Saturday, 11 June 2022

Tailoring Major Customer Management by Business Model (Vive la Difference?)…

Given that the Morrisons takeover has now been approved and Boots endgame is fast approaching, it is perhaps time to acknowledge the different business models at play when managing UK major customers...

UK retailers now comprise two PLCs, two in Private Equity ownership, one Partnership, a Co-operative, and a strong probability that Boots will end up in PE hands, it seems logical that we should acknowledge that these fundamentally different business models should each be handled differently…

Given that they have different approaches to what success looks like, it seems natural that understanding their key drivers in the new norm and adjusting our approach to meeting those needs may help us gain a competitive advantage over our rivals that simply offer a ‘same size fits all’ option.

Their different business models cause retailers to have different business needs, to hear and assess our offerings from different perspectives, to have differing opinions re fair share, but more importantly, they are driven to behave differently based on the extent to which they perceive their needs are being met. Based upon the extent of these differences, making them an offer-in-common patently misses a trick in normal times. Making the same mistake in times unprecedented could be unrecoverable…

Clearly, differentiating these business models can help. Essentially there are five traditional retail business models operating in the UK (DTC and pureplay online are also present but will best be dealt with in a future NamNews article). These business models are PLC, Private Equity, Co-operative, Partnership and Private Company:

Public Limited Company (PLC)

Have shares traded on the stock market i.e. Tesco and Sainsbury’s. They are driven by Price to Earnings ratio (P/E), Share Price, in turn driven by Return On Capital Employed. ROCE is a multiple of Net Profit BT/Sales and Sales/Capital Employed i.e. Stockturn. They are also very focused on minimising Corporation Tax (For a detailed treatment of ROCE, see Finance in major customer management In other words, as you know, a PLC can be a low margin, fast rotation business or a high margin, slow rotation business. All that matters is the combination of margin and speed of rotation in producing an acceptable ROCE.

In selling to a PLC, it is worth keeping in mind that they are interested in what you do to improve their P&L i.e. Increase their sales, and reduce operational costs – in fact, reduce their business costs (including credit period) to improve their NPBT. They rely on small, frequent and accurate deliveries. They are obviously interested in your direct trade investment and increasingly interested in your use of retail media. In fact, retail media’s precision, impact and productivity at the point of purchase can make your retail media spend act in both your interests (See Alexander Knapman’s Retail Media summary on page 3). The PLC retailer obviously regards your brand as a means of attracting your consumer to the aisle to be confronted by their better-priced own-label equivalent. However, they also see your need to optimise your use of their retail media.

A PLC retailer operates entirely differently to a PE-retailer…

Private Equity Owned Retailer: i.e. Morrisons, Asda, Boots.

They are driven by Earnings Before Interest, Depreciation and Amortisation i.e. EBITDA. Think typical P&L starting with sales, then come the direct expenses (i.e. costs of generating sales, manufacturing/buying goods followed by sales and administration expenses. Then comes the EBITDA line, below which are Interest, Tax, Depreciation and Amortisation. Anything below the EBITDA line does not affect the valuation of the business, providing sufficient cash is generated to meet interest payments.

PE owners are less driven by net profit before tax because the nature of the business model means that the high cost of borrowing to buy the company results in little or no corporation tax being paid in the typically 5 to 7 years of PE ownership. Moreover, the retail management team are usually heavily incentivised to ensure a 100% focus on the EBITDA driver. A UK PE-retailer is typically valued at 10x EBITDA in the open market (other industries/sectors have different multiples of EBITDA). In other words, a PE retailer wants you to help reduce operational costs and simplify their processes whilst driving sales. Like PLCs, they can see brands as a means of drawing shoppers into the aisle to

be confronted by a better own-label offer. Following takeover, they will inevitably take steps such as selling off as many shops as possible, and leasing back those that are or can be made more profitable.

Hopefully, it can be seen that a PE-retailer is run very differently [See The-implications-of-private-equity-takeover-of-a-mult ]from a PLC retailer, but both see business through a strictly financial lens…

Co-operative Retailing:

As you know, Co-operatives arose in response to a fundamental need in the community. The core values that underpin the co-operative model – self-help, democracy, equality, equity and solidarity – guide the way decisions are reached. Ideally, this means that the Co-op will buy to serve the needs of their members and the interests of their community will be factored into their business decisions. Moreover, their one-member, one-vote rule means that the interests of the largest shareholders do not trump the rest. This group emphasis has caused them to appear less efficient than ‘normal’ retailers in the past, but they have evolved a sustainable model that generates sufficient profit to survive and grow in the current climate. Their emphasis on bottom-line impact tends to be less overt, and cash is used more as a measure of productivity than an end in itself.

The Co-op is thereby radically different to a PLC and a PE retailer and needs to be treated accordingly, if only to spread your business risk over the various routes to consumer…

Partnership Retailing: i.e. Waitrose

The John Lewis Partnership is a 100-year-old model and began as an experiment to find a better way of doing business by including staff in decision making on how the business would be run. The principles for how the company should operate were set out, along with a written constitution to help Partners understand their rights and responsibilities as co-owners.

The founders wanted to create a way of doing business that was both commercial, allowing it to move quickly and stay ahead in a highly-competitive industry, and democratic, giving every Partner a voice in the business they co-own. Their profit-sharing scheme can help partners focus on goals in common but given that profit-share is a significant part of their remuneration package, then issues can arise at times of low profitability when partner share is reduced.

Moreover, in a rapidly changing retail environment, the mix of retail format i.e. combination of department store and food retailing can cause difficulties in shifting gear. Suppliers have to sell to Waitrose in ways that acknowledge the influence of department store thinking and can accommodate the inefficiencies of combined distribution in terms of out-of-stocks.

Suppliers have to factor the high level of shopfloor partner involvement and their sense of ownership into business strategies, whilst allowing for potential dilution of morale when profits are not deliverable, factors that are not often present in PLC and PE-retailer relationships…

Privately Owned Limited Company: i.e. Aldi

Think Morrisons in Ken Morrisons’ day before going public i.e. little or no borrowing, a focus on minimising tax, simplicity of execution and limited frills, and a straightforward, no-nonsense offering representing good value for money…

In essence, Aldi simply fitted into the model that Morrisons could have become. The key advantages of the private company model include being able to act without having to have the approval of outside shareholders. That said, survival in the current climate means being able to generate an acceptable ROCE, capital rotation and a net profit before tax. Big ideas cannot be financed if internal funds are insufficient, thus limiting expansion. Negotiations, usually with owners of the business can be tough, and are usually finance-based and often need to deliver demonstrable value for money. Thus it can be seen that privately-owned retailers are different to Partnerships, Co-ops, PE-retailers, and PLCs…

It is important, and in the current climate vital, that suppliers treat all these models differently, using an approach that acknowledges these differences in business needs, objectives, and what good looks like, in order to ensure that what they hear from your proposals resonates with their financial aspirations and delivers accordingly.

All else is detail…

Wednesday, 8 June 2022

Swedish Online Supermarket Launches In The UK Offering Savings On Brands Of Up To 60%

Motatos, an online grocer that offers shoppers discounted prices on surplus inventory from wholesalers and distributors, launched in the UK this week.

The business was founded in Sweden in 2014, but now operates stores in Denmark, Finland, and Germany, and has proved popular with cash-strapped consumers.

Motatos sells food that would otherwise have been thrown away due to modifications in packaging, seasonal changes, or short best before dates. It focuses on ambient goods such as soft drinks, snacks, household goods, pet food and personal care products.

It sells lines from leading brands such as Cadbury, Kellogg’s, Heinz, Typhoo, Walkers, Ariel, and Dove, with claims of savings of up to 60% against the “normal retail price”.

Motatos founder Karl Andersson said: “We’re really excited to be launching in the UK at this stage in our development. There’s so much opportunity here for consumers to be able to help reduce waste whilst also reducing their weekly spend, meaning they don’t have to choose between price and being environmentally conscious.”

Christabel Biella, Motatos UK country manager, added: “The cost of living crisis is affecting all sectors, and UK shoppers are looking for ways to cut down their monthly spend without compromising on all the brands that they love.

“With prices surging, Motatos is hoping to make a real difference to consumers by offering savvy savings, allowing them to be sustainability-minded and reduce waste. It’s a win-win.”
The site has a minimum order value of £20. Deliveries are free for orders over £40, with a £2.99 charge for those below that level.

NamNews Implications:
  • The right offering, right timing, right brands, right target audience…
  • Pressing the right buttons: Waste-reduction, environment-protection, Sustainability, savvy savings...
  • Watch this one go…
#WasteReduction #Sustainability #Saving

Tesco Requesting ‘Back Margin’ Payments As Part Of Price Negotiations

Tesco has reportedly been using cost price inflation (CPI) negotiations with suppliers to make requests for fixed fees to support promotions.

According to trade magazine The Grocer, the development marks the return of the so-called ‘back margin’ practice that had largely disappeared under Tesco’s previous CEO Dave Lewis, who had moved the business towards front margin and an EDLP model.

The change comes as supermarkets face CPI requests from suppliers looking to offset surging commodity and energy costs.

A source is quoted by The Grocer as saying: “Before Dave Lewis came in, Tesco had an extraordinary number of ways of charging suppliers. But that completely changed and has been minimal ever since.

“However, they’ve obviously got a tsunami of suppliers coming to them looking to increase prices and so they have brought back margin into discussions.

“It’s actually quite a clever thing to do because, with the desperation of suppliers to get CPI through, many are going to accept this.”

It is believed that Tesco is offering a sliding scale of charges on promotions, such as positioning on gondola ends or in-aisle shelf markers.

Ged Futter, founder of consultancy The Retail Mind, told The Grocer that Tesco’s move was “legitimate” but urged suppliers to stand firm in negotiations and not allow a retailer to couple CPI negotiations with requests for fees for promotions.

Meanwhile, Tesco stated that it currently only operates five forms of back margin, compared with 24 in 2015. Its Chief Product Officer Ashwin Prasad is quoted by The Grocer as saying: “We’re working with our supplier partners to navigate the pressures of inflation and deliver the best possible value for our customers.”

NamNews Implications:
  • A reminder:
    • Front Margin: the margin that you get from the party to whom you sell the product, i.e. sell side.
    • Back Margin: the margin that you get from the party from whom you purchase the product i.e. Buy side
  • A reminder:
    • Avoid this return to the ‘old days’.
    • It is the precedent that counts…
    • …and should be counted.
  • i.e. ‘Eyes wide open’ even with trade partners…
#BackMargin #FrontMargin #TradeInvestment #TradeFunding

Major Oil Producer Eyeing MFG Forecourts

Motor Fuel Group (MFG), the forecourt giant that was put up for sale by its private equity owner earlier this year, has reportedly attracted interest from one of the world’s biggest oil producers.

According to Sky News, the Abu Dhabi National Oil Company (ADNOC) is lining up bankers to work on a potential offer for MFG, which has a price tag of around £5bn.

City sources are quoted as saying that ADNOC had yet to make a firm decision about whether to bid ahead of an initial deadline this week. However, they said it was preparing to hire JP Morgan to advise it on its interest in the UK company.

ADNOC, which is among the 20 biggest oil companies in the world, would be a significant player in a bidding war for a company that has rapidly grown its estate and profitability under the ownership of Clayton, Dubilier & Rice (CD&R), which acquired Morrisons last year.

MFG is currently embracing the transition to cleaner energy and has committed to spending £50m this year on installing hundreds of electric vehicle charging points across its roughly-900 sites.

If ADNOC does bid for MFG, it is expected to face a fight with Fortress Investment Group and Macquarie, the Australian financial services behemoth which recently bought Roadchef, the motorway services operator, for about £1bn.

However, Sky News noted that it was not certain a sale will go ahead given the difficult financing markets. Sources stated that CD&R will only proceed with a sale if it can secure an attractive valuation.

NamNews Implications:
  • From a NAM’s eye view, MFG are heading for a period of uncertainty.
  • Which will end upon receipt of an ‘attractive valuation’ (£5bn).
  • Then a 6 month ‘Settling-in period’ following the sale.
  •  Meaning a probable shift to short term strategies/Initiatives by suppliers…
#FuelDistribution #FuelOwnership

Irish Grocery Sales Fall As Inflation Reaches Nine-Year High

The latest take-home grocery figures for Ireland have revealed that sales in the country fell by 6.5% in the 12 weeks to 15 May 2022, latest figures from Kantar.

The drop came as grocery inflation hit 5.5%, the first time it has risen above 5% since August 2013.

David Berry, Managing Director for Kantar Worldpanel Ireland, said: “Food and drink prices are continuing to climb, and the impact of this on grocery budgets is now unavoidable for many people. Our research shows rising cost of living is a key concern for 81% of Irish consumers. A staggering 62% expect that they will have to cut back on the amount of food they buy in response to current prices. We’ll be seeing the effects of inflation for months to come.”

Shoppers are shifting their behaviour to manage the cost of buying food, including by turning to cheaper alternatives. Berry explained: “People are now making four fewer trips to the supermarket on average per month than they were this time last year.

Similarly, brands made up more than 50% of grocery sales in 2020 and 2021 … brands’ share of grocery spend dropped to 49% in the latest 12 week period, equivalent to a €29m fall.”

Despite the tough circumstances, people have been enjoying the recent warmer weather and are looking ahead to the summer months, with Berry noting: “Sales of BBQ meats, like burgers and sausages, and prepared salads have increased by 2% and 8%, respectively, in the latest 12 week period. Soft drinks have also seen a 5% boost this period, equating to an extra €5m through the tills.

It’s likely that sales of these items will keep rising as we make the shift to more summery foods and leave the soups and stews behind, but prices are going up too. A trip to the supermarket to buy BBQ meat, salad, and soft drinks will now cost €1 more on average in total than it would have last year.”

For the sixth consecutive period this year, Dunnes has retained its position as Ireland’s largest grocer, with a 22.3% market share. Berry continued: “Dunnes seems to be recovering well from the challenging COVID-19 period. The retailer’s current market share is now 1.2 percentage points higher than May 2021, boosted by 98,000 new shoppers in the latest 12 week period.”

Tesco is now slightly ahead of SuperValu in the race for second place, each accounting for 21.9% and 21.7% of the market. Tesco benefited from shoppers visiting the store more often, bucking the general market trend and allowing it to move just ahead of SuperValu.

Lidl holds a 13.1% market share this period. Aldi follows 0.9 percentage points behind, holding a 12.2% market share.

NamNews Implications:
  • Inflation at 5.5% still has a bit to go.
  • i.e. try what-ifs re 10% and assess the implications for your categories.
  • “A staggering 62% expect that they will have to cut back on the amount of food they buy in response to current prices”, says it all…
  • P.S. Note Lidl growth vs 2019…

And to think, an endangered species, being supplanted by underhoof plants...!

Wednesday, 18 May 2022

Cost Of Morrisons Rescue Deal For McColl’s Revealed

Administrators’ documents show Morrisons paid the equivalent of £182m to rescue McColl’s.

Morrisons won by promising more cash for unsecured creditors and leveraging its position as McColl's main supplier.

McColl’s had an equity value of around £3m by the time its shares were suspended on 6 May. However, regulatory documents published by administrators PwC revealed that senior creditors were owed £160m.

PwC’s account of the chain’s final months show that four credible bidders had emerged for McColl’s, but that had narrowed to three by the time shares in the group were suspended.

The PwC document noted: “Any buyer would need to have the capacity to supply the entire store estate, possibly in a short space of time. All parties realistically capable of doing this had already been approached.”

Both EG and Morrisons submitted offers that included the retention of the entire estate of almost 1,200 stores, the rescue of McColl’s pension schemes, the costs of the administration, and full repayment of secured bank lenders and preferential creditors such as HMRC.

McColl’s had been in talks for several months with its lenders and Morrisons for financing to secure its long term future. In March, its Chief Executive Jonathan Miller stepped down after the business endured torrid trading conditions and supply chain issues that impacted its revenue and profit.

Commenting on the deal last week, Morrisons’ Chief Executive David Potts said: “...we believe this is a good outcome for McColl’s and all its stakeholders. This transaction offers stability and continuity for the McColl’s business and, in particular, a better outcome for its colleagues and pensioners.”

The wholesale agreement will continue without interruption.

McColl’s has converted 270 shops to Morrisons Daily, “fundamentally reshaping the business into a more profitable and sustainable model”.

In November, it announced that it would accelerate the number of conversions to 450 within a year.

The rollout is expected to continue and provide Morrisons with a significant presence in the convenience channel to challenge chains such as Tesco Express and Sainsbury’s Local.

NamNews Implications:
  • In other words. Morrisons’ £182m offer covered:
    • Retention of the entire estate of almost 1,200 stores
    • The rescue of McColl’s pension schemes
    • The costs of the administration
    • Full repayment of secured bank lenders
    • And preferential creditors (HMRC)
  • It follows that McColl’s will be run on strictly financial terms going forward.
  • All part of the New Norm…
  • Key that suppliers run a financial check over major customers.
  • i.e. given your exposure, what incremental sales would cover your credit exposure, if a customer got into terminal difficulties.
  • In the process, why not reclassify your major customers as Invest, Maintain or Divest?

Thursday, 12 May 2022

Private Label Loyalists Now Equals Those Of Brands

Amid the current cost of living crisis, new research shows that supermarket private label loyalists (shoppers that buy them over 75% of the time) are now equal those of national brands loyalists in all key European markets.

According to a new report from IRI called Private Labels: Hiding in Plain Sight, around 50% of shoppers switch between both with most now appearing in the mid-income bracket, but also with high-income cohorts in France and Germany. Private label shoppers are looking beyond price. Where they intend to spend more or less in 2022 and beyond is in line with wider category trends.

The study highlights that modern private label brands have evolved from their origins 40 years ago and developed into strategy-focused, differentiated, data-driven, and consumer-obsessed brands. Private labels are gaining ground in value sales, market penetration, consumer value and retail experience, while closing the gap on instantly recognisable national labels.

According to IRI, private labels now occupy a global category footprint of 16.5% of FMCG value sales. Driven by several growth factors, private labels are said to offer the same or better quality, affordability, healthier options, consumer acceptance, and portfolio stratification into Premium.

With the highest penetration in Spain (44%) and Germany (38%), private labels make up 35% of total FMCG sales in Europe, equating to €194bn. Germany records the highest absolute value (around €60bn), followed by the UK (€43bn).

The report notes that private labels have become a substitute in several growth categories for many national brands having undergone a significant transformation that focuses on quality, trust, environmental credentials, innovation, and delivery on claims.

In certain categories, such as beauty, vitamins and supplements, and alternative remedies for example, private labels often lead in innovation, which is then followed by national brands.

Ananda Roy, International Senior VP, Strategic Growth Insights at IRI, said: “Private labels may not be instantly recognisable brand names, but the fact is they don’t need to be. Retailers have re-imagined what consumers can expect from them in every supermarket aisle. They offer considerable value to shoppers who are not entirely price-driven by delivering quality, product performance and premium innovations which are comparable to the bigger, more established national brands.

“They compete for growth and margin on near equal terms and often present worthy competitors that are perhaps not fully acknowledged by the big brand owners. Private label brands are basically hiding in plain sight.”

Report highlights:

Pandemic chaos causes sales to slide, but positive outlook ahead – Consumer buying behaviour amid pandemic chaos provided a transient boost to national brands, causing private label value sales to fall. During 2018-2019, private labels experienced strong value sales growth (+8% and +11.3% respectively). However, this tapered off during the early stages of the Covid crisis as consumers opted for trusted national brands amid uncertainty – value sales dropped 1% in 2020 (value share 35.2%) and 1.4% in 2021 (value share 34.6%).

However, IRI believes there is a distinctly positive outlook ahead as this trend is likely to be dampened and possibly reversed as national brands raise prices to counter inflationary headwinds and private labels return to growth.

Strategic drivers of growth – Growth in private labels has accelerated due to established retailer equity and trust, transparent pricing and consistent availability across national store portfolios. Edible and non-edible private label products are often manufactured under white-label arrangements alongside national brands. Consumers are receiving the same high-quality products they would if buying a national brand in terms of product performance, and in the case of edibles, taste, quality, and healthy options often match those of rival national brands.

Occasionally, if things do go wrong, consumers also receive the exact same consumer protections (returns, refunds and goodwill gestures) from retailers as they would from national brands. This has helped narrow the value and equity gap with national brands significantly.

Price wars looming – Small and mid-sized manufacturers are likely to lose consumers, volume and value to large manufacturers and private labels who are expected to mitigate inflation and maintain availability, despite ingredient shortages and supply-side disruptions. This creates the real possibility of price wars in the remaining half of 2022 with private labels having the potential to capitalise on inflationary trends.

Innovation is the new battleground – Private labels are often leading innovation in high-margin categories, such as Bakery, Beverages, Beauty, Vitamins and Supplements and over the counter healthcare remedies. IRI’s research shows that consumers found shopping in-store for private labels easier owing to clean labelling and clear ingredients. This made the experience more enjoyable and less confusing than having to shop amongst the confusing array and proliferation of packs, offers and formats among national brands. Shoppers say the gap between private label and national brands is narrower still when shopping online due to the platforms and mechanics being identical.

IRI expects new innovations to make private labels even more competitive as they take advantage of quick commerce, shoppable recipes, meal kits and leveraging retail media, all of which offer new routes-to-market, attraction of higher-income shoppers, and lower cost-of-sales.

Beyond retailers, Quick Commerce players are now creating their own private labels as seen recently in the UK by the launch of Jiffy’s bakery range.

Non-edibles lead recovery – Growth has been led by Italy (+3.4%) and Spain (+1%) and lagged in France and the Netherlands (-4%). However, there is evidence of a soft recovery, particularly in non-edibles, which is being driven by the easing of Covid restrictions. This has risen by 1.2% in value sales over the last five weeks.

Actions for manufacturers and retailers

As private label enters 2022 with a competitive tailwind, IRI has outlined several strategic opportunities and actions:
  • Induce shoppers by trial and conversion of the 50% that regularly switch between private label and national brands.
  • Further mining of loyalty data to enrich shopper segmentation and tracking.
  • Invest more in retailer media to personalise promotions, experiences and track effectiveness.
  • Promote private labels as ‘better value’ based on quality, trust, innovation and sustainability credentials.
  • Make shopping for private labels quick, easy and fun by ensuring transparent pricing and clean labelling that helps clarify range, endorsements, innovative packaging and merchandising.
  • Disrupt product experience and route-to-market which are less easily substituted.
  • Partner with quick commerce leaders to create higher margins, bypass brands and distributors and create opportunities to offer a wider range of food and non-food products.
IRI’s ‘Private Labels: Hiding in Plain Sight’ report can be downloaded here.
NamNews Implications:
  • If retailers obey the normal brand ground rules…
  • …especially ‘always more than it says on the tin’…
  • …and focus on repeat sales via loyals…
  • …then own label sales and penetration will continue to increase.
  • Largely at the expense of less focused brands?
  • This IRI report is a worthwhile read…