling 728,000 of the plastic bracelets a week, dropping to 2,000 – illustrates the extent to which pound shops are affected by consumer whim.

Whilst Poundland are perfectly equipped to optimise such demand with great prices, deep down as a public company the helter-skelter nature of whim-demand has to make them more appreciative the steady-state sale of ‘less exciting’ mainstream brands.

Given this need, and providing the branded supplier’s costings make a pound version viable, then the price discounter represents a good alternative route to consumer.

However, in the medium term both retailer and supplier are increasingly vulnerable to any rise in running costs, such as the introduction of the living wage. Any increase in inflation will also present a problem, given the onshelf £1 price.

In time Poundland will become sufficiently established in the mind of the consumer as a source of good value and will probably be able to increase shelf prices, with the ‘£1’ becoming a reminder of low priced value for money.

Meanwhile, suppliers need a constant focus on cost control and product development in order to remain within the £1 price parameter, and work with Poundland on a fair-share search for realistic and profitable ways of optimising this unique but volatile route to consumer.

All else is detail.... 

Guest Blog: Riding Two Horses – Managing a Mixed Business For Success by Richard Nall

It is the eternal conundrum for many CPG suppliers:  Should we ‘get into’, or stay in, Own Label?

With core customers losing share (e.g. to grocery discounters), and lean manufacturing techniques releasing capacity year after year, organisations face a constant battle to fill their factories.  Other solutions, such as exporting, take time to research, and appointing the right distributor can be fraught with difficulties; whilst M&A can exacerbate the problem (and concurrently release second hand kit for sale following manufacturing rationalisation, inadvertently creating a new competitor).

Superficially, it can seem attractive to fill capacity with own label but if that is as far as your thinking goes, then stay with your knitting.  I suggest that you think carefully how you will ride both horses, both today and tomorrow.  Is the problem that your and your competitors’ brands are not distinctive enough, or are your innovation efforts too weak?  For many, these might be improved, so this should be your immediate focus.

If you still believe that your future lies in own label then start with a mental re-positioning.  Think Retail Brand or Customer Brand.  Successful firms treat customers’ brands as their own with concomitant levels of brand development and innovation resource.  The only outwardly visible difference should be the lack of dialogue investment for the latter.  Start with a crystal clear category vision, defining consumer and shopper growth drivers, followed by a hard-edged discussion as to portfolio roles, and expected levels of financial and organisational benefit and resource requirement.

You might ask yourselves some questions such as:  Why would competing in retail brand be a good thing?  What is their role in driving category sales and profit?  With which retailer(s) do we want to work?  What value would we add?  How can we differentiate from our proprietary brands?  How do we sustain those differences?  What financial and organisational benefits will it bring?  What rules need laying down?

An answer to these questions might look like:  “Competing in Customer Brands allows us to drive category growth, and compete against Brand(s) X (Y and Z) with a diverse portfolio differentiated between the core category drivers.  We will focus Brands A & B on Drivers M & N and develop our customer brand portfolio against Drivers P and Q where Brand(s) X (Y and Z) are strongest.  Our category insight and operational capabilities set us apart so that we will make superior profits vs customer brand competitors.”

“We will earn scale benefits - procurement, manufacturing, distribution and trading - enhancing cash flow and shareholder returns.  This will provide opportunity for increased investment in our branded portfolio.  Net, we will fix our competitors with customer brands, gaining freedom of action to grow our branded business.  Through learning how to be effective retail brand developers, we will create a more agile organisation that operates with significantly greater urgency than today.”

It might sound good but you need to consider, make and stick to some hard decisions re: key practicalities:  How do we ensure our brand development stream remains a core priority and is not disrupted by short-term customer demands?  How will we prioritise resource bottlenecks?  How do we retain corporate enthusiasm for proprietary brands against customer brands?  What IP will we allocate to Customer Brand innovation, if any?  What are our ‘lines in the sand’, and are we REALLY prepared to enforce them?

If you think some of this might be nit-picking, think again.  They are critical issues our clients face daily.  Time and again, we have seen Leadership Teams, and particularly the CEO/MD, inadequately articulate and police their expectations here.  The consequence?  Resource and innovation that should sustain proprietary brands is diverted onto customer ranges.  Over time, the brand stumbles, becoming less important to the manufacturer and customer who is (usually) earning better margins on their own products.  The long-term outcome is invariably commoditisation and category stagnation as insight & discovery, true innovation, and dialogue investment decreases with marketing expenditure switched to customers to prop up sales.

So if this is a live issue for you, or you are already riding both horses, pause and reflect upon the strategic choices you are making, and ensure that your organisation (particularly your sales and innovation teams) fully understands what they are, what they mean, that they buy into them, and, critically, that they abide by them.

Richard Nall - richard@brandgarden.co.uk

Would you buy a used car from this vending machine?

                                                                                                                          pic: The Independent
The Independent reports that Carvana, the first complete online used-car retailer and Forbes 5th Most Promising Company, launched the world’s first, fully-automated, coin-operated car vending machine in Nashville in November.

(See how it works, on the Carvana site)

Apart from eliminating salesmen (!) and the distrust often associated with buying used-cars, this break-through initiative represents another fundamental change taking place in retailing, as buyers and sellers experiment in a desperate search for a competitive edge, and sometimes make ‘the impossible’ work in the process…

In FMCG marketing, this has to be a reminder to always think outside the category-box and our trading ‘comfort-zone’, as we seek ways of differentiating our offering, and take nothing for granted…

Speaking of which, back in Nashville, having taken possession, kicked the tyres and sniffed the exhaust, the buyer then has a seven-day “test-own” period and an option to return the car.
A potential win-win after all…