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…

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?

High Street failure creditors owed £2bn – report

In a BBC article, financial analysts Company Watch found £499m was recovered in assets from the 19 biggest retail failures since 2012.

Banks and other secured lenders got at least £365m and about £123m was spent on fees and other bills. Administrators earned £33m from the failures, with some charging up to £950 an hour. Only £14m went to last-in-line unsecured creditors such as suppliers, landlords and customers, meaning a total loss of approximately £2bn.

To put that in perspective, assuming suppliers have an average 7% net profit margin, a loss of £2bn translates into incremental sales of £28.5bn in order to recover the loss…

Others can debate the merits of the insolvency laws, but for NAMs the issue has to be the reduction in at-risk retailers and wholesalers in the customer portfolio.

Essentially, as the frontline members of the supplier-retailer relationship, it is vital that NAMs optimise their unique advantage in being able to combine their closeness to and knowledge of, the  customer with latest financial results in order to pick up signals of deepening financial crisis and take appropriate action before the bankers, government and administrators line up outside the shop…

NAMs can underestimate their value at this stage. While others in the company have to rely upon historical data and press commentary on the customer, the NAM is unique in being able to ‘read’ the state-of-mind of the customer, today.

In order to optimise this advantage if is obviously essential that  the NAM understand the basics of Balance Sheet and P&L in order to be able to complete the insolvency jigsaw.

Some tips:
-  See cover charge indicator
-  Spotting the signs of trouble 
- Working around bankrupt customers

Failure to anticipate the ‘obvious’ means the NAM is saddled with the task of obtaining the incremental sales elsewhere…

Creditors pay £1bn for retail failures, enough said?

Creditors, such as suppliers and landlords, are likely to have lost more than £1bn from the retail sector's 20 biggest insolvencies since the start of last year, according to the credit information specialist Company Watch, just published in The Independent.

This figure obviously represents just the tip of the iceberg, in that many smaller retail business, often below the radar of suppliers have also gone bust over the same period, with the evidence available in the level of  boarded-up high street outlets.

But are we using the correct KPI?

Incremental sales as a measure of Threat or Opportunity
As we all operate sales-based business-models, our only access to wealth generation is via the net profit on sales made to third parties. This means that when we count the cost to us and the value to our business  partners, it is best to calculate the incremental sales of the sum given or received.

Thus the above loss of £1bn would translate into incremental sales of £10bn, assuming all suppliers had a net profit margin of 10%...a mean achievement for many, in the current climate.

Application to the role of the NAM
Apart from being responsible for the early warning when a customer is in difficulties (demands for more credit, cash–based incentive, lack of compliance….) the NAM is also the one who has to generate the incremental sales via other customers when the liquidator intervenes. (Can you imagine anyone else generating extra sales?)

A reflex-calc for NAMs?
For this reason it is vital that NAMs calculate their company net profit margin and factor in the resulting incremental sales requirement when ANY money is invested in a customer, whether via free credit, settlement discount, trade funding or deductions.

In other words if your company makes a net margin of 5%, you need incremental sales of £20k for every £1,000 invested in a customer… (£1,000/5) x 100, which needs to be  a reflex-calculation for every pound spent…

Incidentally, on the Opportunity side, your retail customer with a net margin of 2.5% needs to appreciate that every £1,000 you invest in their business represents incremental sales of £40k…more valuable than they think, in these uncertain times?

(For this reason we have added an automatic incremental-sales-multiplier for supplier and retailer to many of NamCalc’s 32 tools) 

HMV suppliers resist cut-price deal, the downside of administration…

According to the FT, HMV’s administrator Deloitte is attempting to pay rock-bottom prices to buy up the CDs, DVDs and video games provided to it under a loan arrangement, a move being resisted by some suppliers.

Before HMV went into administration, the entertainment retailer had agreed more favourable terms with suppliers, which meant it only had to pay for stock after it had been sold in stores. As a result, HMV is now stocking many thousands of video games, DVDs and CDs on consignment, where the content owners – music and film companies – still retain ownership.

Deloitte first offered to buy up this stock – which runs to hundreds of thousands of music CDs and films – at 12p in the pound, allegedly still significantly lower than standard retail deals of between 65p to 70p in the pound.

Given the large number of retail chains now in administration (see details), this negotiation stance by administrators presents issues for brand owners in many other categories.

Whilst every little sale helps in unprecedented times, the combination of low revenue and the low sell-on price by retailers in administration for prolonged periods, means brand value is suffering the same damage as an item on perpetual BOGOF.. 

Experienced NAMs will also appreciate that goods sold on consignment and based on scanned sales, means that the supplier is taking over the shrinkage problem. In other words, if a supplier delivers 100 items, and the retailer is paid for 98, two having been stolen, the suppliers absorbs the 2% loss.

A  final thought, have you ever tried to actually retrieve unsold consignment goods...?