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...

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…

Home Delivery charges - a one-way subsidy?

Given that picking, bagging and making a home delivery costs supermarkets up to £20, the £5 charge actually represents a subsidy for the service.

This leaves the retailer with four options:

• Absorb the loss: impossible on current retail margins, especially as the online/physical shop ratio increases?
• Charge more for instore purchases: An increasing an unacceptable burden on those that want/need to shop instore.
• Charge £20 per delivery: a significant turn-off for many online shoppers?
• Or radically increase the minimum order size: a likely mismatch with real shopper need?

Going for scale
Some retailers may see significant scaling up of home deliveries as a possible solution, with the milkman’s street-agreements as a way forward (in the final days of home delivery of milk, dairies agreed solus access to individual streets in order to make individual milkmens’ routes profitable), a practice that might cause issues with the competition authorities, nowadays…

A radical business model?
However, for radical thinkers, the way forward may be via a significant scaling down of store sizes and numbers to better match a shrinking need for physical presence as online increases. With less physical overheads, the average retail margins of 25% could be used to fund home delivery, thereby evolving a new retail model that fully acknowledges a future balance of online and physical retailing.

Otherwise, Amazonian third party online retailers will emerge to take up the space, profitably… 

Unprecedented Treats for Unprecedented Times?

A $200,000 bottle of whisky made to mark the 60th year on the throne of Queen Elizabeth II is on sale in Singapore for a mere S$250,000 ($198,500) a bottle - and it may well find a buyer, (for a buyer?).

No doubt it's a premium sip. Only 60 bottles of Diamond Jubilee were made by the Johnnie Walker unit of Diageo PLC from a blend of whiskies distilled in 1952.

It's also a premium price for Asian aficionados at the month-long Master of Spirits II event featuring specialty wine and liquor put on by luxury travel retailer DFS Group, part of the LVMH empire of high-end goods and services.

Discerning palates, and expats' excessive longing for the old country apart, this differential vs. a spirits’ bogof at Tesco has to be a reflection of the gap  building up in societies everywhere… the issue is whether this gap will continue to increase to breaking point, or whether new governments will take steps to keep the lid on via attempts to return to normal supply and demand in markets everywhere… Either way, time for suppliers to reassess trade strategies and avail of opportunities, ahead of  competitors locked in old patterns…

Incidentally, should any potential expat buyers like to take a first class trip back to the UK and pick it up locally, the same package - the vintage whisky in a crystal decanter with silver trimmings, two crystal glasses and a leather-bound booklet - is priced at 100,000 pounds ($159,100) in Britain.

Headlines for the year 2015 (Part 1)

Given all the political and economic uncertainty, we thought it might be useful to attempt to forecast the 2015 headlines to provide a realistic context to help with your trade forecasting:

Headlines 2015
- Green shoots beginning to appear - Brown
- Sir Fred returns to UK as pension provider
- Asda extends blind e-auctions to shoppers for ultimate value
- MPs expenses to be paid in Euros to support £
- Aldi opens 1000th store, 'may be getting some traction' say multiples
- Anonymous apology leaked from Downing Street 'an attempt to smear PM'
- Retailers trial 360 days credit to test supplier financial stability
- New shop opens in Gateshead
- etc
- etc
Why not add your suggestions? (only thing at risk is your possible knighthood)

Conclusion: use this year's forecasts?