Motorway prices and the Savvy Motorist

Motorway service areas are charging up to four times the high street price for basic food and drinks, according to new research by the Institute of Advanced Motorists.

With instances of charges up to £2.09 for a 500ml bottle of water vs. a 95p high street price, and a basic cheese sandwich costing £3.99 at some motorway service stations, as opposed to just £1.00 on a nearby high street, it would be reasonable to expect savvy motorists to carry basic provisions in order to reduce costs of using motorway facilities.

One approach might be to charge for washroom facilities, a la the old Ryanair on-board joke, but even this may reveal limits that cause the ultra-savvy driver to perhaps make less socially acceptable alternative arrangements when taken short...

To take a more positive approach to optimising the mix of holiday/guilt/pamper mode that prevents too critical a response to travel retail prices at airports, and taking note of the grocery multiples response to equivalent problems, perhaps motorway service operators should focus on enhancing the shopping experience, whilst reducing prices to a level that is just about acceptable in terms of value for money...(see Buying-mix-analysis ref competitive appeal)

This could present opportunities for NAMs to treat the service station as a retail business unit, and apply shopper marketing and category management techniques already proven in a classic retailing environment.

In applying this consultancy approach to the Motorway services station opportunity, the proactive NAM may also find it beneficial to add value by coaching the facilities manager on negotiating more realistic site rentals with the landlords, a key cost driver in travel retail...

Calculating the actual outcome of a negotiation session - the real P&L of the deal...

As we begin (!) to emerge from the effects of the global financial crisis, survival-minded suppliers and retailers can benefit from maintaining strict financial measures and controls in optimising the joint-profitability of their trade partnerships.

One area that may need attention is ensuring that deal-evaluation includes the factoring-in of all concessions, both financial and non-financial. 

The following approach may help. 

As you know, negotiating a deal is essentially a process of compromise, in that instead of simply selling product at the regular price and making our normal supplier gross margin (50%) on the deal, we effectively dilute that margin by making additional financial and non-financial concessions to the buyer.

Financial concessions:
Financial concessions could include discounts, rebates, advertising & promotional allowances etc.

Non-financial concessions:
Non-financial concessions could include advertising & display material, POS, demonstrators, analyses of Sales, Promotional and Category data, etc.

We try to dilute the negative impact of giveaways by ‘insisting’ on receiving equivalent concessions from the buyer that ideally will replace any losses in negotiation.

For this reason it is essential to convert all concessions into their financial equivalents in order to keep a running check on giveaways and receipts during the negotiation process.

In practice, it is best to develop and manage a Negotiation P&L as follows:

Deal Analysis
Total sales to the customer in this deal at list price                             £250,000
Less Gross Margin of 30%                                                                 £75,000

Net sales to the customer                                                               £175,000

Less the Price concessions we gave:
- Quantity discount 3%                          £5,250
-   Advertising allowance 7%                   £12,250
-   Early payment discount 1.5%              £2,625
-   Listing fees                                         £6,500

Less the non-Price concessions we gave
-    POS material (estimate £5,000)          £5,000
-    In-store demonstrators                        £3,500
-     Samples                                            £2,500                                                

Total given away                                                                              £37,625

Less Concessions received from the customer
-  Earlier payment                                      £2,500
- 20% increase in facings                           £8,750  (estimate 10% sales increase)                                                                                                i.e. assume supplier 50% gross margin                                                                          
-  Exclusive in-store promotion                   £10,500 (estimate 12% sales increase)
i.e. assume supplier 50% gross margin

Total received from customer                                                          £21,750    

Net amount given away in negotiation                                            £15,875 
i.e. 9.07% of sales given away in negotiation

The above application hopefully demonstrates why factoring in the non-price concessions and insisting on buyer reciprocation is vital in negotiation.

It then remains to add value and devalue to optimise concession-exchange in the process.....simple!  

Celesio sacks CEO - a two-way Opportunity window?

Today’s news that Celesio has removed its CEO, citing “different opinions of the management of the company”, coupled with a market capitalisation of €2.6bn (a snip!), represents a final opportunity for Hutchison Whampoa to bolt a global wholesale network onto its A.S. Watson/Superdrug retail arm and attempt to catch up and become a second global H&B player to Alliance Boots.

By the same token, given the abruptness of the move, and the inevitable temporary destabilising effect on Celesio, Alliance Boots have also been presented with an opportunity to race ahead in their quest for comprehensive global coverage and ultimate re-flotation…

Either way, H&B suppliers would benefit from a couple of ‘what if’ analyses (ideally with global colleagues) to explore the implications and their options ref global trade strategies....

Opportunities in Deflation-Inflation Mix as Shops Slash Margins?

Ambient foods NAMs may be encouraged at ingredient cost increases finding their way to shelf-prices, resulting in average price increases of 2.5%, according to latest figures available from the British Retail Consortium and Nielsen.

At the same time, key non-food categories have experienced significant shelf-price deflation as retailers slashed prices in attempts to drive sales in falling markets.
As an indicator of severity, non-food deflation rates were as follows:
- clothes and shoes, 6.7% cheaper
- furniture and carpets, 2.4% cheaper
- TVs, DVD players, fridges, washing machines and ovens, 4.7% cheaper

However, as most mixed-goods retailers operate portfolio businesses, in that their overall interest, and that of the stockmarket is in overall profitability, then increased food sales can become a means of subsidising losses in non-foods…. 

In addition, having ‘allowed’ food price increases, the retailer may be tempted to seek financial support from suppliers that appear to be ‘more profitable’ as a result.

Whilst experienced NAMs will no doubt draw upon their repertoire of ways of saying ‘no’ to requests for non-specific subsidies (See How to say ‘No’), it may be more difficult to explain net profit margins of 7%+ in a supplier’s UK Annual report, compared with the retailer’s 3% or less in their P&L (See How to justify your bottom line).

However, imaginative NAMs will see real opportunities in promoting ambient food as a traffic builder to enhance shoppers’ access to non-food bargain offerings, and also use related food/non-food purchases as a means of driving the impact of retailers’ sales of more profitable foods to the bottom line, and claiming credit for the strategy….

Getting the numbers right in Independent Retailer Month

Despite the obvious advantages of capitalising on the public mood in support of local retail, coupled with fuel  savings and ultimate dilution of multiples’ power, the actual return per outlet is usually too low to justify the necessary investment in independent retail.

For this reason, suppliers that rely on traditional financial measures of ROI will find it difficult to realise the full potential of local shops.

However, a simple shift in perspective can help.

Given that a local retailer can be more flexible in terms of meeting shopper needs, and with the right support can be more willing to encourage customers to engage with the product in the store, it remains for the supplier to find a viable financial formula in order to justify the investment required.

Suppliers that can take the creative leap into regarding the instore experience as part of marketing of the brand, not only making media investment more effective, but optimising a final stage on the way to purchase, with ‘hands-on’ contact providing an effective way of managing expectations, have to gain a competitive edge over those who focus primarily on the major multiples…

In other words, why not regard say 50% of the store-visit costs as part of the national media advertising budget, and thus make the sales per independent outlet vs. the ‘reduced’ instore-investment compare better with other uses of brand resources?

Independent Retailer Month provides an ideal opportunity to run the numbers on a 50/50 basis on current promo-programmes, evaluate the ROI results and take steps to focus more effort next year, while those already using this approach reap the rewards over the next four weeks….

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…

'Making do' with existing space: the Tesco-Sports Direct space-partnership…

Sports Direct is in advanced talks to take excess space in some of Tesco’s biggest stores, possibly via the Mezzanine floors. Sports Direct would be able to benefit from the customer traffic to Tesco, and allow the grocery multiple to shed space to a non-competing retailer.

As you know, Tesco is already reducing floor-space. A 120,000 sq. ft. store in Stockton-on-Tees, for example, is to be reduced to 80,000 sq. ft. by installing a gym on the store’s mezzanine floor, and a children’s play area on the ground floor.

They are already comfortable with the Sports Direct connection (see the Czech Republic, where Tesco cut the size of a hypermarket from 80,000 sq. ft. to 50,000 sq. ft., with Sports Direct taking the bulk of the excess space).

Retailing being a pragmatic model, Tesco realises that a 100,000 sq. ft. store represents space overcapacity. Reasons are irrelevant. In the ‘here and now’ retailing is about alternative use or going bust, with retail margins too low to allow any other options. Tesco’s willingness to consider complementary space-partners, rather than plough on regardless, has to be the right attitude. The rest is detail…

Imaginative NAMs, particularly those in multi-channel categories, already see the potential of collaborative promotions involving Tesco’s space-partners. For instance the scope for healthfood/sports supplements joint-initiatives is a no-brainer…

The real opportunity
But the real creativity is in seeing that this space-partnership is not about ‘making-do’ with a large store problem. With care, this idea can be rolled out into Tesco’s other formats, via complementary partners in many other categories, all realising synergies in existing store traffic.

As always, change of this nature can represent threats and opportunities for suppliers. This means that any categories/brands that are currently ‘space-fillers’ become ‘de-listable’ as Tesco develops its space-partnership model, and, paradoxically ‘needs more space’ as the idea develops…. However, those NAMs that can go to Tesco with creative linkages involving complementary routes to consumer, and even suggestions for possible space-partnerships, have to represent added-value for both retailers…

In other words, it is time for a really fundamental review of what your brand  represents to your consumers, in their preferred shopping environment, in the context of the Tesco space-partnership concept, remembering that all creativity is simply the linking of two old ideas that have not been combined before….

State of the nation…

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome become bankrupt. People must again learn to work instead of living on public assistance."
- Cicero , 55 BC

So, evidently we've learned nothing in the past 2,068 years?