Monday, 5 December 2022

Morrisons Suffers Credit Rating Downgrade

Morrisons has had its credit rating downgraded due to the £6bn worth of debt it is now saddled with from the takeover by CD&R and shrinking profits amid poor sales performance.

Credit rating agency Fitch highlighted that the struggling grocer has been pushing up prices faster than its rivals, causing it to lose market share. It also noted that soaring debt interest costs will lead to a £200m drain on Morrisons’ profits over the next three years. 

Fitch downgraded the Morrisons’ debt rating from a ‘speculative’ BB level, to a ‘highly speculative’ B+, suggesting a ‘material’ risk of it defaulting.

It is the latest blow for the retailer since it fell into the hands of CD&R last year and adds to growing concerns about the role of private equity firms, which rely on vast amounts of debt to fund takeovers.

In September, Morrisons reported a halving of third-quarter profits as it lost sales to the discounters and faced “unprecedented inflationary pressures” in its food manufacturing operations. The grocer’s like-for-like sales also fell 3.1% as more competitively priced chains tempted cash-strapped shoppers to their stores.

Chief Executive David Potts has come under pressure to revive the ailing chain, with industry experts branding the takeover by private equity “at best a distraction, and at worst a bit of a disaster”.
Morrisons was overtaken in market share terms by Aldi earlier this year, with Lidl stating last month that it had the “momentum” to leapfrog the traditional Big Four supermarket.

Despite the downgrade, Fitch said Morrisons’ sales decline would reverse in the coming year. It noted that the group’s performance would be boosted by the acquisition of McColl’s, which was cleared by competition regulators at the end of October.

NamNews Implications:
  • Key is where Morrisons goes from here.
  • Sale & leaseback of essential assets would be the obvious route for a PE-owned company, as interest rates rise...
  • Anticipate sale of all outlets, leaseback of profitable outlets...
  • a way back to more profitable sales!
  • Meanwhile, ensure your fair share of sales & investment, going forward…
#PrivateEquity #SaleAndLeaseback #InterestRates

Monday, 28 November 2022

Waitrose Pledges More Support For Egg Suppliers

Following recent reports of shortages and the rationing of eggs in supermarkets, Waitrose has pledged a further £2.6m to go directly to UK egg suppliers.

The shortages have partly been blamed on a major outbreak of Avian flu. However, farmers argue that this is not the main problem, but a scapegoat, allowing the supermarket chains to distract customers from their refusal to pay egg farmers a sustainable price.

The egg industry has faced surging feed and energy costs, making production unviable for many farmers.

Waitrose noted that retailer’s farmers had “suffered through 18 months of extreme market volatility”. The retailer claims it constantly monitors the market and farming input costs, and has been increasing the price paid for eggs over the last 18 months

James Bailey, Executive Director at Waitrose, commented: “Without our farmers, we can’t function as a business. We’ve cultivated long standing relationships with ours, and paying them fairly and offering our customers free range British eggs are commitments that we simply won’t sacrifice, even when the going gets tough.

“We continue to have a good supply of 100% British free range eggs, which is testament to these strong relationships and our unwavering commitment to our farmers. As other retailers are seeing shortages, we have seen a slight rise in demand but we’re working hard to ensure we have the quality, high-welfare products on our shelves that our customers expect from Waitrose.”

Related item:
Why eggs are being rationed

NamNews Implications:
  • Waitrose has pledged a further £2.6m to go directly to UK egg suppliers.
  • A pointer for all…
  • This is all about sharing inflationary profit increases.
  • Else the hens/owners will reduce production.
  • A no-brainer issue of knife-edge economics…
#EggShortages #AvianFlu #ChickenShortages #FairShare

SPAR Planning To Extend Own Label Range

SPAR has revealed that it plans to develop its own-label range across more frozen, ambient and non-food items next year to cater to cash-strapped consumers during the cost of living crisis.

Speaking to trade publication The Grocer, the symbol group’s Managing Director Louise Hoste noted that shoppers were actively seeking own-label lines in categories that were traditionally brand-led.

SPAR’s own-label range currently comprises around 1,000 lines across chilled, fresh and BWS, as well as frozen, ambient and non-food. It plans to create another 90 new lines during 2023 across the frozen, ambient and non-food categories.

Hoste is quoted by The Grocer as saying: “Own label share is growing faster than brands in categories such as health and beauty, and we are well-placed to meet this growing need. Frozen is a category which serves many customers’ needs at a keen price point, whilst also enabling customers to manage their food waste and being able to have meal solutions ready to go straight from the freezer.

“Inevitably, considering the cost of living crisis, the SPAR brand team are reviewing all categories to ensure customers have suitable options for their budgets, whether that is customers that are still looking to treat themselves with premium, or customers looking for value products.”

NamNews Implications:
  • It could be said that most grocery retailers are pursuing this option...
  • ...overtly or not.
  • Meaning brands need to increase their appeal vs, own label equivalent.
  • In a manner that fits most routes to market...
  • It used to be called tailor-making, folks!
#PrivateLabel #OwnLabel #Competition #Inflation

Thursday, 6 October 2022

Corona Launches Online Lifestyle Store

AB InBev has announced the launch of its online lifestyle store for its Corona beer brand.

The European shop is a collaboration with sports and lifestyle retail company Cube Partnership after a deal was brokered by AB InBev’s exclusive licensing representative IMG.

Corona’s lifestyle collection includes a range of organic cotton t-shirts and sweatshirts that are made using natural dyes and water-based prints.

In addition, all products use plastic-free packaging.

Maxime Pudzeis, head of licensing EMEA at AB InBev, said: “We are delighted to partner with Cube to create Corona’s first online lifestyle store. It will provide the perfect launchpad to expand and diversify our consumer offerings with sustainable products that embody everything people love about the Corona brand.

“Building on the success of Corona’s previous apparel collaborations, we are determined towards delivering exciting and innovative collections that truly elevate the consumer and partner experience to the next level.”

NamNews Implications:
  • Having survived and thrived through the ‘pandemic’, a beverage saddled with what could have been one of the most unfortunate brand names in history…
  • …is now opening an online lifestyle store.
  • AB InBev have to be congratulated for imagination and courage at all levels…
  • (Lesser companies would surely have ditched the brand?)
  • Perhaps a pointer at how we should all place Covid in perspective.
  • And revert to ‘Business as usual’ in spite of the unprecedented distractions…
#BusinessAsUsual #Unprecedented #Lockdown #ShoppingHabits

Monday, 3 October 2022

Retailers Have Stocked Up On Festive Goodies, But Will Anyone Buy Them?

Retailers were already feeling nervous before Liz Truss and Kwasi Kwarteng launched their mini-budget for growth – and sent the pound into freefall and mortgage rates soaring.

The industry may have bought its stock for the peak trading season, so the fall in the value of the pound will not affect prices or profits until next year.

The main short-term concern before Christmas, when most consumer industries make the majority of their profits, will be consumer sentiment and spending power.

Read the full article on The Guardian website

NamNews Implications:
  • Taking some of the pressures on consumers:
    • Mini-budget fiasco sending pound into freefall and mortgage rates soaring.
    • A pause in house sales
    • Domestic renters in fear of rent increases
    • Benefit cuts
    • Spending on expensive items down
    • Skipping the little extras
    • Trading down to supermarket own label or discounters
    • Spare cash left after paying for essentials plummeted 10% in August for the average family
    • Outstanding net credit card debt has risen on average by 0.9% per month since the start of the year (No one appears to be mentioning authorised and unauthorised overdrafts at 40%...)
    • Autumn long-feared energy bills hit doormats
    • Clothing, homewares, nights out and trips away must all be on the list of household budget cuts
    • A general feeling of economic malaise and fear about the future
  • Fancy some Christmas shopping...?
#HouseholdCutBacks #MiniBudget #FallingDemand #ChristmasShopping

Thursday, 29 September 2022

Open-Book Accounting, Post Lockdown

UK supermarkets agreeing to ‘Open Book’ deals with suppliers amid an energy crisis can be a step forward in terms of supplier-retailer collaboration. Patently the root cause/s of this development are far more complex and threatening than an unanticipated hike in the price of energy.

In fact, what we are currently witnessing is the latest stage in a process that kicked off with the 2008 global financial crisis, when the cost of consumers bailing out ‘banks that were too big to fail’ began an era of low inflation and interest rates that was used in an effort to stimulate demand. The resulting and excessive ‘quantitative easing’ or printing of money caused a build-up of debt whereby a global shock was required to attempt to re-set global economies via a 2.5-year series of Lockdowns.

As markets recovered unevenly, imbalances of supply and demand resulted in soaring inflation affecting fuel/energy, supply shortages, and changes in shopping patterns, all causing chaos on shelf.

Suppliers and retailers have now been pitched into each other’s arms with the aim of collaborating or die…

Open Book Accounting (OBA) is but one aspect of this new level of partnership. In fact, NamNews quoted trade magazine The Grocer in reporting recently that industry experts are calling for supermarkets to work more closely with suppliers to prevent the energy crisis from causing food shortages.

Sources told The Grocer that some retailers were taking a collaborative approach and agreeing to so-called ‘open book’ deals. For instance, this enables both sides to track suppliers’ energy bills and take them into account during cost price increase negotiations.

At its simplest level, OBA is a ‘safe’ business practice where a company shares key financial information with stakeholders such as funders, clients, suppliers, investors, or contractors.

However, whilst ‘opening the books’ can be a major cultural change for many companies, extreme times require extreme measures, and when introduced in highly competitive retailer-supplier environments, there can be consequences…

Essentially an OBA relationship embraces a mix of Commitment, Focus, Trust, Integrity, Effective Communication, and a determination to work collaboratively in solving problems-in common. All in a highly stressed and uncertain environment where trust is paramount.

On the plus side, benefits can include:
  • New levels of collaboration between retailer and supplier
  • Resulting financial transparency improves performance
  • Members of supply chains can benefit from less overlap and costly buffering
  • Working capital usage can be optimised by relating invoice settlement to shorter, more efficient order cycles
  • Can provide a trustworthy basis of actual costings that reflect the true risk and effort for each party, minimising the need for second-guessing
One way of ensuring delivery of these benefits is for the partners to work to a P&L-in-common (see below).

Potential downside impacts of OBA can include:
  • OBA requires a massive cultural change in each organisation, top to bottom
  • Use of skills unavailable in-house e.g. independent auditors (cost, delays, objectivity)
  • Degree of detail required can be information and resource-intensive
  • Requires openness, trust and transparency that will take time to develop
  • Increased job-mobility increases the risk of information-leakage

It is hopefully obvious that OBA depends on the establishment and maintenance of long-term working relationships, especially in an environment where retailers often see rapid buyer job-rotation, sometimes six-monthly, as a way of minimising the close NAM-Buyer working relationships that make it difficult to negotiate tough deals with people you like…

In terms of NAM and Buyer, OBA obviously raises a number of issues for each party:
  • A supplier has direct experience of their brand cost structure in a given category
  • A retailer could have access to all brand costs of all category members (i.e. optimum methods of production, methods and ingredients combination)
  • Risk of incremental growth of own label at the expense of brands, via the use of brand-production insights
  • Global suppliers and retailers will have access to differences in fuel/energy prices/increases in different countries (distraction at local level especially given the relative lack of pointers in mainstream media)
Ways of optimising an OBA relationship in practice
OBA needs high degrees of trust and collaboration in supplier-retailer relationships, given that its effectiveness requires that partners share data and financial information about costs incurred in every part of the supply chain. Both parties can use this insight to ensure that costs are kept low, without compromising other aspects of the joint supply chain.

Confidentiality is a must-have, but realistically, if both parties continue to derive more benefits from collaboration than the quick hit of exploiting business secrets, there is a reasonable chance that leakages will be kept at manageable levels. Nevertheless, pragmatists on either side are unlikely to forget who is on the other side of the table…

Also, in most organisations, there will be ‘trade secrets’ that will never be opened up to anyone, even the company’s local management, let alone second or third parties… This can often take the form of the ‘magic ingredient’, a formula handed down from the owner’s great-grandparent and now securely locked in a bank vault overseas, often in a low-tax environment like Switzerland. This vital ingredient, with a transfer price designed to syphon off profits from overseas subsidiaries, ensures that corporation tax obligations are kept manageable, even in unprecedented times...

In terms of day-to-day negotiation, given the benefit of OBA and their ‘open’ access to much detail in the joint supplier-retailer business, time normally spent on adding value to concessions, devaluing concessions from the other party, and explaining/excusing our inability to comply with impossible requests or enter no-go areas, energies can be redirected to joint exploration of mutual gain. Using real data, with less time needing to be spent on validation, results can be tracked via the joint P&L. In other words, Buyer-NAM time can be more productively spent on the ‘How?’ rather than ‘Why?’ of dealing with joint trading issues, hopefully to more effect.…

Moreover, in terms of individual negotiation sessions, the Size of the Deal on the Table can be quantified quickly, allowing a joint placing of the session in context using real data:
  • Customer’s share of the category?
  • Private label share of category?
  • Our share of their business (£, %)
  • Our share of their category (£, %)
  • Size of the deal for them (£, %)
  • Size of the deal for us (£, %)
Choosing the right partner
Given the risk of OBA going wrong, especially in the current climate, it is vital that extreme care is taken in choosing the right Invest customer. In other words, OBA should only be considered for customers meeting the following criteria:
  • Potential (Immediate importance, life-cycle, market share)
  • Partnership (Strategic alignment, relationship possibility, cultural fit, consumer match)
  • Profit (Share of profit vs. share of sales)
  • Performance (Relative competitive advantage within the customer, share of category)
The results of this new level of risk-taking needs to be captured in an enhanced customer account management tool, as follows:

Customer Account Profitability impact (A P&L-in-common, sharing the net profit before tax in proportion to relative risk)

Given current crisis conditions in the market, desperate measures like OPA are required… Obviously, it cannot and will not be applied to all customers, but it can be a very effective basis for deeper relationships with Invest partners.

We are going to have to share what has always been confidential, and as you know it is always easier to be truthful than to add the extra pressure of having to lie consistently… Providing we take normal business precautions, and a customer meets the other criteria for Invest-Customer status outlined above, it may be worth considering this ultimate step in measuring the financial relationship, a P&L-in-common.

Essentially, this means extending our Customer Account Profitability model to use shelf price as the starting point, then adding in all retail costs to arrive at the supplier selling price, less all manufacturing and distribution costs, a percentage of national advertising & promotion related to the size of customer, and itemising all trade investment/funding for this customer, including retail media.

This leaves a joint net profit before tax to be split between supplier and retailer according to negotiated agreement of relative risk for the two parties. The joint P&L thus represents a final measure of each party’s trust in the costs and value of the amounts involved, the ultimate measure of fair share!

OBA represents a major breakthrough in supplier-retailer relationships, with trust as an essential bedrock, but in the new norm, there are few other real options.

Unless you prefer to return to the good old days of Them and Us…?

Sterling-Dollar Exchange rate in perspective:

Given this morning's fall in Sterling to near parity with the dollar, some of the Linkedin community with longer memories may remember in the 1940's people used to refer to a Half Crown (2 shillings & 6 pence) as a "Half Dollar" 

i.e. an exchange rate of $4 =£1.

"The times they are a changing..."

#ExchangeRate #Dollar #Pound #Value

Profits Slide At Aldi But Pledges To Prioritise Lower Prices Over Short-Term Gains

Aldi saw its profits slump significantly last year due to rising costs and investment in pricing. However, the discounter stated today that it was willing to sacrifice margin to maintain its focus on “providing the lowest grocery prices in the UK” amid the worsening cost-of-living crisis.

Over the year to 31 December 2021, Aldi’s operations in the UK and Ireland saw pre-tax profits fall 86.5% to £35.7m on sales up 0.9% to £13.65bn.

Aldi cited Covid-related costs, increasing staff pay and investment in prices. The small increase in sales came after the chain missed out on the online grocery boom during the pandemic.

“Preserving our price discount and rewarding our people will always be more important to us than short-term profit,” said Giles Hurley, CEO Aldi UK and Ireland. “Being privately owned means we can keep our promises even when times are tough.”

Aldi attracted 1.5 million extra customers over the past 12 weeks vs 2021 from supermarkets. This helped boost sales of the discounter’s Specially Selected own-label range by 29%.

Kantar showed sales growing at 18.7%, overtaking Morrisons to No 4

Aldi buying teams were “working tirelessly to counter the impact of inflation and maintain its discount against traditional full price supermarkets”.

Aldi has over 970 stores, plans 16 more in the UK by 2023, to its target of 1,200 by 2025.

Other investment – part of its ongoing £1.3bn two-year pledge – will include expanding/relocating dozens of existing stores + developing its distribution centres and technology infrastructure.

Re cost-of-living crisis, Hurley said: “It’s also a time when Aldi comes into its own. From our carefully selected range to our smaller format stores to our trademark efficiency, we can leverage our unique approach for the benefit of all of our customers.

“We will do whatever it takes to maintain our discount to the traditional full-price supermarkets and keep grocery prices as low as possible..”

Unlike the big gains by discounters in 2008, Mults are price-matching discounter key lines and introducing expanded budget ranges.

Hurley said their private ownership allows a longer view and huge global buying power.

Also, Aldi’s efficient business model can insulate customers vs rising prices across the food supply chain.

Re how much profit margin Aldi will sacrifice in 2022 to protect shoppers, Hurley said: “We always make value the cornerstone of our business. No matter what it takes.”

NamNews Implications:
  • Aldi are able and willing to take a profit-hit to grow share…
  • …as they continue to operate ‘on a roll’ in the UK.
  • And given that they rarely sacrifice share gains…
  • …not a bad strategy.
  • Suppliers and retail rivals need to watch for Lidl pursuing similar policies.
  •  Aldi and Lidl can afford to run at a loss, supported by their global operations…
  • …for as long as it takes!
#Aldi #DiscounterShare #CostOfLiving