Friday 19 December 2014
Wednesday 17 December 2014
'Prompt' Payment - are we all missing something?
News that food giant 2 Sisters has been seeking more than four months to pay its bills, is but the latest in a growing line of companies that apparently see supplier credit as a free source of Working Capital…
Given that the interest-free credit period given by suppliers was originally intended to help a customer to bridge the gap between receipt of the goods and payment by its customers, then payment should be related to this time-frame.
How about replacing the 'Prompt' Payment Code with a Fair Payment Code?
In the fast-moving UK grocery & food industries, with daily deliveries and average supplier credit-periods of 30-45 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods in the industry.
Moreover, government belief that the Prompt Payment Code (i.e. compliance with negotiated terms) fixes the problem, is a misconception.
A supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.
If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper or customer. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?
In practice this means that fresh produce delivered daily to retailers, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system? Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.
Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis away from free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...
However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.
Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster. This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.
A real Christmas present for suppliers everywhere?
Given that the interest-free credit period given by suppliers was originally intended to help a customer to bridge the gap between receipt of the goods and payment by its customers, then payment should be related to this time-frame.
How about replacing the 'Prompt' Payment Code with a Fair Payment Code?
In the fast-moving UK grocery & food industries, with daily deliveries and average supplier credit-periods of 30-45 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods in the industry.
Moreover, government belief that the Prompt Payment Code (i.e. compliance with negotiated terms) fixes the problem, is a misconception.
A supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.
If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper or customer. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?
In practice this means that fresh produce delivered daily to retailers, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system? Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.
Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis away from free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...
However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.
Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster. This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.
A real Christmas present for suppliers everywhere?
Monday 15 December 2014
Abolishing Trade Investment by suppliers - the impact on brands
News that Tesco is allegedly planning to dismantle the system of using Commercial Income, or Trade Investment, as a source of cash from suppliers raises a number of issues for NAMs and competing retailers.
What does it mean financially?
Conclusions:
Still ok with your trade agreements for 2015?
(Why not substitute your brand's % in the above calculation and see what it is costing you to be onshelf...?)
What does it mean financially?
- Supplier cannot afford additional investment (in fact the calculation shows why so many suppliers are struggling profit-wise)
- Retailers are not going to surrender Trade Investment & Deductions as sources of income
- Retailers may try to negotiate Trade Investment into Margin, thus removing the issue of how it is booked in the business
- Trade Investment may be absorbed into retail running costs and price-cutting, with less available for in-store customer incentives
- Eventually, additionally funding may be requested in order to 'create a bit of excitement' in-store....
Still ok with your trade agreements for 2015?
(Why not substitute your brand's % in the above calculation and see what it is costing you to be onshelf...?)
Thursday 11 December 2014
Walgreens-Boots: Pessina to acting CEO, Wasson to retire
News just in confirms that following completion of the merger in Q1, 2015, Greg Wasson will retire and Stefano Pessina will become acting CEO.
Although Boots will represent 33% vs Walgreens 66%, the combination of Pessina’s personal shareholding of 16% and the acting CEO role has to give Boots the opportunity to punch way above its weight in 2015…
A happy New Year to NAMs everywhere!!
Although Boots will represent 33% vs Walgreens 66%, the combination of Pessina’s personal shareholding of 16% and the acting CEO role has to give Boots the opportunity to punch way above its weight in 2015…
A happy New Year to NAMs everywhere!!
Wednesday 10 December 2014
UK accounting watchdog warns retailers after Tesco scandal
Britain's Financial Reporting Council (FRC), which polices accountants and is examining how Tesco's error came about, said on Monday that the boards of all retailers and suppliers should provide investors with sufficient information on their accounting policies, especially Commercial Income (i.e. Trade investment).
This is particularly important for NAMs as the watchdog said it would focus on this area when it comes to reviewing audits for 2014 that will be published in 2015.
The FRC said there was no single accounting standard for such disclosures and there is an "absence of well-known industry norms", meaning that auditors have to resort to judgement in most cases.
Given the 20+ ‘buckets’ that suppliers use for trade funding, it might be useful if NAMs simplified and segregated their funding.
‘Supply and Demand’ rewards could provide a useful basis for clarification. In other words, classifying elements of commercial income as either facilitating supply economies, or optimising consumer demand, might help, but still leaves complexity....
Supply rewards could include:
- Central assortment & listing
- Timely and committed forecasts
- EDI
- Central credit, settlement terms, and payment
- Returns/write-offs
- Deductions
Demand rewards could include:
- Listings
- 'Appropriate' range/assortment
- Category compliance: shelf space & level, fair-share facings
- Promotional compliance, price support, POS compliance, additional placements/displays
- Minimalising post-audit recoveries
- Sales achievement
It is likely that the SFO-Tesco outcome will result in new auditing procedures aimed at transparency, defensibility and like-with-like 'comparability' in dealing with Commercial Income in retail accounts.
Meanwhile, suppliers can anticipate the changes and possibly avoid major retrospective overhauling of their trade funding process, by taking action to clarify their trade funding process now, while others await the inevitable…
This is particularly important for NAMs as the watchdog said it would focus on this area when it comes to reviewing audits for 2014 that will be published in 2015.
The FRC said there was no single accounting standard for such disclosures and there is an "absence of well-known industry norms", meaning that auditors have to resort to judgement in most cases.
Given the 20+ ‘buckets’ that suppliers use for trade funding, it might be useful if NAMs simplified and segregated their funding.
‘Supply and Demand’ rewards could provide a useful basis for clarification. In other words, classifying elements of commercial income as either facilitating supply economies, or optimising consumer demand, might help, but still leaves complexity....
Supply rewards could include:
- Central assortment & listing
- Timely and committed forecasts
- EDI
- Central credit, settlement terms, and payment
- Returns/write-offs
- Deductions
Demand rewards could include:
- Listings
- 'Appropriate' range/assortment
- Category compliance: shelf space & level, fair-share facings
- Promotional compliance, price support, POS compliance, additional placements/displays
- Minimalising post-audit recoveries
- Sales achievement
It is likely that the SFO-Tesco outcome will result in new auditing procedures aimed at transparency, defensibility and like-with-like 'comparability' in dealing with Commercial Income in retail accounts.
Meanwhile, suppliers can anticipate the changes and possibly avoid major retrospective overhauling of their trade funding process, by taking action to clarify their trade funding process now, while others await the inevitable…
Tuesday 9 December 2014
Tesco's Christmas' Surprise - a Final Shocker for the Market?
Today’s profit warning, indicating that February’s year-end profits will come in at £1.4bn, 25% lower than analysts’ expectations, had better be the final shock from Tesco…
Whilst the City will be relieved that no further scandals were revealed, this below-expectation profit guidance has to mean that analysts are still not reading Dave Lewis well enough, and will hopefully result in an over-reaction in terms of the share price…
In other words, the stock market will probably mark the shares down more than is warranted, just-in-case…
There is hopefully an element of ‘kitchen-sinking’ in the 2014-15 results in that we have to assume that all write-offs have been factored in, which, coupled with investments in price, availability and other improvements in its customer offer, lead us to expect that all future announcements will be defensible, transparent but above all, conservative….
We are obviously seeing only the surface impact of the changes being undergone in Tesco, as Dave Lewis’ new team revisits plans and strategies, implementing a new commercial approach that will underpin stronger long-term relationships with its suppliers to ensure that revenue recognition is transparent and appropriate, all in the shadow of an SFO investigation….
What it means for NAMs
• All commercial income will be redefined, quantified and where possible, retrospective
• All forecasts will be conservative, and ideally tied to clear KPI measures
• …However, in order to avoid missing out on unexpected demand, Tesco will expect a rapid response to sales surges...
The future conversation will be about demonstrable cost & value, as a base requirement.
In return, suppliers should insist on 100% compliance, and fair-share dealings, shock-proofed…
Whilst the City will be relieved that no further scandals were revealed, this below-expectation profit guidance has to mean that analysts are still not reading Dave Lewis well enough, and will hopefully result in an over-reaction in terms of the share price…
In other words, the stock market will probably mark the shares down more than is warranted, just-in-case…
There is hopefully an element of ‘kitchen-sinking’ in the 2014-15 results in that we have to assume that all write-offs have been factored in, which, coupled with investments in price, availability and other improvements in its customer offer, lead us to expect that all future announcements will be defensible, transparent but above all, conservative….
We are obviously seeing only the surface impact of the changes being undergone in Tesco, as Dave Lewis’ new team revisits plans and strategies, implementing a new commercial approach that will underpin stronger long-term relationships with its suppliers to ensure that revenue recognition is transparent and appropriate, all in the shadow of an SFO investigation….
What it means for NAMs
• All commercial income will be redefined, quantified and where possible, retrospective
• All forecasts will be conservative, and ideally tied to clear KPI measures
• …However, in order to avoid missing out on unexpected demand, Tesco will expect a rapid response to sales surges...
The future conversation will be about demonstrable cost & value, as a base requirement.
In return, suppliers should insist on 100% compliance, and fair-share dealings, shock-proofed…
More on 'Tesco- the end of the beginning for a great retailer' here
Sunday 7 December 2014
When the target misses the point...
Most of us remember the Dudley Moore free-range chicken TV campaigns....??
It was intended as a way of having Dud discover different continental foods available at Tesco, such as farmers' cheese, wine etc, with free range chickens as a back-drop...
Unfortunately, the demand for free range chickens soared, resulting in numbers that far exceeded what was available in France...
Apparently, this meant that Tesco had to source overseas, discovering that chickens in different continents were bred/evolved to different profiles (big breasts here, big thighs there, you know how it is...) resulting in some confusion at UK tables.
The campaign eventually ran out of steam also...
Hat-tip to Mike Anthony for the reminder of a truely memorable campaign
It was intended as a way of having Dud discover different continental foods available at Tesco, such as farmers' cheese, wine etc, with free range chickens as a back-drop...
Unfortunately, the demand for free range chickens soared, resulting in numbers that far exceeded what was available in France...
Apparently, this meant that Tesco had to source overseas, discovering that chickens in different continents were bred/evolved to different profiles (big breasts here, big thighs there, you know how it is...) resulting in some confusion at UK tables.
The campaign eventually ran out of steam also...
Hat-tip to Mike Anthony for the reminder of a truely memorable campaign
Friday 5 December 2014
Premier Foods 'Invest or else' request from suppliers
According to the BBC, Premier Foods have allegedly been asking their suppliers for payments to continue doing business with the firm.
NAMs, long accustomed to fielding such ‘requests’ from major customers, might be forgiven for thinking that Premier Foods had diversified into retailing…
Essentially, when a company enters a supply arrangement with a customer, they obviously negotiate a working arrangement that should be summarised in a supply agreement – a legal completion of the agreement process where UK suppliers still lag behind their continental cousins.
However, commercially speaking, a contract is an instrument that ‘can’ rather than should be used, because in practice, resorting to the law is an end-of-relationship process rather than a basis for a mutually productive partnership…
The agreement to supply needs to include the total package – all terms and conditions, binding both parties. This up-front agreement can contain some ‘gun-to-head’ elements in that the customer, exploiting their size, can make it a condition that they will pay in 90 days for a product delivered daily.
Strictly speaking, this condition can be in compliance with current ‘pay-on-time’ legislation, but ignores the fact that the 90 days can be unreasonable where the customer experiences the value of the product within days of receipt on a rapid rotation line, and credit period was always meant to simply cover the gap between delivery and resale of a product.
In other words, the customer observes the letter of the law, as worded, and ignores the real issue, the need for payment within an appropriate-for-purpose time frame – the law patently needs modifying to make this more explicit.
The same holds for a retro-demand for additional cash, for whatever purpose. However, if the request applies to future dealing, then that becomes a basis for negotiation, however unfair the balance of power…
When a customer steps outside an agreement and imposes a new condition retrospectively, the supplier has a genuine grievance, and a basis for action, if a comprehensive written contract exists. It may still be unrealistic to expect a small supplier to take on a big customer. In fact the little guy may even 'knuckle under', with wise customers keeping in mind the possibility of the ‘don’t get mad, get even’ condition being invoked….
The real issue is the damage being done to the customer’s reputation for fair dealing, both with other suppliers, the legislature and current employees, and especially with the general public - the ultimate consumers - in times where abuse by big business is becoming an increasingly sensitive topic….
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