According to an article in The Guardian, Amazon is apparently forcing British publishers to cover 20% VAT on ebook sales, even though the company must only pay 3% to Luxembourg where it is based.
At NamNews we are not in the business of either praising or criticising retailers, merely attempting to clarify business relationships as a basis for fair-share relationships between suppliers and retailers.
How VAT works
Experienced NAMs will appreciate that in practice, VAT is an on-cost, and is paid by the shopper, i.e. in the case of an ebook selling at £10, VAT inclusive, the shopper is paying £1.67 in VAT, resulting in a net retail price of £8.33.
This VAT is the retailer’s output tax.
The retailer collects the VAT, and in turn pays the supplier/publisher the net price (allowing for retail margin etc) +VAT at 20% i.e. assuming a retailer’s margin of 30%, the retailer pays the supplier £5.83 + 20% VAT = £5.83 +£0.97 = £6.80.
The £0.97 is the retailer’s input tax.
The retailer subtracts their input tax from their output tax and pays the difference to the government. i.e. in the case above, the retailer pays the government £0.70.
International tax implications
As you know, it is not the business of the supplier to ensure that the retailer pays its required VAT. That is a matter between the retailer and the VAT people. In the case of Amazon, the article suggests that they are collecting at the 20% rate and paying at 3%. This will inevitably become an issue for Amazon as the ebook sector grows and UK VAT authorities possibly attempt readjustment to UK rates and clawback.
The fact that suppliers are fulfilling their obligations by paying at the full UK VAT rate means that they will have no issue with the VAT authorities.
This means that publishers can focus on optimising the ebook pricing model that, thanks to Amazon scale and easy-buying facility, has allowed ebooks to be charged at approximately the same price as hard-copies, rather than what would be justified by the almost zero incremental production costs of the electronic versions.
How publishers can negotiate with Amazon
No-one is in any doubt that Amazon are tough negotiators, with increasing power to use their consumer-gateway role as a vital route to shoppers. Any extreme abuse of this privilege will eventually mean more trouble with the competition authorities than is worthwhile, despite the additional revenue...
Increasing supplier leverage
Suppliers/publishers can 'even-the-balance' by opening up direct ebook access to the ultimate reader, remembering that fulfillment, unlike with CDs and DVDs, can all be handled in-house, providing they make purchasing as simple as Amazon’s 1-click process, and a no-quibbles returns policy....
This means suppliers can use ebooks-direct to add value and personalise the offering (author insights etc) in ways that are probably not yet on Amazon's agenda....
The resulting say 30/70 split in direct/Amazon sales would surely provide some leverage in negotiation, rather than divert energies to concerns about Amazon’s tax issues..
Meanwhile, food NAMs might usefully contemplate the online implications of food-VAT being introduced….
Tuesday, 23 October 2012
Monday, 22 October 2012
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…?
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…?
Friday, 19 October 2012
Optimising your E-xperience via the IGD’s: Trading in a Digital World. (Part 1)
With almost 250 delegates, all four major online grocers, Tesco, Asda, Sainsbury’s and Ocado, together with some key suppliers, shared online updates, plans and joint-opportunities with a multifunctional audience that buzzed throughout the session, and not only via text-questions to the speakers...
However, apart from being a great idea-source (I managed to limit my note-taking to 8 pages, more in later postings), the presentations touched on some of the key issues affecting the development of online for both suppliers and retailers that are perhaps not aired sufficiently, but have material impact on personal development within the supplier-retailer environment…
‘The poor relative syndrome’
Essentially, in common with many new business initiatives, online can be a small but patently important development for a company. In a flat-line market online provides high-growth, innovation, novelty and excitement compared with the traditional business. However, it is often seen as a relatively high risk diversion, with many risking a ‘wait and see’ mode. In other words, if successful, online will have many parents, whilst if it fails, it will morph into an orphan. As such, online tends to be insufficiently funded and hampered by inadequate resourcing, especially in uncertain times...
The need to sell from within…
For these reasons, much depends on the drive and enthusiasm of those involved in online to constantly ‘sell’ the online idea and achieve results by persuasion, taking on full responsibility, with little designated authority…(rather like the role of a traditional NAM, a resident expert in achieving change against impossible odds...)
Selling is vital to ensure that online is integrated into mainstream business strategies, taking each of the key business functions and ensuring there is an online equivalent, with dedicated personnel, all sharing the opportunities and insights, enthusiastically, in the face of traditional priorities, envy and deep down, fear of change.
How to sell the online idea
Realistically, online will need to be sold, and sold convincingly by those who hope to make it yield its full potential, fast…
In other words, think of your company as a reluctant buyer, leaving you but two ways of attracting attention of the rest of the business – curiosity and fear. By making a ‘buyer’ of ideas curious to hear more or fearful of inaction, we destabilise their status quo, leaving them susceptible to change.
Fortunately the novelty of online provides enormous scope for making colleagues curious, whilst the continuing downward spiral of categories such as CDs, DVDs, Games, Magazines and Newspapers provides ample evidence of the dangers of inadequate corporate response to emerging technologies….
Keep in mind that online supporters in retail have similar issues
A key point of the conference for me was that colleagues in online retail share the same in-house issues. In other words, you will find your equivalent within your major customer needs support and can assist in return, in helping online realise its full potential for suppliers and retailers.
For me this was demonstrated by the fact that each retailer ended their presentation with specific steps on how to optimise the online supplier-retailer relationship, encouraging supplier-colleagues to find ways of innovating within a new online retail environment, signalling a willingness to identify and implement genuine fair-share synergies with like-minded suppliers.
Missing E-opportunities?
To avoid further delay, it is now time to play catch-up by attending events like the IGD digital session, and helping your traditional colleagues come to terms with how fast the E-food train is already travelling...
We may be some years away from a ‘beam me up, Scotty’ facility, but in the meantime, there is little harm in exploring appropriate ‘what-if’s’ for your business model…
Meanwhile, why not go online and have an E-xtatic weekend, from the NamNews team!
However, apart from being a great idea-source (I managed to limit my note-taking to 8 pages, more in later postings), the presentations touched on some of the key issues affecting the development of online for both suppliers and retailers that are perhaps not aired sufficiently, but have material impact on personal development within the supplier-retailer environment…
‘The poor relative syndrome’
Essentially, in common with many new business initiatives, online can be a small but patently important development for a company. In a flat-line market online provides high-growth, innovation, novelty and excitement compared with the traditional business. However, it is often seen as a relatively high risk diversion, with many risking a ‘wait and see’ mode. In other words, if successful, online will have many parents, whilst if it fails, it will morph into an orphan. As such, online tends to be insufficiently funded and hampered by inadequate resourcing, especially in uncertain times...
The need to sell from within…
For these reasons, much depends on the drive and enthusiasm of those involved in online to constantly ‘sell’ the online idea and achieve results by persuasion, taking on full responsibility, with little designated authority…(rather like the role of a traditional NAM, a resident expert in achieving change against impossible odds...)
Selling is vital to ensure that online is integrated into mainstream business strategies, taking each of the key business functions and ensuring there is an online equivalent, with dedicated personnel, all sharing the opportunities and insights, enthusiastically, in the face of traditional priorities, envy and deep down, fear of change.
How to sell the online idea
Realistically, online will need to be sold, and sold convincingly by those who hope to make it yield its full potential, fast…
In other words, think of your company as a reluctant buyer, leaving you but two ways of attracting attention of the rest of the business – curiosity and fear. By making a ‘buyer’ of ideas curious to hear more or fearful of inaction, we destabilise their status quo, leaving them susceptible to change.
Fortunately the novelty of online provides enormous scope for making colleagues curious, whilst the continuing downward spiral of categories such as CDs, DVDs, Games, Magazines and Newspapers provides ample evidence of the dangers of inadequate corporate response to emerging technologies….
Keep in mind that online supporters in retail have similar issues
A key point of the conference for me was that colleagues in online retail share the same in-house issues. In other words, you will find your equivalent within your major customer needs support and can assist in return, in helping online realise its full potential for suppliers and retailers.
For me this was demonstrated by the fact that each retailer ended their presentation with specific steps on how to optimise the online supplier-retailer relationship, encouraging supplier-colleagues to find ways of innovating within a new online retail environment, signalling a willingness to identify and implement genuine fair-share synergies with like-minded suppliers.
Missing E-opportunities?
To avoid further delay, it is now time to play catch-up by attending events like the IGD digital session, and helping your traditional colleagues come to terms with how fast the E-food train is already travelling...
We may be some years away from a ‘beam me up, Scotty’ facility, but in the meantime, there is little harm in exploring appropriate ‘what-if’s’ for your business model…
Meanwhile, why not go online and have an E-xtatic weekend, from the NamNews team!
Tuesday, 16 October 2012
Walmart bases training on British military academies!
According to People Management, Walmart has turned to British military leadership training expertise at Sandhurst, Lympstone and the Ministry of Defence’s Staff College to speed up the development of its managers in America.
However, before eager NAMs reschedule their weekend leisure, the retailer’s leadership training does not include assault courses or shooting exercises, instead it emulates other areas of military academy learning.
Promoting on performance, the academy also works to push people beyond their current capabilities, so attendees are not just trained for their current job, they are trained for the next rank up and the one beyond that and for two more levels beyond that.
In other words, rather like our NamNews training, where even new NAMs are treated like CEOs, as many of today’s ROCE-based leaders will confirm, by personal example…
However, before eager NAMs reschedule their weekend leisure, the retailer’s leadership training does not include assault courses or shooting exercises, instead it emulates other areas of military academy learning.
Promoting on performance, the academy also works to push people beyond their current capabilities, so attendees are not just trained for their current job, they are trained for the next rank up and the one beyond that and for two more levels beyond that.
In other words, rather like our NamNews training, where even new NAMs are treated like CEOs, as many of today’s ROCE-based leaders will confirm, by personal example…
Monday, 15 October 2012
Coupon promotions in uncertain times, how Risk Intelligence can help
News that coupon redemption is increasing and moving up the social and economic scales may call to mind that coupons have been known to have been ‘too successful’, on this the 20th anniversary of the Hoover Free Flights fiasco. Those with long memories will recall when Hoover's free flights promotion was launched to a wide-eyed British public in August 1992, it seemed too good to be true. Over the next 21 months, many Hoover customers discovered it was. It ended up costing the company £48m…
Anticipating coupon redemption-rates is but one of the uncertainties a NAM needs to be able to factor into the day-job and sleep nights.
There is a special kind of intelligence for dealing with risk and uncertainty. It doesn’t correlate with IQ and most psychologists fail to spot it because it is found in a disparate group of people such as weather forecasters, professional gamblers and hedge-fund managers…
A new book, Risk Intelligence: How to live with uncertainty by Dylan Evans , can be a NAM’s guide to the twilight zone of probabilities and speculation, a DIY tool to making decisions in all aspects of the role.
Four Steps to Calculating Probability
Essentially, risk intelligence is about having the right amount of certainty, and Dylan outlines four mental steps in estimating a probability and when assessing the truth or falsehood of a statement:
The book goes on to help readers improve their risk intelligence, think by numbers, make use of probabilities (the 100 percent rule), and even evaluate betting odds... In fact, with the right degree of application, the book will point you at everything a NAM needs to help cope with unprecedented times, or even anticipate the outcome of promotions…
In short, it debugs the process of using numbers and probabilities to clarify your thinking, helping you to risk excelling in the day-job, while others are unaware of the risk they are actually taking by awaiting a return to the ‘risk-free’ days of twenty years ago..
Anticipating coupon redemption-rates is but one of the uncertainties a NAM needs to be able to factor into the day-job and sleep nights.
There is a special kind of intelligence for dealing with risk and uncertainty. It doesn’t correlate with IQ and most psychologists fail to spot it because it is found in a disparate group of people such as weather forecasters, professional gamblers and hedge-fund managers…
A new book, Risk Intelligence: How to live with uncertainty by Dylan Evans , can be a NAM’s guide to the twilight zone of probabilities and speculation, a DIY tool to making decisions in all aspects of the role.
Four Steps to Calculating Probability
Essentially, risk intelligence is about having the right amount of certainty, and Dylan outlines four mental steps in estimating a probability and when assessing the truth or falsehood of a statement:
- First take stock of what you know about the issue (identify the bits of information you already possess that may bear on the issue)
- Next, for each bit of information, decide (a) whether it makes the statement more or less likely, and (b) by how much it affects the probability that you are correct
- The outcome of the process should be a hunch or feeling, the strength of which varies according to your degree of belief
- Finally, translate this feeling into a number that expresses that degree of certainty (use % i.e. 65% certain that this is the way forward)
The book goes on to help readers improve their risk intelligence, think by numbers, make use of probabilities (the 100 percent rule), and even evaluate betting odds... In fact, with the right degree of application, the book will point you at everything a NAM needs to help cope with unprecedented times, or even anticipate the outcome of promotions…
In short, it debugs the process of using numbers and probabilities to clarify your thinking, helping you to risk excelling in the day-job, while others are unaware of the risk they are actually taking by awaiting a return to the ‘risk-free’ days of twenty years ago..
Friday, 12 October 2012
Online retailing: Killing the killer-charge at checkout…
News that the OFT are ordering the removal of unexpected charges at online checkout, should not be news, and above all should not be necessary...
Alienating the first-time shopper
The issue does not affect the regular online user, who arrives at checkout knowing all the downside, may grumble at the extras, but completes the purchase.
The real problem is the fact that the online retailer, having gone to the trouble, expense and use of price to attract the suspicious, dithering first-user, and drawn them through the hoops of the online purchasing process, suddenly at checkout presents a surprise extra charge that causes them to hit the cancel-button and head for the shops...
Repeat purchase as the only KPI
Any brand owner can confirm that the upfront expense of attracting a new user can only be recovered if that consumer requires less persuasion to come back a second time, and may break-even on a spontaneous third visit to the brand. ‘Telling their friends’ may happen if the brand experience exceeds expectations…
Amazon, the real competitor
Apart from keeping in mind that if the OFT are getting involved, it is already too late, online retailers hoping to survive should re-check their biggest competitor, and hopefully conclude that Amazon’s entire offering is based on comfort, trust and re-assurance for every user, with 1-click purchase a reward for coming back a second time…
Amazon are not growing at 26% CAGR by accident, or by attempting to charge shoppers more than they bargained for…
Alienating the first-time shopper
The issue does not affect the regular online user, who arrives at checkout knowing all the downside, may grumble at the extras, but completes the purchase.
The real problem is the fact that the online retailer, having gone to the trouble, expense and use of price to attract the suspicious, dithering first-user, and drawn them through the hoops of the online purchasing process, suddenly at checkout presents a surprise extra charge that causes them to hit the cancel-button and head for the shops...
Repeat purchase as the only KPI
Any brand owner can confirm that the upfront expense of attracting a new user can only be recovered if that consumer requires less persuasion to come back a second time, and may break-even on a spontaneous third visit to the brand. ‘Telling their friends’ may happen if the brand experience exceeds expectations…
Amazon, the real competitor
Apart from keeping in mind that if the OFT are getting involved, it is already too late, online retailers hoping to survive should re-check their biggest competitor, and hopefully conclude that Amazon’s entire offering is based on comfort, trust and re-assurance for every user, with 1-click purchase a reward for coming back a second time…
Amazon are not growing at 26% CAGR by accident, or by attempting to charge shoppers more than they bargained for…
Thursday, 11 October 2012
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…!
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…!
Wednesday, 10 October 2012
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
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
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