Premier Foods 'Invest or else' request from suppliers

According to the BBC, Premier Foods have allegedly been asking their suppliers for payments to continue doing business with the firm.

NAMs, long accustomed to fielding such ‘requests’ from major customers, might be forgiven for thinking that Premier Foods had diversified into retailing…

Essentially, when a company enters a supply arrangement with a customer, they obviously negotiate a working arrangement that should be summarised in a supply agreement – a legal completion of the agreement process where UK suppliers still lag behind their continental cousins.

However, commercially speaking, a contract is an instrument that ‘can’ rather than should be used, because in practice, resorting to the law is an end-of-relationship process rather than a  basis for a mutually productive partnership…

The agreement to supply needs to include the total package – all terms and conditions, binding both parties. This up-front agreement can contain some ‘gun-to-head’ elements in that the customer, exploiting their size, can make it a condition that they will pay in 90 days for a product delivered daily.

Strictly speaking, this condition can be in compliance with current ‘pay-on-time’ legislation, but ignores the fact that the 90 days can be unreasonable where the customer experiences the value of the product within days of receipt on a rapid rotation line, and credit period was always meant to simply cover the gap between delivery and resale of a product.

In other words, the customer observes the letter of the law, as worded, and ignores the real issue, the need for payment within an appropriate-for-purpose time frame – the law patently needs modifying to make this more explicit.

The same holds for a retro-demand for additional cash, for whatever purpose. However, if the request applies to future dealing, then that becomes a basis for negotiation, however unfair the balance of power…

When a customer steps outside an agreement and imposes a new condition retrospectively, the supplier has a genuine grievance, and a basis for action, if a comprehensive written contract exists. It may still be unrealistic to expect a small supplier to take on a big customer. In fact the little guy may even  'knuckle under', with wise customers keeping in mind the possibility of the ‘don’t get mad, get even’ condition being invoked….

The real issue is the damage being done to the customer’s reputation for fair dealing, both with other suppliers, the legislature and current employees, and especially with the general public - the ultimate consumers - in times where abuse by big business is becoming an increasingly sensitive topic….

Additional details in The Telegraph here
Update in The Independent here

Sainsbury's results - welcome to the real world of UK retail

Today’s interims reveal no surprises, and together with the Tesco, Morrisons and Co-op revelations, and given the relative transparency of Asda’s results and dialogue with the stockmarket (via Walmart), it can be assumed that everything is now out in the open, with the major players acknowledging that 'The grocery sector is undergoing structural change as customers shop more frequently, using online, convenience and discount channels more’.

True, the Tesco SFO investigation may eventually yield some additional output, but in the main this will be limited to more precise definitions of the elements of Commercial Income along with some amendments to accounting process and a switch to results-based reward that major retailers will ignore at their peril.

The UK version of capitalism is generally very forgiving, provided stakeholders can rely on the truth of what they are shown, and there is no reason to second-guess via the share price. Therefore a line will be drawn and all will move forward.

In other words both Coupe and Lewis are openly clearing the decks and making ready to do battle with the discounters and other retailers, on the premise that in a flat-line market, any growth comes at the expense of the competition… 

Share prices will inevitably follow…

From suppliers’ points of view, we are into a new era of transparency and demonstrable value-for-money, real-time.

Retailers are now into cost-cutting mode with aggressive sell-off of non-productive assets (and suppliers?) a key feature of the programme.

In future, everything will be measured, with a heavy emphasis on assessment in terms of demonstrable impact upon ROCE - the driver of share price.

This means that NAMs will need to re-calculate the cost of every element of the trade offering, especially Trade Investment, and will be expected to demonstrate the benefits of compliance via the impact on a retailer’s P&L and Balance Sheet.

In turn, given the challenges faced by the multiples, and their overt need for help, suppliers are in a once-only position to demand fair-share dealings in return.

For those that hesitate to grasp this unprecedented opportunity, this could well be the last trick they will miss…

Tesco troubles pile high, but will not come cheap…

According to Reuters, the auditors for all three of Britain's biggest publicly-quoted retailers - Tesco, Sainsbury's and Morrisons - told investors in their most recent annual reports that their businesses faced material risks regarding the reporting of the supplier rebates. Those at the smaller online retailer Ocado did likewise.

In other words, ‘everyone knows’ or should have, that forward booking of supplier rebates is common practice, and usually causes no problems in good times, but…

Another, more obvious sign of trouble has been the dramatic falls in ROCE levels since the 2007 global financial crisis, with one notable exception: Walmart is still delivering a steady 18%+, operating in the same economic conditions.. (Clients and NamNews subscribers might care to check over our in-house updates for reminders going back at least five years…)

When new management, auditors and legal advisers re-assess past accounting process, it is probable that more issues will be added to the pile…

Meanwhile, to maintain the audit-momentum, the Independent reports that in the US, Los Angeles-based law firm Glancy Binkow & Goldberg has said it is investigating potential -class action- claims on behalf of Tesco’s American shareholders over possible violations of federal securities laws, focusing on “certain statements” issued by Tesco about its operations and financial performance.

The resulting falls in share price will impact suppliers and especially NAMs...

All of this will cost Tesco, and to a lesser extent, the other multiples much time and money, and major distraction, as the benefits of hindsight kick in ….

However, it should be borne in mind that whilst Tesco is on the ropes, it is not on the canvas…

Deep down, the crisis is but another business problem that needs managing, in order to focus on consolidating a 25% market share (see KamBlog)

This set-back will give Tesco and its supplier-partners a once-and-for-all opportunity of ‘cleaning up the future’, providing a basis for fair share dealing where willing compliance saves the cost of second-guessing, a place where business development becomes the focus of business reviews and appropriate reward for risk the basis for negotiation…

A true resetting of the supplier-retailer clock to a new time-zone in trade relationships.. why not scroll down, and keep scrolling, for ways and means?

Myners’ striking at core Co-op issues...

Euan Sutherland argued that democracy and values might be vital, but without radical change the whole future of the Co-op business was at risk.

By implication, Lord Myners’ resignation endorses that view.

In practice, the Co-op will not go bust, but may break down into separate societies, each operating and buying without the benefits of scale, and as a consequence becoming less attractive to suppliers in terms of being a counter to the power of the major multiples…

The BBC quotes the Midcounties submission to Lord Myners' re-organisational recommendations: "Among the independent consumer co-operative societies, it is demonstrably the case that it is the most democratic that are the most successful in commercial terms, not the reverse."

No one is claiming that democracy in business does not work, it just takes longer…

And, as even the most consultative CEO’s know - and their teams accept - in crisis conditions a degree of temporary autocracy is essential…

If the Co-op really wants to perform commercially, it means being able to deliver an acceptable ROCE – not the currently depressed 5-10% level currently being delivered by the UK major multiples, but more akin to Walmart’s 19% - a combination of 5% Net profit and a stockturn of 10+ times/annum.

As anyone with commercial experience knows, producing an acceptable surplus of sales over costs – i.e. a source of funds for investment in the business and sharing with members – means aiming at 10% net profit and achieving 5%...

Suppliers are prepared to invest in suitably qualified trade partners a combination of retail margin (25+%), free trade credit of 45+ days, trade investment of up to 20% of retail purchases, and even suffer up to 7% deductions off invoice for failure on their part to meet professional retailer agreements...

All the supplier require in return is fair-share treatment, retail professionalism and 100% compliance, a standard even the major multiples find onerous…

If the Co-op wants a place at the table with the major multiples, and to be treated as a serious ‘invest’ player by key suppliers, it needs to perform commercially, and deliver standards of compliance comparable with other retail players…

A focus on the bottom line can help drive the business in the short term, and managing a gradual improvement in ROCE will provide a longer time-frame, each demonstrating to suppliers that the Co-op qualifies for longer term investment, and means it..

Unfortunately, a £2bn loss is not the best place to start…

Debenhams ‘little help’ from suppliers...

If you have received notice of an alleged discount  of 2.5% on invoices outstanding on 17th December, you will have already calculated the incremental sales you need via Debenhams to cover the cost…?

Workings: (simply substitute your figures below)

• Suppose Sales to the customer £2m/annum, average payment period 45 days, i.e. 365/45, i.e. 8 times /year
• Suppose your Net Profit, before tax on customer’s business is 5%
• Average amount outstanding is £250k i.e. £2m/8
• 2.5% of £250k  is £6.25k i.e. by allowing an additional 2.5% off invoice, you are giving £6.25k from your net profit, before tax, to the customer
• Therefore, £6.25k/5 x 100 = £125k = incremental sales you require to cover the cost of making an additional investment of £6.25k in the customer…

This raises several issues:

• Creation of a precedent in terms of similar retrospective demands from customers in the future – ‘remember that new store we opened in ’93?’
• One more step towards ‘common industry practice’ quotable by other retailers requiring similar help from suppliers
• A reminder that in  buying and selling, one is dealing with independent legal entities, making what should be legally enforceable agreements…
• A deal is a deal, or should be… i.e. a retrospective demand without consultation undermines an agreement, and should be a trigger for renegotiation, or walkaway…

Opportunity
Given these unprecedented times, this type of request should be an opportunity to check out the consequences of each customer wanting similar help i.e. if your total UK sales are £50m, a 2.5% ‘one-off’ discount on outstanding invoices would require incremental sales of £3,125k, in a flat-line environment…. However, if all suppliers stand firm on existing agreements, causing some customers to eventually go bust, then perhaps running a ‘what if’ calculation on the financial consequences of a customer going into liquidation should form part of a reassessment of your total relationship with major customers, on the way to fair share negotiation…

Eventually, all suppliers will have to face up to the reality of 'what business they are in', the reward-for-risk balance required to make it worthwhile, with the Debenhams Christmas initiative presenting an opportunity to scope out the options available, before the banks do it for you…

Opportunities in Deflation-Inflation Mix as Shops Slash Margins?

Ambient foods NAMs may be encouraged at ingredient cost increases finding their way to shelf-prices, resulting in average price increases of 2.5%, according to latest figures available from the British Retail Consortium and Nielsen.

At the same time, key non-food categories have experienced significant shelf-price deflation as retailers slashed prices in attempts to drive sales in falling markets.
As an indicator of severity, non-food deflation rates were as follows:
- clothes and shoes, 6.7% cheaper
- furniture and carpets, 2.4% cheaper
- TVs, DVD players, fridges, washing machines and ovens, 4.7% cheaper

However, as most mixed-goods retailers operate portfolio businesses, in that their overall interest, and that of the stockmarket is in overall profitability, then increased food sales can become a means of subsidising losses in non-foods…. 

In addition, having ‘allowed’ food price increases, the retailer may be tempted to seek financial support from suppliers that appear to be ‘more profitable’ as a result.

Whilst experienced NAMs will no doubt draw upon their repertoire of ways of saying ‘no’ to requests for non-specific subsidies (See How to say ‘No’), it may be more difficult to explain net profit margins of 7%+ in a supplier’s UK Annual report, compared with the retailer’s 3% or less in their P&L (See How to justify your bottom line).

However, imaginative NAMs will see real opportunities in promoting ambient food as a traffic builder to enhance shoppers’ access to non-food bargain offerings, and also use related food/non-food purchases as a means of driving the impact of retailers’ sales of more profitable foods to the bottom line, and claiming credit for the strategy….

Managing the post-rescue Booker-Makro relationship..

As one of our most popular NamNews items yesterday, reports in The Grocer of alleged demands by Booker from suppliers for lump sums/terms-harmonisation raise issues for suppliers.

It may be worth running through your financial options rather than resorting to simply saying ‘no’ and possibly jeopardising a potentially productive relationship..

No one expects you to simply give in to every request for additional monies, but being able to explain ‘why not’ can perhaps build your status in the relationship, leaving the customer to pass on and try a less-skilled supplier further down the line…

Essentially, if you are in the business of fair-share defensible dealings with customers, then anticipating and managing demands for correction of pricing and terms disparities following a merger of two customers will be part of your regular routine, using your normal tool-kit.

However, given the unprecedented times, a reminder of the process when two customers combine operations, may be of value:

Your business relationship with a customer will have the following ingredients
- Gross Margin on sales by the customer
- Credit period
- Settlement discount
- Trade funding
- Deductions

Gross Margin:
This should be the same for all customers that perform the same/similar function in re-selling your product. If different, it would be wise to clarify and be able to justify the additional services provided by the customer that enjoys the larger trade margin. Inability or unwillingness to do so will inevitably result in forced harmonisation upwards, or even de-listing. Handling the issue properly could result in the newly-combined customer adopting the additional services across the business.

Credit Period:
It is a no-brainer that a newly merged customer will want the same credit-period as its new partner, and if a defensible rationale does not exist, expect a demand for harmonisation to the longer credit period, with possibly a two-year back-haul ‘to recover the benefit we would have enjoyed’….  It would be unwise not to have calculated the cost of credit in advance for each of the customers and worked out the impact of ‘harmonisation’, before the customer asks…

Settlement discount:
If you operate a settlement discount to encourage early payment, hopefully it will stand ‘like-with-like’ comparison between the two customers…?  Ideally the discount will pay the same rate for the same reduction in payment periods. Why not check it out on our settlement discount tool and work out the inevitable customer demand in advance, rather than in the heat of a ‘demand’ session?

Trade funding:
If, like most suppliers, you operate 20-25 trade-funding ‘buckets’, it would be wise to check out ‘who gets what, and why’ for each of the two customers, quantifying cost to you and value to the customer in each case (our latest version of NamCalc covers 33 trade calculations). In practice this means working out the incremental sales required by the customer to generate the lump sum equivalent to what you give in trade funding…i.e. a customer with a net margin of 3% needs incremental sales of £33k for every £1k you invest in their business… (£1000/3 x 100)

Deductions:
These depend on service level, contracts and the ability of the customer to measure  and claim for real loss.
Best to clarify your options ‘just-in-case’ and if tempted to procrastinate, remind yourself that in the US, deductions can represent up to 7% of a supplier’s sales…

‘Lump sums for rescuing Makro’:
In taking over Makro, a commercial decision was made within the normal constraints of the takeover process i.e. it was not possible to consult with suppliers in advance, so presumably all costs were factored into the agreed price at a known level of risk that did not include incremental help from suppliers….  In the same way, as Makro drifted downwards, most suppliers will have assessed the risk and cost to them of the company going bust and will have factored this into their trade strategies.

Only if the takeover of Makro results in genuine incremental business for the supplier, will additional payments be negotiable…

A supplier that has completed the calculations outlined above will be better prepared than most to handle the resulting session with Booker…

[Incidentally, if you have not had a request yet, it may be because of your position relative to other suppliers on the radar…. So a 'what-if' on the above options may be worth a moment of your time?
If you are stuck on any aspect of the application, why not give me a call?]

What if consumers demanded supplier trading-terms from retailers?

An article on retailers' treatment of suppliers in today's Independent* introduces an idea that may hold the key to achieving fair-share treatment in supplier-retailer relationships.

Suppose consumers began to modify their shopping behaviour as follows:

• Telling the shop staff they are happy with the price, but need a 5% settlement discount to pay at point-of-purchase...
• Demanding a retro-rebate on goods purchased from the store six months previously...
• Requesting an advertising allowance to carry the store's shopping bag home...
• Applying a deductions' allowance for unbudgeted delays at the checkout, low on-shelf availability, 'cold' bread at the bakery, unhelpful staff...
• Expecting a contract allowance for buying a jar of own-label coffee every week for a year...
• Offering to buy a product's all five variants in exchange for a full range bonus..
• Seeking a quarterly/yearly bonus for shopping regularly...
• Requesting a listing-allowance to add the store's own label product to their shopping list...
• Demanding a de-listing allowance to cover the inconvenience of removing same when tastes change...
• Making a promo-allowance a condition of 'telling-a-friend'....
• Requiring a 'customer representative allowance' to encourage family members to tell their friends..
• Demanding a merchandising allowance for displaying product on the rear window-ledge of the car...
• Offering to fill the car-boot and all available seats in exchange for a full-load bonus...
• Requesting a collection-allowance to cover the cost of selecting goods from shelves and transporting to the checkout...
• Demanding a compensation allowance because the new jumbo-pack does not fit home-storage shelving...

[NAMs are invited to add personal experiences to the above 'shopping list'.....]

Unlikely that consumers would take a pro-active stance against business practices they deem unfair?  So thought a well-known high street coffee chain when their customers discovered their off-shore arrangements to minimise UK corporation tax payments...

* The Independent 

The Savvy Approach to Late Payments, Invoice-Haircuts and other power abuse..

A cross party Parliamentary inquiry into late payment will take place next week. The meeting, which will be chaired by Labour MP Debbie Abrahams, will examine just how serious the problem has become for SMEs, but will also look at other issues around poor payment practices, including so called ‘invoice haircutting’.

Catch-up
By way of background, NAMs may not be aware that the legislation is slowly catching up with reality in these matters, in that last month government regulations were updated to define 'late payments' (60+ days)  and impose interest  (Base +8% i.e. 8.5%). However, as always, these developments miss the basic point that unless the Government adopts the get-tough approach taken in other jurisdictions such as France, the measures will fail.

(To really protect SMEs you need to create a non-negotiable time limit for the payment of commercial debts. This is what happens in France, where failure to comply with the Commercial Code can result in criminal prosecution and heavy fines. An excellent article by Ben Gardner, a commercial law expert at Pinsent Masons develops this point in some detail)

The Savvy Consumer Approach
Given the fact that the savvy consumer may be beginning to appreciate that late payments, invoice hair-cuts and other power abuse like off-shore tax avoidance may be part-hindrances in their search for demonstrable value for money, it can only be hoped that any 'naming and shaming' will help to focus consumer pressure on companies that use trading partners' funds to supplement their cashflow and bottom-line.

The Savvy Supplier Approach
Without evidence, the law cannot act. However, whilst we are all aware of the commercial risk in whistle-blowing on a customer, the savvy supplier has to find 'safe' ways of making power-abuse known, hopefully  adding to the anecdotal 'evidence' that may heighten sensitivity to the issue for all parties and stakeholders..
Furthermore, repeated generic references to the increasing cost -and risk- of financing free supply-chain credit and its impact on retail prices may help when suppliers are communicating via mainstream and informal media.

The Savvy Retailer Approach
However, the real opportunity lies available for those retailers that, having run the numbers on the value of 90 days free credit, appreciate the commercial advantage of voluntarily reducing their payment period to a more equitable level, first...

What is 'fair payment'?
The current legislation, here and in France, refers to 60 days as being an appropriate period of credit.
However, whilst 60 days may be appropriate in 'normal'  B2B relationships, we believe that the payment period should be related to the supply-usage cycle. In other words, as many fast-selling SKUs are delivered daily, and food-based retailers hold an overall average of just over two weeks stocks, we would submit that 15 days credit (net) in the case of such supplier-retailer commercial relationships would be more appropriate.

Incidentally, for those NAMs that have a gap in store-visits near the Houses of Parliament next week, the all party inquiry into late payment takes place next Tuesday, April 23, at the Houses of Parliament’s Grimmond Room, Portcullis House, between 2 and 5pm.....

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……

How to choose the right customer, when trade-funds are scarce….

Given that even in precedented times key accounts were never created equal, in unprecedented times the differences have become greater and require even more careful classification in deciding whether a customer should be labelled invest, maintain or divest...

In the current climate, it is crucial to redefine what makes a customer special, and deserving of your increasingly scarce attention. This means starting with measuring real Potential, assessing scope for fair-share Partnership, establishing relative Profitability and your ability to Perform, all relative to other key customers in your supplier-portfolio.

Potential
Ignoring history, how important is the customer now in terms of relevance in the market, ability to adapt to new demands, responsiveness to new ideas, high growth phase of its life-cycle, and potential market share?

Partnership
To what extent are you and the customer strategically aligned in terms of urgency? In other words, if you are striving to sort next year’s agenda, and the customer is obsessing about this coming weekend, your minds will never meet.... 
In terms of relationships, would you drink with the buyer in the evenings, without having a reason? 
Is there a good cultural fit, in terms of trust, risk appetite and little need for second-guessing? 
Finally, is your brand profile well represented in the customer’s traffic flow in terms of consumer match?

Profit
If they represent 10% of your sales, do they also represent 10% of your profits, i.e. a fair share relationship is possible?

Performance
How good is your competitive appeal vs. available competition within the customer?

Whilst scoring well on the above criteria will not guarantee a successful ROI each time, at least you will be starting with the right customer….

The myth of scale economies?

How to measure the actual savings on increased quantities?

Yesterday’s NamNews item ref Morrisons’ latest ‘routine negotiations’ not only scored our highest visitor-count, but more importantly raised the question of how much discount to give when a retailer offers bigger volumes for a lower price…

As always, accepting an offer that ‘feels good’ instead of running the numbers is a good way to compromise profitability...

Also, given the long lead times required to negotiate something you want, the pressure to agree a scale-discount in the heat of the final moments of a last-minute discount-negotiation can cause you to accept ‘an offer you can’t refuse’…knowing that if you do refuse, the guys back of the ranch can label it a bad decision, never having to test it with actual numbers…

The following steps may help:  

• Keep in mind that a 10% Increase in sales does not necessarily mean a 10% reduction in costs
• Also, as a supplier, you know more about manufacturing cost-savings than the buyer…
• Select a specific SKU for one of your leading brands in the customer’s portfolio
• Check out the sales, order sizes and average delivery delivery-frequencies of the SKU to the customer in question
• Check with marketing/finance/production the cost savings on sales increases of 10%, 20% and 30%
• (sales increases greater than 30% have to raise the question of whether you have been missing too many ‘potential’ tricks with the retailer…)
• Actual savings will be driven by packaging and ingredient scale economies, capacity relationships etc in production and delivery, but it should be possible to arrive at a conservative figure ( you won’t believe how low the savings are, using real figures …hence ‘the myth’ of scale economies)
• Ask for a quick check of other big SKUs (other brands in your portfolio) to isolate any ‘funnies’ in terms of exceptions
• In negotiation, focus the discussion on your chosen SKU and limit the ‘give & take’ to a fair share of the real savings
• Run a reality-check of the incremental sales required to produce the shared savings, just in case…
• Agree minimum order quantities, and timed delivery frequencies, along with quarterly purchase levels
• Build these conditions into a deal/contract tied to a discount paid retrospectively on performance, with on-time payment added for good measure
• After six months consider extending the deal to include the rest of your business with that customer
• This will hopefully bring your dealings a little closer to real scale-economies at the next ‘routine negotiation’, only this time with the benefit of a little history…

On the other hand, why not simply roll over, and over, and over……like other folk?

Everything is negotiable, when the chips are down…

Keith Ewing, owner of Number Eight Clothing in Stirling, commented that Independent retailers need to "put their heads above the parapet", as his shop was nominated as one of the UK's "top 100 inspiring shops" for 2013 by Draper's magazine. He listed rent-reviews, online, buying and display as key needs in independent retailing.

NAMs could help by sharing their negotiating expertise with appropriate retailers, as follows:

In practice, independent retailers can help themselves to survive by adapting the supplier-approach to business development:

• Cutting-costs: rent and rates are currently too high in these unprecedented times. Landlords and local government know this and are vulnerable to the ‘walk-away’ threat by retailers. In other words, retailers should calculate the level of rent and rates (seek help from commercial architects that can provide a broader view) that make the business viable, and renegotiate on this basis, ideally via a combination of lower rent and a ‘per cent of sales’ model, to force landlords to share the business risk.
• Driving sales: develop a strong online strategy by mining your customer records and collecting email addresses going forward in order to extend your reach beyond a shop visit. Optimise supplier help by negotiating better prices, terms and supply arrangement and especially instore merchandising in exchange for customer stats and enthusiastic/ innovative collaboration. Suppliers want you to succeed as a counterbalance to major multiple retailers and are willing to negotiate flexible packages for the right customers.

Being a business consultant to the retailer can optimise the trade partnership and broaden the NAM’s expertise in managing other customers.

Sharing negotiating expertise can help....

New Supply Chain Finance Scheme - every little helps, but..

News that a group of 38 major UK companies, including Tesco, GlaxoSmithKline, Marks & Spencer, Diageo, Rolls Royce, BAE Systems, Centrica, and Vodafone, have signed up to the Government’s new supply chain finance scheme aimed at helping improve the flow of working capital for small businesses by piggy-backing on the customer's credit rating is a great step forward, but suppliers to retailers are still under pressure from financing trade credit.....

Implications

• Great initiative in that small/medium suppliers can benefit from the credit rating of larger customers
• But they still have to finance the credit, albeit perhaps not at penal interest rates
• The real issue is retailers taking 45 days+ to pay for goods that are often daily-delivered, with shoppers paying in cash…
• See Cost of credit calculation on Kamcity

Action

1. Work out the actual cost of giving credit to the customer
2. Calculate the incremental sales required to cover cost of free credit i.e. say your net margin is 5%, then every £1,000 it costs to give free credit means you need incremental sales of £20,000 to cover the cost
3. Substitute your figures in the above calculation and book an appointment with the buyer...

Amazon ebook VAT advantage removed - back to level-playing-field competition?

According to The Guardian, Amazon is to be stripped of its huge tax advantage in the UK (VAT 20%) on the sales of ebooks after the European commission ordered Luxembourg (VAT 3%) to close a VAT loophole. Luxembourg will be forced to increase its VAT rate to 15% on EU digital sales. This was inevitable (see Kamblog) especially given Amazon’s 90% share of the UK ebook category.

In my opinion, what is more important for publishers and other suppliers to Amazon was a reference to base price equality in the original Guardian article…..   

Contract terms with Amazon
According to The Guardian, an Amazon contract they have seen says: "If the base price exceeds the base price … provided to a similar service then … the base price hereunder will be deemed to be equal to such lower price, effective as of the date such lower price comes into effect." In other words, if Amazon discover that a retail competitor is being given a lower price, they will apply that price to current dealings and claw back any difference, from the time the lower price was charged.

Like all retailers, we believe that Amazon are entitled to set and agree trading terms in advance and apply conditions that they will enforce where necessary. It is the responsibility of suppliers to ensure that they quantify the terms and implications of all deals with retailers before entering into contractual agreements...

Application of base-price-equality to all retailers, retrospectively...
In the case of Amazon’s ebook base-pricing comparison, the issue for all suppliers is even more important. There is nothing to prevent the same principle being applied to the rest of Amazon’s business, or indeed, to any retailer buying from suppliers.

Action for suppliers:

1. Check your base-price per customer, and do a numbers-based ‘what if’ on the lowest price being applied to your entire customer portfolio, retrospectively (its not going to go away)
2. Forget ‘trade secrecy’ and assume all customers know everything (remembering that it only takes one staff member…)
3. Check that a true-like-with-like comparison is being made, and be able to calculate and demonstrate your rationale (the numbers will count in the end...)
4. Find ways of lowering prices to customers to the same level for the same level-of-access to consumer, or find ways of terminating the ‘lowest price’ customer (pay the retailer for work done on your behalf)
5. In the meantime, ask for proof of lower prices elsewhere, to avoid the mistake of defending the wrong case, and thereby giving the retailer additional scope for claw-back (hear the buyer out, and answer the objection)

In other words, best to play fair with all customers, before you are forced to, and establish a defensible basis for fair-share negotiation via sustainable numbers…before you need to....

Premier Foods - joining up the dots in retrospect...

As you may remember, as long ago as the 5th October 2012, KamBlog analysed Premier Foods options and advised you to watch this space to see the dots joining up in retrospect… (Steve Jobs warned that you can't connect the dots in life by going forwards, it's only in retrospect that you begin to make sense of the bigger picture..)

Walking away from a £75m bread contract
Premier Foods’ decision not to renew their £75m own label bread contract with one of the major mults is all part of a move to reassess each part of its business and sell/walk-away when the figures don’t add up. This in turn is driven by a need to drive up the share price by improving its Return On Capital Employed (see KamBlog – Premier Foods).

Next moves
In a low margin, high overhead category, Premier now have to place the £75m with another mult on better terms, or suffer an increased overhead burden, probably resulting in sell-off of bread-related assets to restore profitability.

Meanwhile, by demonstrating  their willingness to walk away from unprofitable deals with retailers, Premier have done a favour for other suppliers, besides causing their share price to rise 4¾ - 6pc - to 83½p, yesterday.. voila!

Going back to the future
The key idea here is that these moves were obvious on the 5th October, to those NAMs that were prepared to explore the greater business context, and then attempt to anticipate the implications for their category and customer relationship. Running the what-if numbers then reveals the urgency…

As Steve Jobs proved many times, by using historical dot-joining to establish the big picture (including the numbers) he was able to anticipate future consumer needs and design accordingly…

Apple’s resulting output provides the evidence all around you...

Sainsbury's changes to non-foods payment terms...the bottom-line impact

According to The Telegraph, Sainsbury’s have extended its standard payment terms to 75 days for all non-food suppliers. In some cases, this will mean suppliers waiting more than twice as long for payment. In the unlikely event that a supplier decides to withhold supplies, or even attempts to negotiate a compromise, it is vital that such decisions be fact-based.

This means calculating the cost of the change in terms along the following lines: (check through the method with your finance people, and substitute your own figures)

Assumptions: 
- Supplier has a net margin of 7.5% and sells £5m per annum to the retailer, payment in 40 days, net
- Cost of borrowing is 8%

Cost to supplier of giving 40 days credit:
- Number of times per annum the supplier is paid, on 40 days        = 365/40
                                                                                                    = 9 times, approx.
- Average amount owed by retailer                                               = £5m/9
                                                                                                    = £556k i.e. a permanent loan to the retailer, interest-free
      -    Cost of borrowing to give 40 days free credit                     = £556k/100 x 8
                                                                                                     = £44.5k

Cost to supplier of payment extension to 75 days: i.e. 35 days extra
- Number of times per annum the supplier is paid, on 75 days        = 365/75
                                                                                                    = 4.9 times, approx.
- Average amount owed by retailer                                               = £5m/4.9
                                                                                                    = £1,020k i.e. a permanent loan to retailer, interest-free
- Cost of borrowing to give 75 days free credit                              = £1,020k/100 x 8
                                                                                                    = £81.6k
- Therefore cost of additional 35 days                                           = £81.6k - £44.5k
                                                                                                    = £37.1k

For the supplier, this is the equivalent of incremental sales of £494.7k (i.e. £37.1k / 7.5 x 100, a 9.9% increase in sales).

In other words, to maintain the status quo in a fair-share relationship, the supplier needs a concession from the retailer of £37.1k, or will suffer a drop in net margin on the retailer’s business from 7.5% to 6.8% (i.e. £5m/100 x 7.5 = £375k - £37.1k = £337.9k/£5m x 100 = 6.8%)

Why not run the numbers on your business, using your figures in the above calculation, to explore the impact on your bottom line, and re-assess your negotiation  strategies…?

Tesco Want Closer Links With Suppliers – Ready?

The Tesco presentation has been well covered elsewhere, and  Philip Clarke’s full speech is available on the Tesco website.

However, in terms of ‘getting personal’, nothing beats the real thing. Best to have been a member of the audience and to have experienced the passion in person. Straight from the main man, a promise to work more closely with suppliers. These guys are really serious about more collaboration with the right trade partners in order to create a more personalised consumer offer, reflecting the current multi-channel environment and anticipating future demand.

In other words, Tesco feel the need to innovate and believe they can best do that in collaboration with suppliers. 

Keeping the best for Tesco, on condition...
However, I would suggest that they feel the need to such an extent that they will go to third parties should suppliers be found wanting…  This means saving your best ideas for Tesco, thereby potentially accessing 31+% of the UK market.

In return, it is vital to demand a fair-share relationship, based on a robust financial partnership, all wrapped up in a contractual agreement, of equal value to each side, in terms of both letter and spirit of the deal…

Getting there means being able to calculate the real cost to you, and being able to demonstrate the full financial value of your offering to Tesco, convincingly…

This time it is different
Tesco are serious, and they need serious trade partners.  In going for broke with Tesco, you are going to make your biggest UK customer bigger.
It is therefore vital that you also secure a fair share of the action…

Incidentally, participating in the live personal experience is truly incremental.
It probably explains why the IGD Convention is a sell-out every year – a key issue being the location of a venue large enough to accommodate all applicants…! 

When Major Customers Become Major ‘Share-holders’...

Yesterday’s news that a major pizza manufacturer fell into administration following the loss of a major contract, raises the issue of risk in dealing with large customers.

With the possible exception of those supplying M&S, major customers’ share of a supplier’s business tend to replicate retail market shares.

Fair shares in the marketplace
In other words, in the food sector, the major mults’ shares of a typical food suppliers business might be
- Tesco            30%
- Asda             17%
- Sainsbury’s    16%
- Morrisons      12%

With Health & Beauty, the shares would obviously be skewed in favour of Boots, sometimes taking  a 30+% share.

To access the full potential of a product, this suggests that a  supplier should aim at achieving these relative shares in the marketplace.

Dealing with a customer you like...
However, given the differences in relative compatibility*, a supplier can find that they ‘get along’ better with some customers, making it ‘easier’ to collaborate, resulting in that customer’s share becoming greater than its market share. This can sometimes lead to a point where it can represent more than 40% of the business, a position that is not desirable for supplier or retailer, given the consequences of termination for each party, including possible negative (and often undeserved) media coverage for the retailer..

Fair share and risk
Given the risk profile of the supplier (risk-seeking, risk-neutral or risk-averse) it is important to attempt to achieve and maintain ‘fair shares’ as per above.

In the event that a customer begins to ‘over perform’ it is obviously important to follow it all the way, at the same time diagnosing probable causes and attempting to replicate the process with other major customers. In which case the Ansoff Matrix on developing business, could provide a few pointers…

In the current climate, we may devote so much time avoiding the possibility of a customer going bust, we can run the risk of a customer being too successful, with equally catastrophic consequences…

* See qualities of a good trade partner

Premier Foods - the split-up options

Following Premier Foods appointment of a new COO with a brief to help see the grocery and bread businesses managed as two distinct divisions in recognition of the different “opportunities and challenges” facing each business, it might be useful for NAMs to explore the options and possible actions available to the company. This could add insight on how the company will manage the trade and also help you anticipate the impact on competing brands.

Essentially, the company needs to increase its perceived value in the market and thus raise its share price. This will not only give it more autonomy but will also make it easier to sell all or part of the operation at the appropriate time..

The emphasis will therefore be on improving its Return On Capital Employed (ROCE), a driver of the share price.

Step 1
The first step has to be a split of bread and groceries, given that they are totally different business models.

• Bread is a fast moving, high rotation (daily), high wastage (10+%), short shelf life (days/weeks) and narrow margin business, especially supply-side, whereas
• Grocery is slower moving, low rotation (2 monthly), lower wastage (2+%), long shelf life (1-2 years), more generous margins supplier and retailer

Bread: Premier need to strip out cost, sell-off non-core parts, simplify and explore possibilities of sharing the distribution burden

Grocery: Here they need to continue emphasis on a limited number of power-brands and sell off anything non-core

Step 2
The company will then be in a position to apply the ROCE principles to what remains on the two businesses.
ROCE = Return on Sales  x Sales/Capital Employed  i.e. improve the margin and speed up the rotation of capital (factories + stocks, debtors and cash)

Companies are either in a narrow margin, fast rotation business, or they are in a higher margin, slower rotation business. This is why splitting the bread and grocery businesses is a long overdue no-brainer….

Step 3
First they need to focus on improving Net Margin by

• Increasing their selling prices and sales (more advertising on fewer power-brands, up-skilling the negotiators)
• Reducing the levels of discount and promotional expenditure ( did I suggest it was going to be easy?)
• Reducing the levels of sales and distribution costs (hence hiving off the bread business, and need for special vigilance on trade funding and compliance)
• Driving volume, especially bread but also grocery power-brands ( move to more responsive social media )
• Changing the product mix to focus more on higher margin items, (consumers permitting…)
• Minimise ‘specials’ in terms of tailor-made deals/trade arrangements of any kind, (they just cost more…)

Step 4
Then comes increasing the Rotation of their Capital by

• Driving the volume of sales as high as possible, using existing or lower levels of Fixed Assets (factories, plant), + Current Assets (stocks, debtors and cash)
• Getting paid faster via settlement discounts, ‘delisting’ any financially unstable customers
• Improving sales forecasts i.e. if they forecast 100% and achieve 95%, then 5% of sales become ‘passengers’ with their costs shifting onto the 95% that are sold, thereby hitting the bottom line
• Generally, improving their ability to convert business cost into revenue…

These moves will drive the overall ROCE, increase the share price, and make each or both of the companies easier to sell, if necessary.

If all of this seems a bit theoretical, why not watch this space over the next six months? You will then be looking at historical moves, whereas some of the above points may help you anticipate and take appropriate action NOW, when it really matters…