Redefining the Supplier-Retailer Relationship - the Independent Retailer as an advertising medium for the Brand

Given the fact that global pressures on supplier and retailer profitability, especially since 2008, caused by a combination of Amazonian online, and discounting in a flat-line environment, suppliers are having to re-consider the emphasis traditionally assigned to multiple retailers in customer portfolios. These developments coupled with the increasing need for suppliers to optimise every channel to the consumer, are causing brand owners to fundamentally re-assess the role of different customer-types in their portfolios.

In other words, the traditional view of major customers taking more than 50% of supplier resources has been overtaken by events...

Essentially, suppliers now need to view customers’ outlets as selling points, advertising media and fulfilment centres (in terms of optimising the retail space as distribution and Click & Collect points).

Whilst the customer’s role as sales agent has been well documented elsewhere, and their role as fulfilment centres is evolving pragmatically as means of traffic–building and covering distribution costs, their role as advertising media may be worth exploring…

As they struggle with large space redundancy, and with long-tail ranges increasing their need to cherry-pick within categories, the mults cannot afford to offer a full representation of the suppliers’ range at point- of-sale, let alone provide hands-on experience of the brand within the store.

Add to this the fact that in a zero-sum game the additional trade support required by the major multiples means that there are even less supplier resources available for maintenance and development of the independent trade.

Current market pressures in terms of limited growth potential of the mults, a need to match Amazon online standards in going direct to the consumer, and increasing risks of being unable to find ways of working with Aldi and Lidl as they deliver 15%+ rates of growth, makes it vital that suppliers try to make more use of the independent trade as a route to consumer.

In fact, it could be said that Independent retailers are becoming more important to suppliers as consumers shop smaller, faster, closer and more frequently. They are also in need of NAM-quality consultancy advice.

This, coupled with the fact that the revenue stream from a good independent retailer cannot cover the costs of regular calling by a salesforce, means that the opportunities represented by the independent trade will continue to represent unfulfilled potential, unless suppliers take a radically different approach to investment in the channel.

Historically, suppliers have regarded the independent trade as a sales outlet, needing to at least break even on the cost of visit vs. size of order in order required to justify the cost of calling. This approach has obviously limited the number of direct-call accounts that are economically viable, resulting in increases in trade concentration, as the strong get stronger. Fortunately, the evolution of alternative channels such as online and discounting has halted the progress of the mults…

In many categories such as toys, books, houseware and home entertainment, the independent specialist retailer can fulfill an important ‘educational’ role on behalf of the supplier. Here the retailer helps to bring the consumers closer to the brand, allowing them to interact and bond with the product. They will also benefit from advice and shop staff expertise.

Properly supported with appropriate training and sales-support material, the independent retail outlet can also function as a ‘living billboard’ for the brand, communicating with the consumer in a way not easily achieved via the multiples. Unfortunately, given the economics of running an independent retail store, it is not easy for the retailer to match competitor’s prices. This inevitably results in their shoppers taking the advice and experience of the brand, and buying the product elsewhere. The increasing appeal of online retailing simply adds to the dilemma of ‘lost sales opportunities’ for a specialist retailer.

However, if the supplier shifts the role of the independent retailer from a sales to a marketing function, seeing the outlet as an interactive advertising medium, then it becomes easier for the supplier to classify at least some of the cost of independent calling as ‘advertising’. In fact, given the increasing fragmentation of traditional above-the-line media, it could be said that a well-motivated and supported specialist retailer could have more brand impact on the consumer than traditional media. The same could be said of trade investment with mults that can no longer justify traditional levels of trade spend as they struggle to exceed flat-line sales performance.

With this change in stance, it becomes easier to justify the allocation of say 50% of the cost of independent coverage to a combination of the brand’s advertising budget and trade spend.
It may even be more cost-effective…

Making the Numbers Count at the 2018 Interface…

Given the nine year austerity fall-out from the 2008 global credit-squeeze and the pre-Christmas slowdown in UK retail, 2018 will have to be played very close to the financial edge…  This makes it is crucial that suppliers quantify and demonstrate key aspects of the risk-reward relationship at the supplier-retailer interface. Creative use of numbers can help.

However, whilst robust calculating methods can often reveal usable insights (see NamCalc), the confidence and ability to lead a reluctant buyer to ‘obvious’ financial conclusions requires a little more… Working confidently at the financial-edge requires a constant willingness to reduce issues and situations to numbers, to the point that the resulting moves seem instinctive. This means building up a repertoire of calculating-tools that can be adapted to most aspects of a trading relationship, and by continuous application, internally and with the customer, a level of confidence and credibility is built up over time. 

Essentially, optimising the supplier-retailer relationship is about working towards and maintaining a fair balance of relative risk and reward between trade partners. It is crucial to understand both supplier and retailer business models in the current climate in terms of how money works within each organisation, using open domain accounts as a basis for comparison.

This means isolating every type of financial transaction with the customer, calculating its cost to the supplier, and then its value to the customer based on respective business models, and net margins. In other words, a supplier making a net profit of 9% (remember when?) has to achieve incremental sales of £11,1k for every £1k ‘invested’ with the customer. Realistically, suppliers nowadays are lucky to make half that, so in practice a supplier has to generate £22k for every £1k investment.

Meanwhile, a retailer making a net profit of 3.5% has to generate incremental sales of £28.6k to generate that same £1k received from the supplier. In other words, suppliers and retailers have more in common in this low margin environment. However, in case you have not looked lately, retail net margins have collapsed in the past nine years…

Taking latest accounts, it can be seen that a £1k investment by supplier is ‘less valuable’ to Sainsbury’s (net profit 1.9%, £1k = incremental sales of £52k) than to Tesco, with its net profit of 0.1% (£1k = incremental sales £1m!). BTW, are you getting a feel for the real pressures on the guys in Cheshunt…?). Seeing business life in terms of incremental sales thereby requires differing levels of emphasis and support in negotiation.

In this way it is possible to use incremental sales as a measure of the value of trade investment to the retailer, thereby impacting two important buyer KPIs, margin and sales growth. In practice, the buyer is measured on gross margin, but is increasingly affected by the resulting net margin as a driver of ROCE and ultimately share price. 

Apart from helping in day-to-day negotiation, working the numbers at the supplier-retailer interface is really about identifying relative risk in the total pipeline, and allocating rewards appropriately to all members of the demand-supply chain. Because of a reluctance or inability on the part of the NAM to factor in different parts of the relative remuneration package over the past nine years, the risk-reward balance has become tilted in favour of the retailer.

In spite of this advantage, the continuing price wars have diluted net margins in retail, as a result of which retailers are now heavily dependent on their excessive terms packages to maintain profitability… As a consequence, for instance, current credit periods in no way reflect improvements in delivery frequency over the past nine years.

This additional insight added to average payment periods of over 20 days, coupled with daily delivery, means that eventually, an indefensible and politically damaging position will emerge, as more suppliers go to the wall…

The resulting ‘exposure’ will probably cause more damage to retailers’ share prices than the cost to the major multiples of voluntarily reducing retail net margins to say 2.5% and payment periods to say 5 days, before being forced to make these ‘obvious’ moves by government and especially public opinion.

Retail prices could also be reduced slightly to satisfy the public, and the margin savings passed back to suppliers on a fair-share basis, thereby increasing their margins without a massive distorting of the market.

Counting the numbers could help in spreading the pain… 

Christmas wishes from the NamNews Team!

When every little disguise helps on a store visit... (Liu Bolin, Camouflage artist)

Like your Burger well-done, really well-done?

Pic: Insidefmcg.com

According to Insidefmcg.com, supermarket giant Coles has released the new Coles Finest Charcoal Brioche Burger Buns. Those with sensitive palates may be relieved to learn that the buns were created using activated charcoal from coconut husks...

The result is a soft, rich buttery bun with a unique texture, colour and flavour.

BTW, if you really want to make dieting easier try googling 'charcoal buns' and select 'images'.

Minimum unit pricing - the effect on your favourite tipple...

A Food-To-Go Opportunity for Brands?

 Source: IGD, Gavin Rothwell

The 250 delegates at the IGD's recent food-to-go session had a first-hand opportunity to experience some of the creativity driving CAGRs of up to 8.4% in this sector over the next five years.

Whilst healthy eating was a key theme, it emerged that provided suppliers tailored to consumer need, there is an opportunity for appropriate branded suppliers to move beyond the 'butter portion' approach to food service. Instead, food-to go represents a growth opportunity for brands that can re-package to fit within the creative offerings being made by Coffee Specialists, FTG Specialists and other FTG routes to market.

If any of your colleagues need persuading, why not pass them a copy of the above slide (and check with IGD for additional research), and ask them to compare with the uncertainties of your current routes to market.

The Pound shop opportunity took us by surprise until brands realised that brand-packs could be viable in smaller sizes.

A pity to miss a similar opportunity with food-to-go..... 

Tesco Boss Gives Evidence At Fraud Trial

The trial of the three former Tesco executives accused of being involved in the retailer’s profit overstatement in 2014 continued yesterday, with the group’s current Chief Executive Dave Lewis taking the witness stand. (More)

• The key issue is that newly appointed Lewis acted comprehensively with appropriate haste to correct the situation…
• …and as long as this point is accepted by the consumer-shopper, the harm in their eyes will be minimised.
• With the benefit to suppliers that trade investment has been put into the national spotlight, and is being booked accordingly, by all…

CMA Delays Revealing Provisional Decision On Tesco’s Proposed Takeover Of Booker

Having originally said it would publish details by the end of October, the CMA yesterday altered its administrative timetable to say the provisional findings would be available ‘early/mid November’. (More)

• Continued uncertainty means suppliers to Booker revert to short-term mode in terms of dealings with Booker…
• …and the rest of the wholesale sector.
• Whilst at the same time anticipating further consolidation in UK wholesale.
• i.e. reducing the possibility of prices and terms discrepancies…
• But if the deal goes ahead, be prepared to offer Tesco-Booker terms to all wholesalers.

The unintended consequences of an unprecedented merger:

• This issue is not about increased Tesco buying power (Booker would add 10% to Tesco purchases)
• The real issue is that Booker will be able to avail of Tesco buying terms, resulting in unmatchable competition for wholesalers not so privileged…
• Time for suppliers to conduct what-ifs on supplying all wholesalers on Tesco terms?
• Or watching Tesco-Booker grow at the expense of other wholesalers - same difference?
• Or other wholesalers being taken over by other mults? - almost same difference?

Ground down by the price of your £2.50 high street cappuccino?

 pic: Brian Moore

Given that the humble £2.50 cappuccino has fallen out of favour, coffee connoisseurs demand more than a standard caffeine fix to help them through the day, at a price!

The Daily Mail lists sources like The Connaught in Mayfair (£7.50 for any cup of coffee) and Claridge’s (up to £20 for a filter coffee for two people), apart from the ultimate deep-pocket source like The Wellesley hotel in Knightsbridge serving Wild Kopi Luwak coffee, at £45 a cup (More).

But the real issue has to be the contrast between High Street coffee at £2.50 a cup compared with home filtered at 9p a cup.

In other words, far from seeing up market varieties as a threat, a DIY approach might be more dangerous…

In fact, with street coffee priced at upwards of £2.50 a cup, I have reverted to grinding and filtering best quality French coffee beans, purchased from Waitrose at £2.60 per 227g bag. Each bag yields 5 x 6 cups, effectively costing me 9p a cup. If I could buy wholesale, the price would be no more than £2/bag...

OK, the ambience is worth something, but 30x 'domestic rates'?

In fact, when you think about it, apart from the bill, most people's memory of a great restaurant meal is coloured by the final course, a cup of coffee. Yet, even at these mark-ups, some restaurants risk diner alienation by skimping on the coffee, thereby triggering the 'tell a friend' mechanism' whereby, if you please a customer, they tell one friend, disappoint them and they tell ten, electronically.