A step beyond GSCOP?

Whilst the issue of supplier-retailer trading relationships has become ‘Agenda: Upper Quartile’, and the Code of Practice, in practice, is now being seriously considered by key stakeholders, it could be that suppliers are not raising their sights and expectations to a place that was always the aim of GSCOP, in spirit rather than by the letter of the Code.

Whilst it is obviously important for all parties to understand the detail and practical application of GSCOP, it is important to keep in mind that focusing on the ‘letter’ of the code in legal terms will at best slow down the evolution of what could, and should, be a basis for improved day-to-day dealings between suppliers and retailers.

Meanwhile, there is little point in criticising retailers’ legal departments for helping buyers to avoid falling foul of the letter of the ‘legislation’, that is what corporate lawyers do….  And besides, retailers need, and can afford to employ the best talent available in finding a way forward, especially in unprecedented times…

In fact, should the GCA team ever find themselves in a position to levy a fine of 1% of a retailer’s turnover, they will find themselves opposite a/the best-in-class legal team, entirely focused on provable ‘letter-of-law’ breaches, with the spirit-of-law aspects playing little, if any, part in the process.

The answer for suppliers has to be a company-wide emphasis on evolving a sustainable offer that represents a demonstrable edge over available alternatives, an advantage that is not easily replicated by the competition. In practice, this could mean a supplier has to construct their own portfolio re-set, stripping out any brand/SKU that fails to reach this standard, and live with the consequences.., before Tesco does it on their behalf.

This should be followed by re-negotiation of your existing supplier-retailer relationship to a point beyond GSCOP, a fair-play arrangement where each party’s reward is proportional to relative risk, and the partners collaborate because they want to be in business together, in the full spirit of a mutually productive working relationship…

Over-idealistic, naïve even? 
Would you prefer having to refer to a lawyer’s ‘letter’ for every stroke, and a life where you best energies are wasted on second-guessing your ‘opponents’ on the other side of the buyer’s desk?
There is a better way...

The GCA-GSCOP five-issue approach to optimisation of supplier-retailer relationships.....

Some indication of the steady progress being made by the GCA can be gleaned from the latest YouGov survey (here), but nothing beats participating in yesterday's 2nd Annual Conference, a unique mix of Sales, Finance and Legal stakeholders, all sharing a common interest in optimising the supplier-retailer relationship.

(NamTip: key for NAMs to have a detailed knowledge of GSCOP in order to fulfill their co-ordinating role re the major customer)

At the start of the GSCOP process, the GCA was faced with what could have been an overwhelming number of potential issues. However, by focusing on a rolling five-issue 'hit-list', Christine Tacon was able to help both suppliers and retailers focus on a manageable set of issues within GSCOP as follows:

Top Five Issues:
1. Consumer complaints (processing charges by retailer) - New (in discussion)

2. Delays in payment (failure to pay suppliers within agreed time periods) - New (in discussion)

3. Forecasting/service levels (issues arising re forecasting and call-off/delivery) - Live (currently under discussion with each party)

4. Requests for lump sums: (see GSCOP) - Live (currently under discussion with each party)

5. Packaging & design charges (possible excess over market rates) - Live (currently under discussion with each party)

Forensics: third party audits (2 year limit on claims) - Closed (meaning agreement has been reached on process and  interpretation. Any further instances will be regarded as in breach)

Drop and drive - delivery performance:
(issues around possible discrepancies between deliveries and receipts - Closed (see Forensics)

As can be seen above, given that two issues are 'Closed', five issues remain. At yesterday's conference it was announced that the Consumer complaints issue is now closed. This means the GCA is now in the process of prioritising a new issue, to be determined by degree of relevance to suppliers/retailers i.e. your opportunity to submit details of perceived breaches either directly to the GCA, or via your trade association.

It has taken many years to reach this point in the evolution of supplier-retailer relationships. The application of GSCOP is now gathering momentum but still requires 'proof of purchase' in order to access the benefits

Your input can help...

NB GCA Conference: Speaker presentations now available here

Tesco - playing the waiting game

Given the amount of uncertainty in the Tesco pipeline - Product cull, SFO Commercial Income investigation and GSCOP checkout - it is tempting for certainty-seeking NAMs to await the output from each initiative before incorporating the results into their trade strategies...

This is almost as dangerous as ignoring their existence and ploughing on regardless, using the tools and skills that were designed to work - and did so effectively - when markets grew steadily at 5% in real terms!

But five years of flatline demand was never anticipated or budgeted for...

Pragmatic NAMs don't need to wait for inevitable conclusions - they take informed guesses at what will affect them and act now. They thus gain while others sit and wait.
OK, perhaps others stand and wait - looks better, but is no more productive.

Informed guesswork:

- The Tesco Product Cull - a mix of surplus products and sub-categories of up to 30,000 SKUs, eliminating those items that do not represent a sufficient point-of-difference to justify a place in the slimmed-down Tesco portfolio. If you have any doubt, consider it out...

But even if your brand is on the plus-side of marginal, consider whether it is worth trying to break through to the guys making the cull-recommendations, or is it best to devote your energies to establishing alternative distribution, before the lanes get jammed with other NAMs' cars...

- SFO Investigation - a long drawn out exercise that will hopefully result in a set of clear definitions of trade investment buckets, their purpose, their time-of-value transfer (to allow for defensible booking and auditing), and - without doubt - paid on results and in arrears...

Meanwhile, busy buyers will be tempted to pull these payments into front margin and possibly fund deep-cut prices with the 'surplus' profit.

- GCA Investigation: This will focus on Tesco's compliance with GSCOP in two areas:
Part 4 (paragraph 5) of the Code: No delay in Payments;
Part 5 (paragraph 12) of the Code: No Payments for better positioning of goods unless in relation to Promotions.

Whilst it is possible that Tesco may have been moving so fast in recent years that inadvertent breaches may have occurred, the GCA is still reliant on hard evidence of non-compliance with the letter of the Code, in order to pursue a case against a retailer.

Only when retailers and suppliers can be persuaded to define and comply with the fair-play spirit of GSCOP will the CODE become a day-to-day working tool* in the supplier-retailer relationship. The reference in Part 4 (paragraph 5) to 'payment within a reasonable time after the date of the supplier's invoice' goes part of the way, but 'on time' payment - whatever period has been 'agreed' - is still the 'letter-of-law' guiding principle for retailers...

KAMtip:
Assume that the three initiatives have panned out as indicated above, and take appropriate action now

* Making GSCOP a workable tool in the day-job for suppliers and retailers:
Why not submit your ideas to the GCA Team on what would make the Code represent fair-play? 
This would represent no 'whistle-blower risk' but could help in establishing a basis for a Mark 2 Code that might better reflect the realities of joint-partnership, with willing compliance a given....  

Hungarian Lawmakers Pass Law On Banning Unprofitable Supermarkets, in the name of fair competition

According to Xpatloop, lawmakers have approved a government law on banning from 2018 supermarkets and hypermarkets that fail to make a profit for two consecutive years.

Given that the new law was this morning cited by Tesco, Hungary's biggest supermarket chain and third-biggest employer, as the reason why they will close 13 shops in Hungary in order to remain profitable for the long term, it can be seen that the new legislation is being taken seriously.... 

The government makes the moves as part of a policy to eliminate of factors that enable large supermarket chains to abuse their preeminent positions. Steps already include a 15-fold rise in the so-called food supervisory fee, the recently introduced advertisement tax, and the ban on tobacco shops in some big supermarkets.

It can thus be seen that the Hungarian government have gone farther than other countries in attempting to combat unfair competition, in that they have reached to the heart of how large companies exercise scale-power and focused on what they regard as root causes of unfair advantage, namely the ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and the sale of some categories (tobacco).

In other words, these moves should be seen as a progression towards ensuring fair dealings by large retailers and suppliers in an attempt to reduce anti-competitive pressure on medium and smaller trade partners.

It remains to be seen how soon competition authorities in other countries take similar steps, in the search for fair dealings for all...

Meanwhile, time for UK suppliers and retailers to anticipate the inevitable, vis appropriate 'what-ifs'? 

GSCOP in practice - Inaugural Groceries Code Adjudicator Conference

A view from the third row, for those who may have missed a trick by not attending…

Given the relatively low media profile and perceived supplier-retailer apathy re. matters GSCOP since its inauguration in 2009, it was good to participate in a revelatory catch-up at the GCA conference yesterday.

The first surprise was the fact that with upwards of 200 delegates, this inaugural conference occupied the main ‘IGD’ hall at the QE11 Conference Centre, Westminster.

The audience comprised a unique mix of supplier and retailer Code Compliance Officers, trade associations, legal practices, governmental and senior sales, not only from the UK, but equivalent groupings from Canada, Australia, New Zealand, The Netherlands, Ireland, Czech Republic and Norway.

In other words, a high level of interest in these first steps in optimising supplier-retailer relationships in one of the world’s most competitive markets, possibly serving as a template for adaptation abroad.

People came prepared to talk and share experiences and concerns, as evidenced by audience reaction to presentations from a combination of the GCA, British Brands Group, Code Compliance Officers from Tesco and Morrisons, emphasising the scope and opportunities of applying GSCOP in practice followed by an active Q&A session from an increasingly participative audience.

YouGov then presented the findings from the GCA-commissioned research to explore the views, experiences, attitudes, and expectations of suppliers in relation to the Code.

..and therein lay the second surprise... In an industry known for its low key, non-participative response to matters GSCOP, there were 574 responses to the survey – of which 528 were from a mix of direct and indirect suppliers, a ‘robust sample for this type of population’, to quote YouGov. Full details are available here
Christine Tacon presented the GCA Annual report summarising progress to date especially the agreement by major retailers to limit post–audit-recovery to three years, instead of the statutory six years allowed in UK law. This single step should reduce significantly the time, frustration and friction of trying to ‘re-negotiate’ promotional agreements six years in arrears.

The afternoon was devoted to a mix of four very interactive workshops dealing with Enforcement, Genesis of the Code, Success evaluation - survey follow-up  and Trade Associations discussions of supplier issues under the Code.

Details of most sessions are available here

On balance, a good-faith and successful series of initial steps aimed at building a productive basis for improved supplier-retailer relationships, evidenced by the animated discussions with new contacts during the breaks.

It could be now said that we have arrived at the end of the beginning for GSCOP, roll on next year’s conference…

Nice one, Christine….  

Customer going bust - the incremental sales impact!

Yesterday, the administrator announced that lenders and suppliers to toy and model retailer ModelZone face losing up to £11m after it collapsed into administration. Of this, the company owed more than £9m to the secured creditors Lloyds Banking Group, leaving approximately £1.5m to the suppliers, the unsecured creditors.

In other words, the suppliers will receive nothing - the anticipated £4m from the stocks sell-off will go the bank - meaning that suppliers will need to recover their losses via incremental sales elsewhere, whilst their ModelZone stocks end up competing with them in the markets at 50% or more discount….. a double whammy?

Getting it in perspective
£1.5m seems a small amount by comparison with the £9m owed to the secured lenders- a dangerous idea that could prevent us from appreciating the significance of the loss.

In the same way, we have somehow become so accustomed to ‘a trillion here, a trillion there, soon we’ll be talking about real money’ in the global financial crisis that it no longer seems like a joke…  In other words the big numbers appear to have raised the bar on financial pain for suppliers and customers.

How the NAM can break through the apathy
Because of this ‘insensitivity’ to ‘mere millions’ it is vital for the NAM to find a way of expressing loss in a way that is not necessarily alarmist, but yet causes the organisation to take the issue seriously. For instance, a supplier on a net profit of 5% needs incremental sales of £30m to recover from a loss of £1.5m, in the current climate (!), competing against its own liquidated stock selling at ‘50% off’ in the marketplace…

Now do I have your attention?

In the same way, NAMs have to impress upon their colleagues the importance of
- making credit worthiness a top KPI and not just a job for the credit control department
- picking up and communicating every delay in payment, instead of regarding it as a ’one-off’ glitch
- delivery drivers noting stock-gaps of key lines in the customer’s depot
- merchandising colleagues reporting on store-staff morale and on-shelf availability

The carrier of the can
But the main focus should be on the NAM’s ability to read the situation at the supplier-retailer interface, via a combination of updated analysis of the customer’s latest published accounts and the constant realisation that the NAM will have to pick up and implement the incremental-sales-tab in the event of a misjudgement….

Incidentally, using the same ‘incremental sales’ approach, the GSCOP Adjudicator might make more impact by referring to the potential £1bn fine for bullying suppliers not in absolute terms, but as the incremental sales of £20bn required by a retailer making a net profit of 5%, or are we back in the land of funny money?

Grocery Code Adjudication - Managing Expectations?

Whilst small and medium-sized suppliers may be encouraged by early signals ref the appointment of the Adjudicator, it should be kept in mind that the ultimate goal is protection of the consumer.

Those that have taken the GSCOP seriously from the beginning accept that retailers (and suppliers) have had three years to establish ‘precedents’ in terms of payment periods (40-90 days), quality specs, delivery conditions and other trading arrangements that now fall within the letter of the Code…. This means that retailers are now compliant, and only proven breaches will cause them problems. Given their £1bn+ scale, the major retailers will be as anxious as suppliers to avoid the distractions of any breaches by rogue buyers at operating level.

Whilst the Adjudicator is now open to receiving feedback from suppliers, any action against a retailer will require the building and winning of a case with all the legal conditions covered off.    In other words, legally watertight evidence will be essential for the success of any resulting action.

According to The Observer, the adjudicator will have two key options available - arbitrating on disputes and investigating complaints made anonymously or by third parties such as the National Farmers Union.
Presumably all such complaints will have to be investigated, aggregated and sufficiently ‘anonymised’ to protect whistle-blowers, in order to prove that a specific retailer has a case to answer on a specific issue.  Hopefully the combination of a ‘quiet word’ and the possibility of adverse publicity will then cause the obvious excesses to be kept in check…

In the meantime, pro-active suppliers need to reassess their working partnerships with the major mults in the light of the GSCOP. Their aim should be to establish an ‘ideal world’ trading relationship, based on  realistic post-financial crisis market conditions, that would allow both parties to function profitably, all things being equal….

This analysis would then form the basis of a robust and negotiated contract,  upon which they are prepared to litigate in the case of any provable breaches, if necessary. The company will then be in a position to clearly establish what are clear breaches of either spirit or letter of the agreement, and ideally will have collected supporting evidence in the process.

It then becomes a decision whether a visit to the Adjudicator or the law courts will be more effective….

In other words, the ball remains firmly in the supplier’s court, where  the primary responsibility lies with NAM and buyer to reach legally ‘bindable’  agreements between committed trading partners, each gaining sufficiently from the relationship that playing fair is more productive than abuse, as always……

Deductions, an Opportunity for All?

Yesterday’s NamNews report of Tesco and Waitrose allegedly charging suppliers for missed or late deliveries raises a number of issues, especially the ‘ownership’ of risk in business.

Retailers achieve average stockturns of 20-25 time a year by integrating supplier-retailer logistics systems, utilising smaller, more frequent deliveries to produce predictable on-shelf availability performances at minimal instore stock-levels. Partnership at this level is dependent upon contractual agreements (really think GSCOP had gone away?) between the parties that have built-in KPIs and penalties for non-compliance. This allows deduction-parameters and penalties to be negotiated upfront thus preventing ‘surprises’ later.
It can also facilitate a fair-share apportionment of risk in the relationship.

Why bother? 

Given that deductions can represent 7-10% of a supplier’s sales, and as net margins continue to fall, then any improvement in deductions management will not only have a significant impact upon cashflow and profitability, but will also have a major impact upon the equivalent incremental sales-profit relationship.

The numbers count

As always, adding the numbers will help to communicate the issues, internally and externally. 

For instance, for a supplier making 6% net profit before tax, on a sales turnover of £50m, reducing deductions by £1m will impact the bottom line with the equivalent of an incremental sales increase of over £16m…a 32% uplift in sales!

Why deductions occur

Essentially, the management of deductions is complicated by the lack of direct ownership, in that departments such as sales, marketing, logistics, category management and finance all have an influence in terms of cause and effect upon the level of deductions made by customers. Despite the fact that many deductions are preventable, deduction resolution is still regarded as a low status, ‘negative’ activity and in a time of cut-backs, tends to be under-resourced in terms of people, systems-support and relevant information.

Reducing preventable deductions

Leaving aside unauthorised and authorised deductions, suppliers have most to gain by focusing upon reducing preventable deductions, and given that these are mainly caused by the supplier’s ability to adhere to the retailer’s compliance process, the solution lies in the supplier’s willingness and ability to tailor their systems ‘front-end’ to the customer’s requirements, a given with invest-level trade partners committed to joint value creation. Also, given their overall responsibility for the entire multilevel-multifunctional supplier-customer relationship, it is obvious that the NAMs should be regarded as a key driver in fusing the often disparate parts of the interface.

Removing incompatibilities and 'disconnects' 

Essentially, this means leading the search for incompatibilities that cause ‘disconnects’ between the two companies’ systems, selling the solutions in terms of compliance KPIs internally and externally, and incorporating these within overall trade strategies and annual negotiated settlements between the parties.

Payoff

A key payoff resulting from faster deduction resolution for the NAM will be the ability to set promotion strategies based upon real-time performance feedback. As a result, all departments will benefit from better integration within realistic trade strategies that use supply-side and demand-side joint KPIs to move the business forward with greater degrees of transparency and defensibility. 

Board-level involvement

At a higher level, there is a need for board members of supplier and retailer organisations to drive compliance standards across the trade and facilitate the communication and acknowledgement of customer compliance requirements within their companies.

Finally, given that most deductions queries are cleared in favour of the customer, it is hopefully obvious that deductions also represent a major opportunity for retailers to ensure supplier compliance and grow their bottom line at the expense of less organised suppliers distracted by other, more exciting priorities….

For a free copy of our KamTips checklist on Deduction Reduction email me on bmoore@namnews.com

A GSCOP-thought for the weekend?

Given that the designated retailers have little to gain and lots to lose from the spirit of GSCOP, it is unlikely that they are currently preparing to merely observe the letter of the new Code of Practice.

For instance:
Losses from Banned conditions:

• No delay in Payments (they currently pay in 45 days approx., scope for negotiating extension, 90 days ring a bell?)
• No requirement to predominantly fund a promotion ( move from fully-funded to 50%?)
• No obligation to contribute to marketing costs (your current payments reduced to zero?)
• No Payments for shrinkage (say average shrinkage = 2% of retail sales?)
• No Payments for wastage (say 5% of sales, conservatively?)
• No Payments as a condition of being a Supplier (your current payments for listing, etc = zero?)
• Compensation for forecasting errors (think refund of incremental margin from normal sale of promo-stocks)

Potential recovery from:

• Extending credit (by negotiated agreement?)
• Trade funding (currently up to 20% of purchases, scope for more?)
• Deductions off invoice (say 3 -10% of invoiced sales, scope for more?)

The designated retailers have to be working on ways of recovering losses from banned conditions, and also maintaining the status quo by signing suppliers up to a retailer-driven supply-agreement, written in whose favour…?

Are you missing a trick by simply awaiting the outcome?

Have a fair-share weekend, from the Namnews Team!

GSCOP: Something for the final Weekend of 2009?

With the real 2010 finally kicking off next Monday (snow, etc?) the effect of the most fundamental change-agent in supplier-retailer trading relationships will begin to make an impact.
To help you hit the ground running, we have analysed 3 pages of the new GSCOP and added 3 pages of calculation pointers to help show that the parts dealing with Prices & Payments, Promotions and Other Duties can have a positive outcome, given the right tools…

Make the most of your last real reflective opportunity to put the GSCOP onto the 2010 Agenda, by downloading a personal copy of our free analysis

Have a reflective Weekend, from the Namnews Team!

New Groceries Supply Code Of Practice (GSCOP) due for implementation on 4th Feb 2010

Given that the New Ombudsman has yet to be appointed, and with a Government focused upon more important matters like getting re-elected, it means that suppliers will be on their own until after May 2010, minimum….
This means that suppliers are headed for some of the toughest negotiations ever on every aspect of the supplier-customer relationship.

Think about it: Even better, check out the original document on the CC website, factor in the lack-of-readiness on both sides, the usual emphasis on consumer-first, strongest players allowed to win, add a normal dose of cynicism, and capture the result in terms of negative impact on supplier profitability…

In other words, the major multiples have a window in which new ‘norms’ can be established, before a test-case sets realistic and more practical ground rules. This means that concessions on margins, credit periods, settlement discounts, rebates, promotional support, trade funding will be probably be re-negotiated to replace any retailer losses on payments no longer allowed ( such as shrinkage allowances, space-costs, retros, etc)

Add in the costs (and risks!) of putting everything in writing, together with the need for new retailer Code Compliance Officers to report regularly on retailer compliance with the GSCOP, and you begin to see the inevitability of a legally enforceable contract between suppliers and retailers. For guidelines on trade contracts, check with your colleagues in France handling the Carrefour Account.

All of this adds up to a need to quantify every aspect of the supplier-retailer business relationship, counting every penny before, rather than after the negotiation session.
See Namcalc for 34 different ways of calculating cost to you and value to the retailer
Drop me a note on bmoore@namnews to discuss implications for you