Retail Score: Tesco (£1.2bn), Goldman $1.2bn

A Reuters review of six years of filings with the SEC shows the many ways Goldman Sachs managed to earn more than $1 billion from its dealings with Dollar General.

Here are the back-of-the-envelope calculations that show how Goldman did it. (April 10, 2013)

Who says all the potential has gone from retail...?

Tesco Ground Clearance - Non-partner suppliers?

With their latest results revealing the first profit fall in 20 years, it is obvious that Tesco have used the opportunity to announce the clear-out of non-performing assets such as US operation, UK property write-downs, and potential sale of 100 sites it no longer plans to develop.

Logically, this ‘clearance process’ could now extend to non- performing brands and products, resulting in a review of supplier-partner relationships with a P&L by supplier as the ultimate measure…

A way forward?
While others may be scratching their heads and wondering what went wrong, proactive NAMs could benefit from re-auditing their Tesco relationship, reassessing how they well they match the new Tesco austerity-profile, the extent to which they and Tesco are compatible and complementary, compared with other suppliers in the category, and explore potential synergies…

In other words, imagine you are pitching for the Tesco business for the first time, taking a totally fresh look at the company’s market potential and financials, comparing with competitive offerings currently available, all from Tesco’s perspective…then find a way of optimising the potential...

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) 

'Settlement fees' for early payment

Given that some retailers are offering suppliers earlier payment for a discount, it might be helpful to run the numbers and explore the financial impact on a supplier.
Assumptions
-  sales of £1.5m per annum to the retailer
-  current payment period                                 75 days, net
-  Discount for 21 days settlement                    5%

Customer now pays in 75 days
We want him to pay in 21 days
i.e. a  54-day reduction in payment period

Customer now pays 4.87 times per year i.e. 365/75          

We want him to pay 17.38 times per year i.e. 365/21              
Amount he owes us when paying in 75 days
= £1.5m/4.87 = £308,000
 
Amount he owes us when paying in 21 days
= £1.5m/17.38 = £86,306

 Cashflow saving = £308,000 -£86,306
    = £221,694
Settlement discount for 21 day payment
                                                                 = 5%   i.e.              (5% of £1.5m = £75k)
Cost of the 5% settlement            =  33.8%                (£75,000/221,694) x 100  
i.e. the supplier is paying 33.8% 'interest' on the cashflow saving

Supermarket copy-products: compounding the horse-meat aftertaste?

The latest Which? report on the supermarket practice of designing own label pack-graphics that keep them out of court, - just-, provides a good illustration of retailers' inability to appreciate that the 'letter' of the law has very little relevance in marketing and branding...

On the contrary, in preserving hard-won brand integrity, suppliers have learned that keeping within the 'spirit' of the law is a fundamental part of the unwritten 'contract' made with the consumer, and is in fact, the raison d'etre of branding. 

Sure, many suppliers can be easily intimidated into not litigating in cases of 'crossover' pack designs, and expensive legal help can optimise the hair-splitting in-court encounters with those that insist on making a stand, publicly..

However, the real issue is the damage caused to a retailer's integrity-image by being seen to be the party to a deception, a misleading impression affecting the consumer-shopper in the aisle, already busy second-guessing the content of their private label burgers...

The emergence of the super-savvy consumer-shopper, coupled with the aftermath of the horse-meat scandal, now makes it even more imperative that a retailer prevents what could be a tell-a-friend endorsement morphing into a 'tell 10 friends' criticism...
....thereby converting a raison d'etre into a raison d'eath... 

No going back - Tesco faces £1bn writedown to quit America

The size of the charge, via a writedown in the value of Tesco’s assets, shows that even playing by the book, doing all the obvious research, means relatively little when the world turns upside down, especially financially….

Fortunately Tesco has achieved reasonable success in other markets, and remains No.3 in the global league. However, the real issue is that it will take a very courageous leader to attempt to re-enter the US market, when conditions improve..

Better to have left a small physical presence combined with an online offering to make re-scaling easier.
It remains to be seen whether the rest-of-world will provide sufficient scope for the realisation of Tesco’s global ambitions, and remain No.3…

‘Be prepared’
Meanwhile, suppliers have to consider their response to any Tesco moves in their direction, as the company attempts to repair the damage done to its Balance Sheet….

HMV: Grocery Lessons in Survival?

News that Hilco is set to rescue HMV from 3-months administration added to the belief that music companies and film studios have agreed new supply terms with HMV and are backing the deal, means that the company has gained some breathing space…

As suppliers will be unable to offer unilateral support that not also available to other retailers, including grocery, the aim of music companies and film studios should be to reward HMV for any in-store activity that improves and delivers category performance. This support could also be offered to the grocers and mass retail.

However, given that online has possibly made the home entertainment format redundant, survival could depend on HMV being run more like a grocery shop, a format that manages to survive against impossible odds…

Leaving the ‘romance’ of home entertainment retailing aside for a moment, there are a number of grocery measures that could be adapted to the new HMV finance-based model, ideally with the support of suppliers…

Overall, the aim should be to make HMV home entertainment retailing comparable with leading edge major multiples as follows:

• Retail pricing: Suppliers need to set shelf pricing within an omni-channel strategy that will optimise the store model, and reduce unplanned leakage via other routes to consumer
• Net Margin: From its current net losses of 13%, HMV needs to achieve net margins of 5%+. This should start with average Gross Margins of 25%, allowing for 15% to run the shop, and 10% to cover central overheads and net profit.
• Sale-or-return: should not be offered, given that it can remove the incentive to sell and maintain the range and condition of in-store stock
• Stockturn: the grocers manage average turns of 20+, with individual SKUs  varying in response to demand. This can mean suppliers delivering some titles several times per day, if necessary (good practice for dealing with the grocery guys)
• Space Management: Again, leading grocers achieve £1,000 per sq. ft.  per annum on their store areas, with footprint of their fixtures/gondolas over-performing to 'carry' the non-selling space in the aisles. Given the near-vertical merchandising of CDs and DVDs i.e. minimum foot-print, this should be a no-brainer KPI for HMV
• Credit period: In the short term, credit should be limited to 30 days to encourage financial discipline in what is a cash business at point-of-sale.  The current 45-90 days enjoyed by some retailers is a ‘temporary’ aberration that will be corrected as soon as a government begins to fully appreciate the damage being done throughout the demand-supply chain
• NAM/KAM involvement: Acting as leading-edge retail business consultants to the store, with 50% of the NAM/KAMs‘  costs covered by the supplier’s advertising budget, if necessary, given their contribution to brand-building in the aisle

Having covered the above basics of good shop-keeping, HMV will then be in a position to apply all the ‘romance’ of the entertainment category (within a category management & shopper-marketing envelope), and really show the grocers how to optimise home entertainment retailing …

Meanwhile, have a really romantic weekend, from the NamNews Team!

Walmart's onshelf availability – moving from 1-stop to full-stop shopping?

With a database ‘as big as the Pentagon’, Walmart are in a better position than most retailers to validate the extent of shopper migration  resulting from on-shelf out-of-stocks.

According to articles in Bloomberg News,  significant numbers of 1-stop shoppers are becoming so frustrated at finding empty shelves that their full-shop needs to be topped up with essential items bought elsewhere… Bloomberg claim to have more than 1,000 emailed complaints signalling that on-shelf availability is worse than is claimed by Walmart, who say that the small sample size does not represent a national picture.

Anecdotal details of the OOS complaints are given in the article, and over 500 comments are appended to the online version.
Moreover, it would appear that the stock is in the store in most cases, but that staff cutbacks mean that refilling of shelves is suffering because available staff are focused on manning cash registers and answering shoppers’ questions…

Most of the complaints were from previously loyal Walmart customers befuddled by what had happened to service at a company they’d once admired for its low prices and wide assortment. Many said they were paying more and driving farther to avoid the local Walmart. Some had developed shopping strategies, including waiting until the last minute to grab ice cream, lest it melt in the lengthy checkout lines.

Given Walmart’s scale, their ‘handful of complaints’ would be a serious issue for lesser retailers.

However, if the company accepts that a complaining customer is someone trying to give the retailer a second chance, it would be a pity if Walmart waited for an impact on the share price, before taking remedial action…