Settlement Discounts: How much to pay for earlier payment in unprecedented times...?

Given the current casualty rate in retail, getting your money in faster can help.

The issue then becomes: How much to pay the customer i.e. what discount off invoice will make earlier payment attractive to the retailer?

The following screen-pull from NamCalc illustrates the calculation for a 15-day reduction in payment period. 

[The exercise proves that a 0.5% discount is equivalent to a return of 12% on the money for the retailer. We also add in the incremental sales required by supplier and retailer to recover the settlement discount amount]

Just one of the 33 calculator-tools for NAMs available in NamCalc

When a customer goes bust...

Given these unprecedented times, some customers will not succeed...

Supplier NAMs that can anticipate the inevitable, can avoid the fall-out..

One way of increasing your team's sensitivity to the signals is to calculate the cost of profit recovery following liquidation. i.e. the extra sales you need to recover lost profit.

Suppose a customer goes bust owing you £240k, and your Net Profit Before Tax is 3.4%, then via NamCalc below, you will need incremental sales of £7,058,823 to recover your lost profit!

Or would prefer to await a call from the liquidator?

Use of GMROII to demonstrate your value to Tesco

Gross Margin Return On Inventory Investment is probably one of the most valuable, yet underutilised tools in the NAM kit-bag today.

It follows that those that take the (small amount) of time to practice its use, automatically gain a competitive advantage over the competition, invaluable in these unprecedented times.

Essentially, GMROII is valuable because it links your product's Gross Margin for the Retailer, with the retailer’s stockturn of your product, instead of simply focusing on the Gross Margin.

For example, suppose the retailer sells £750k of your product per annum, enjoys a Gross Margin of 35%, and holds an average of 7 days stock of the product.

NamCalc (below) shows that the retailer is making a GMROII of 2,807% on the product. (any queries re the calculation, please let me know on bmoore@namnews.com).

Suppose the retailer is Tesco

Tesco’s latest Sales are £56.9bn, its internal Gross Margin is approx 21%, and it holds an average of 22 days stock i.e. £2.6bn in stock at any time.

Tesco’s GMROII on its total business is therefore 460%

[£56.9 x 0.21/2.6 x 100 = 460%]

Therefore your product’s GMROII of 2,807% is a significant contributor to Tesco’s business.

See details on the NamCalc screen-pull below. Each of the 33 calculator tools also has editorial detail explaining key uses/interpretations of the tool.

More details here

Radical change of business model: Kellogg’s Launches Brand-based Meal Delivery Service Via Deliveroo

Kellogg’s Kitchen Creations is a delivery-only meal service that has launched in East London offering vegetarian and vegan dishes.

Rather than selling bowls of its Rice Krispies or Cornflakes, the firm has hired chefs to create a menu of meals and snacks incorporating some of Kellogg’s popular cereals and cereal bars. [more]

• A two way route to Kellogg’s brands:
• - indirect via the delivered meals
• - a DIY incentive for recipients…
• …and not a whiff of cannibalisation.
• The fundamental issue is a branded food supplier is optimising its brands by incorporating them as ingredients in prepared healthy meals 'hand delivered' to consumers' homes.
• An entirely new relationship with their consumers that could transform Kellogg's business model and perception of the company and its brands.
• A incremental no brainer, one to watch...

The Importance of your Net Margin, when a customer goes bust...

Given that 75 Food Suppliers in the latest OC&C Top 150 Index 2019 (see The Grocer 21-9-2019) have Net Operating Margins of 3% or less, it is worth exploring the consequences of one of their customers going bust, owing them £150k...

On a 3% Net Operating Margin, the supplier needs £150k/3 x 100 = £5m incremental sales to recover the loss...

On a 1.5% Net Operating Margin, incremental sales of £10m!!

Just one of 33 calculator tools in the latest version of NamCalc

Tesco Trade investment: How to demonstrate your value to the buyer

Buyer: "Surely Tesco are worth more than a £10k investment, especially for a company your size?"

NAM: "Given your business model and latest net margin (2019 Tesco Annual Report) of 2.7%, our ‘mere’ £10k is equivalent to incremental sales of £370k for Tesco…."

As you know, apart from cutting costs, the only way a retailer can generate net profit is via incremental sales.

In practice, for a retail business on a net margin of 2.7% before tax, a net margin of £10k = 2.7% of sales.

So, £10k/2.7 x 100 = £370k, the incremental sales required to generate net profits of £10k.

Now, which would you prefer, my little £10k trade investment or having to generate extra sales of £370k in your category….?”

[Note for NAMs: If your company generates net profits of say 4.5%, the £10k trade investment in Tesco is equivalent to incremental sales of £222k. In other words, you need potential incremental sales of £222k to even begin the conversation…]

Source: NamCalc, a 34 calculation financial tool-kit for NAMs

Sainsbury’s Links Up With Euro Garages Again

According to The Grocer, Sainsbury’s recently began supplying its own brand sandwiches and salads, as well as ‘food for tonight’ items like ready meals, to a “small number” of Euro Garages sites. [more]

• Every little helps...
• ...and if a presence in a few Euro garages prove worthwhile...
• …then a full roll-out is inevitable...
• ...along with other possible routes to consumer.
• Time for suppliers in these and allied categories to capitalise on Sainsbury’s willingness to experiment…

Sainsbury’s And WH Smith End Food-To-Go Trial

Nine months after the trial began, a report by The Grocer revealed at the end of last week that Sainsbury’s-branded products were no longer stocked in the trial stores. In some cases, the supermarket’s food-to-go lines had been replaced by the Greencore’s ‘Munch’ range. [More]

• A good quality in retail is the ability to fail fast.
• Trying different initiatives also helps…
• …with the added benefit for retailers that footfall determines success/failure, ‘instantly’…
• NAMs that take this all on board, and propose initiatives accordingly…
• ...cannot go far wrong.