Late payments improving – Action for NAMs

The latest Late Payment Index from Experian®, the global information services company, reveals that UK businesses paid their bills nearly 1.3 days earlier in Q3 2012, compared to the same period last year.  In July to September this year, firms paid their overdue invoices 24.88 days after agreed terms, compared to 26.17 days during the previous year (Q3 2011).

Food retailers showed the most significant improvement, paying their invoices 29.15 days after agreed terms, compared to 34.21 days in the same period last year.

Still a way to go...
Whilst suppliers will obviously be grateful for this average 5-day improvement by retailers, your finance department will remind you that invoices are being paid 29.15 days later than agreed. Think about it, you are delivering some SKUs daily, the retailer is holding average stocks of 2 weeks, and is getting cash from the shopper...

In other words it is vital, especially in this ‘post-recession’ era, to keep up the pressure for on-time payment.

Action: 

• Quantify the cost of financing agreed credit days
• Calculate the cost-benefit of paying settlement discount
• Calculate the cost of the additional late days (checking that you have had your fair share of the five day average improvement in days sales outstanding, from all customers!)
• Calculate the total cost of financing the credit you give your customer, and work out the equivalent in incremental sales required to cover the cost
  (i.e. if you make 8% net on your customer’s business, you need incremental sales of £12,500 sales to cover each £1,000 you give the customer )

Now join the queue outside the buyer’s office….(why not optimise the queuing time by checking out NamCalc?)

'Food-to-come' - What if McDonalds offered home delivery?

Despite the arrival of the newly revealed post-recession era, food-to-go services are still suffering real-world issues with traditional sales.

One answer might be the introduction of home delivery by giants like McDonalds  and Burger King
Obviously a trade-off between delivery charge and the health benefit of walking to the nearest outlet, an issue not likely to factor significantly with the target audience…
The real issues might be quality-on-delivery and set-up of a new home-delivery business model

Quality-on-delivery
In home delivery trials in the US, Burger King claims to have solved the problem by developing what it calls 'proprietary thermal packaging technology,' which ensures the food won't arrive cold and congealed.

Home delivery already in place
McDonald’s already offers home delivery service to more than 25 countries including India, South Korea, Malaysia, China and Egypt and is trialling via a couple of outlets in New York. Due to people becoming busier and busier and highly competitive companies as Yum Brands (KFC, Pizza Hut), McDonald’s has begun offering a home delivery service. The 24/7 McDelivery service is a fairly new business model and is continuously expanding and has proved to be highly successful.

Given the both companies appear to have solved some of the basic problems, perhaps Home Delivery UK might be worth a what-if by key stake-holders?  

‘No-brainer’ inevitabilities...Generic medicine prices in Ireland

Radical changes overdue
With generics = 5% of the €1.85bn drug bill in Ireland vs. 80% in the UK (Dail Questions: Reilly, 25th Oct 2012), and generics prices in Ireland = 2% less than branded prices but 12 times UK generics prices, we would suggest it is inevitable that:

• The government will legislate to increase generics usage to something approaching the UK %
• Prices of generics will then be forced down to levels comparable with the UK (think legislation or encouragement of parallel importing, or both)

Consequence
In other words, on current levels of consumption, a 50/50 split of generics and branded, and generics pricing being reduced even by 50%, the annual drug bill will be reduced to €1.4bn, minimum…

Time for a ‘what if’ on the sales impact of matching UK levels (generics usage = 80% and generics prices reduced by 92% )?

NB. What does this mean for those outside the market?
The above is an example of a market anomaly, with change becoming inevitable when you run the numbers, hopefully leading to better business forecasting. We shall include ‘no-brainer’ inevitabilities as a regular feature of KamBlog, to help clarify the obvious in unprecedented times.
All suggestions welcome!
 

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...

‘Amazon makes UK publishers pay 20% VAT on ebook sales’ – the real issues!

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….

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…?