Back-margin funding of deeper price-cut by the Big 4?

The Telegraph today highlights a new report from Moody’s that says Tesco, Sainsbury's and Morrisons 'can't afford more price cuts', with sales and profits set to fall for another 12 to 18 months…

In other words, there has been some retrieval of customers, but the cost has resulted in margins being reduced by half since fiscal 2013/4....

However, this assumes that supplier trade investment has been used for the purpose intended i.e. in-store motivation of the shopper.

What if the retailer decides to switch a significant amount of back margin into price-cutting?

In practice this could work out as follows: Say suppliers contribute trade investment amounting to 20% of their turnover, to a retailer on 25% retail margin. This translates into 15% of net shelf price.

If the retailer decides to allocate say 5% for ‘back margin’ purposes, this frees up 10% of net sales that could be used for a combination of further price cuts and supplementing the bottom line….

This raises a number of issues for suppliers:

• Would you even know it had happened? i.e. Have you got updated T&Cs in place for each Back Margin bucket, along with appropriate KPIs?
• How ready are you to re-evaluate each element of your trade investment, confident in your ability to quantify the cost, and demonstrate the value to the buyer, using the retailer’s latest financials…?

These unprecedented times still have a bit to run, can you afford to sit it out?

Taking Back Some Back Margin from Tesco, by re-negotiating its usage...

Given that supplier investment in back margin was originally intended to stimulate sustainable sales of the brand and should always have been conditional, many suppliers will be reluctant to simply surrender the allocation and use of trade investment monies – other than the three permitted buckets – to a retail partner working to a different set of priorities.

Moreover, as the surrender of any influence over the use of trade investment by the supplier could result in elimination of any discussion re KPIs and compliance conditions in monitoring retailer performance, even the effectiveness of the three permitted buckets could be compromised.

This could possibly result in either additional transfers to front margin, or even de-listing in extreme cases of poor performance.

It is therefore imperative that suppliers and Tesco find ways of jointly optimising the discretionary use of trade investment budgets by the two partners.

In other words, assuming that the three permitted back margin buckets account for half of a supplier’s 20% trade investment in Tesco, this leaves the ownership/control of the remaining 10% subject to further negotiation… 

In order to convince Tesco of the bona fides of such trade investment ‘retention’, a supplier has to be able to guarantee that the monies are fully allocated to the development of their business with Tesco.

The funds will need to be invested in initiatives that drive traffic to the retailer’s stores, where incremental sales of the supplier’s brands will reward Tesco via a combination of front margin and volume rebates.

It is unlikely that a retailer in Tesco’s current condition would agree to anything less…