Supermarket sales volumes up for the first time in 18 months - but how was it for you?

Latest data from Nielsen showing  that sales volumes in the UK’s leading supermarkets increased 0.6% during the four weeks ending 3 January 2015 produced a collective sigh of relief, and possibly a feeling to the effect that 'it’s all over now, back to business as usual'.

However, suppliers that have never had a better year, and are hoping that no-one, least of all the ‘down-to-us’ retailers, has noticed, will have realised that it is always ‘business as usual’, with success coming to those that can factor any market conditions into customer strategies, and maintain growth.

For them, structural changes are simply a re-balancing of demand on the way to what will probably end up as Tesco 25%, Sainsbury’s, Asda and Morrisons sharing 40%, with the remainder going to the middle-squeezers…

Meanwhile, those suppliers that are still shell-shocked following seven - yes seven - years of flatline demand, having cut to the bone, are licking their wounds, yet hopefully finding time to continually run the numbers on every aspect of the trade investment package, in a constant search for ways of optimising cost and value..

Despite the punishment, they need to summon the energy to dig into the Nielsen data in order to compare category volume growth with customer equivalent and ideally confirm their fair-share of any improvement in sales.

Then comes a re-assessment of their competitive appeal vs. other category players, as a basis of re-engineering their entire trade investment package, by customer.

Given the forensic intensity of the trade investment spotlight (SFO), coupled with the need for high-intensity price-cutting by the mults, it is vital for suppliers to anticipate significant shifts from back to front margin, everywhere…

Only then can we assume that we are ‘back to normal’ in supplier-retailer trading relationships…in anticipation of mults' claims that, having dealt away the increases in front margins via price-cutting, there is now a need for 'a little extra to create some excitement in store' ... 

Busting to win custom - the real fall-out in price-wars

News that the supermarket price war could force more than 100 food suppliers out of business was not news to key stake-holding NAMs...

In fact, anyone with a half-open eye on the UK retail trade will know that a package comprising Trade investment of 20%+ of supplier sales, Trade Credit of 45+ days and Deductions of 7% - all contributing to lower-cost food wastage in the home - can have only one conclusion…

Whilst Begbies Traynor, a corporate rescue and recovery practice, understate this via ‘experiencing financial distress’, being driven into liquidation, or ‘forced into going bust’ probably describes the situation in a way to which NAMs can more easily relate.

Given the price-cutting turmoil in the market, the key issue for NAMs is to establish the state of their own company’s finances, compare with other players in the category, and then find ways of taking remedial action.

In practice, this means accessing Companies House web-check service (online @ £1/company) and downloading your latest annual report.
Remembering that this is the version that the buyer sees, it helps to conduct the analysis from that perspective. In other words, the customer is not interested in the extent to which you are being driven towards the edge, but is more concerned with the resultant impact on continuity/availability… 

You, meanwhile, will have the added benefit of category and customer insight from a supplier perspective.

As you check through YOY Sales and Net Margin, compare these with your performance with individual customers.

Next calculate average trade credit and compare with individual customers to discover the sources of your growing stress/anger...

Assuming that your ex-factory prices are - or should be - 50% of your prices to the trade, you can then calculate the impact of your trade investment  on your net margins, on average, and using your detailed inside-knowledge, assess the extent of ‘fair shares’ incorporated into your individual trade partnerships.

A quick check on the open-domain finances of your category competitors will further confirm the fair-share splits by individual customers.

Finally, a checking of the customers’ finances will then point at key beneficiaries of the monies being squeezed out of your trade partnerships to benefit the consumer…

You are then in a position to ensure that - using open domain-fueled insight, and every tool in the bag - your company is going to survive...

After all, why go bust because your customer does not understand fair-play, or finance...?

Tesco gets new junk status credit rating, proving that the 'first cuts were not the deepest...'

Last week's Tesco moves that included shutting 43 stores, moving the head office and ending its pension program, along with the sale of the Blinkbox movie-streaming unit, price cuts and £250m of cost savings, were judged insufficient to prevent S&P downgrading their credit rating from investment grade to junk status.

Following on from Moody's equivalent downgrade last week, it now remains to be seen whether the third major agency, Fitch Ratings, will follow suit.

What is a 'junk bond'?
Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. As you know, junk bonds are so called because of their higher default risk in relation to investment-grade bonds. In other words, the rating is used by the market to assess the degree of risk for those prepared to engage with a company via purchase of its bonds, investment in its shares, or extending them credit.

In return for the perceived risk, the company will usually have to pay more for the assistance, in terms of interest, or offer earlier payment. This means that the cost of running the business will rise, thereby impacting the bottom line...

What does it mean for Tesco?
Given that the above ratings were given after the announcement of the turnaround plans, it means that the ratings agencies believe that Tesco are not taking sufficient steps to deal with the structural changes in the market, and the discounters in particular...

Action for Tesco?
Tesco now have to add extra moves to the action-list in order to attempt to reverse the junk ratings, ideally before Fitch follow S&P and Moody's.

Possible options include:

• Extension of the headline 'up to 25%' price-cuts on 380 branded products to perhaps an extra 400 brands to fully replicate Discounter product portfolios
• Acceleration of asset sales (Tesco Bank, SE Asia interests, perhaps an additional 40+ store closures) in order to pay down debt and reduce the interest burden
• Searching for, say, an extra £250m in cost savings within the business

NB. the moves have to be sustainable and 'spectacular' in order to counteract the junk ratings, and neutralise the increased costs of doing business.

'Ignoring' the ratings would probably result in additional pressure on the share price.

The Tesco moves also have to be translated into bottom-line KPIs, spelling out how each move will impact net margin, and ROCE, minimum... And all of this in the shadow of the ongoing SFO investigation.

What it means for NAMs?
For speed and clarity, Tesco have to shift the emphasis from back to front margin in order to impact the consumer-shopper.

In order to avoid much of their trade investment ending up in front margin buckets, NAMs need to reassess their competitive appeal relative to other brands/products available to the consumer, in terms of Product, Price, Presentation and Place.

A couple of 'what-ifs' re the impact of a 25% price cut on their brand - or a competitor - in terms of  relative competitive appeal within the category, might help in kick-starting colleagues' focus on the issue...

Next, each element of the investment package should be re-assessed in terms cost to the business and value to the customer, in order to help Tesco to see and quantify the link between brand investment and bottom line impact...

Anything less may be seen as simply another potential cost-saving in a transactional relationship... 

Dalton Philips - a casualty of a time-warp breakout?

Appointed to pull Morrisons into the 21st Century via an injection of IT, global vision and democracy, Philips managed the five-year programme of heavy lifting, but was undone by the middle-squeezing impact of Waitrose and the discounters, at a time when a return to basics was required in retail…

In the interim, with his down-to-earth, common-sense approach, Andrew Higginson will reduce the Morrisons’ message to basics and go for growth via a shift from back to front margin, a focus on pricing and a search for a like-minded replacement CEO.

The new team will build on Philips’ improvement in operating systems, and moves into convenience and online.

Within the business, the new chairman and CEO will sound and feel like Ken Morrison, which will not only provide internal reassurance, but will also ensure a couple of years’ silent tolerance from at least one key shareholder…

Back to the future for Morrisons?
Meanwhile, NAMs need to anticipate a return to the old Morrisons, but manage a retailer that is super-charged with the benefits of a visit to the future… 

The Hungarian Revolution in retail competition legislation - Why this matters to the UK NAM...

Following on from yesterday morning's post re the new trade law in Hungary re closure of unprofitable supermarkets (below), it is obvious that the Hungarian competition authorities have evolved a very effective way of neutralising some of the scale-power of major retailers.

A new model in the management of anticompetitive behaviour
Unlike more 'sophisticated' markets where a set of rules is established, and transgression is detected, proven and penalised, the Hungarian authorities have identified the ways in which large companies can exercise scale-power and are taxing such uses in order to neutralise their impact on smaller players, fast.

This is a much simpler process that does not need the help of whistle-blowers to make a case.
Details are given in the posting below of the steps already taken in taxing large companies' ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and forbidding the sale of some categories (tobacco).

Application of the process to trade credit abuse
It follows that when they come to the issue of trade credit, the Hungarian authorities will not - unlike UK legislators - miss the point of trade credit abuse by penalising breaches in 'on time' payment of invoices i.e. the customer is entitled to negotiate a period of their choice -  45 to 90+ days on a 'take it or leave it basis' and be in breach only if the agreed time period is breached.

Instead, if they follow their current approach, the Hungarian authorities will calculate a method based on transfer of value time-period, plus say 5 days handling to allow for banking system 'efficiencies' which in the case of  weekly deliveries would work out at approximately 15 days from date of delivery.

The authorities would then simply apply a commercial rate of tax - say 5% minimum p/a - on any period in excess of 15 days, thus neutralising the scale power of the customer re credit period. Monies collected in this way could be then re-cycled to subsidise smaller players...

Credit period was never intended to morph from covering the gap between receipt of goods and payment by the customer's customer, to becoming  a source of free credit or working capital, at the expense of a supplier too powerless to object...

Hungarian Lawmakers Pass Law On Banning Unprofitable Supermarkets, in the name of fair competition

According to Xpatloop, lawmakers have approved a government law on banning from 2018 supermarkets and hypermarkets that fail to make a profit for two consecutive years.

Given that the new law was this morning cited by Tesco, Hungary's biggest supermarket chain and third-biggest employer, as the reason why they will close 13 shops in Hungary in order to remain profitable for the long term, it can be seen that the new legislation is being taken seriously.... 

The government makes the moves as part of a policy to eliminate of factors that enable large supermarket chains to abuse their preeminent positions. Steps already include a 15-fold rise in the so-called food supervisory fee, the recently introduced advertisement tax, and the ban on tobacco shops in some big supermarkets.

It can thus be seen that the Hungarian government have gone farther than other countries in attempting to combat unfair competition, in that they have reached to the heart of how large companies exercise scale-power and focused on what they regard as root causes of unfair advantage, namely the ability to cross-subsidise unprofitable store locations, ways of promoting (advertisement tax), provision of food services (food supervisory fee, from 0.1% of sales) and the sale of some categories (tobacco).

In other words, these moves should be seen as a progression towards ensuring fair dealings by large retailers and suppliers in an attempt to reduce anti-competitive pressure on medium and smaller trade partners.

It remains to be seen how soon competition authorities in other countries take similar steps, in the search for fair dealings for all...

Meanwhile, time for UK suppliers and retailers to anticipate the inevitable, vis appropriate 'what-ifs'? 

Tesco's Fightback Plans – a Live version for the guys that count

Whilst we bated our breath and crossed our fingers in anticipation of Tesco’s announcement yesterday, and thankfully had our natural optimism endorsed via a subsequent 15% surge in the share price, Dave Lewis greatest challenge was convincing a room full of City Analysts that he meant business.

This live session is now available online:
Watch the webcast here

The Presentation:
The real benefit for NAMs lies in the fact that the 1.5hr session gives a real demonstration of how Tesco has been dealing with the crisis. In a 60 minute presentation via 42 slides, Dave Lewis explains in some detail the key moves now reported in the media. 

However, as salesmen, NAMs have a special advantage in watching the man in action, with body-language providing additional insight and supplying the pieces of the perception-jigsaw that enables suppliers to enhance anecdotal learnings picked up in face-to-face encounters with the buyer.

The Q&A session:
Whilst it could be said that the opening presentation was rehearsed and fluent, the Q&A session (at approx. 55 mins into the webcast) reflected some of the more obvious issues affecting the audience, and this session gave the analysts (and the viewer-NAMs) access to CFO Alan Stewart and caused Tesco to think on their feet, another learning opportunity for NAMs…

With up to three questions per analyst, and careful observation of the manner in which the answers were handled, the 40 minute session has to yield some individual nuggets for perceptive NAMs.

The questions were mainly financial, reflecting the priorities of Tesco’s current situation, but the over-riding impression for observant NAMs is that whilst Tesco sees its issues and opportunities in terms of meeting consumer need, the key lens they will use will be risk-reward and cost vs. value relationships.

In other words, the numbers will count, big-time!

I could give you chapter and verse re the entire session, but nothing beats the value of finding 1.5 hours over the weekend for those NAMs prepared to invest a little 'leisure-time' in seeing how your career will pan out over the next few years.

Yesterday’s webcast showed the new Tesco culture in action, and if successful, a pointer for the future of UK retail…

Tesco Re-boot - Dave's work-in-progress...

Given the combination of store closures, asset disposals, capital investment cut-backs and appointment of Matt Davies as UK CEO, it is now obvious that baggage-free Dave Lewis means business.

However, these moves are being made in order to shore up the Balance Sheet and cover some of the Pension Fund deficit. Closing 43 loss-making stores and selling dunnhumby and Blinkbox will yield no more than £2.5bn.
Therefore it is best to see this morning’s announcement as part of an overall disposal programme that has to see the disposal of Tesco Bank, and their SE Asia interests in order to give Lewis sufficient elbow room to tackle the real agenda - The neutralisation of the discounters…

In fact, the announcement of up to 25% price-cuts on 380 branded products could be seen as ‘one for the multiple team’ aimed at using big-gun brands to impact Aldi and Lidl's equivalent surrogate-brands. Note that there was no attempt to make the price-cuts via Tesco private label…

It follows that the other mults will need to follow suit to avoid becoming side-dishes on the menu… 

Two issues remain:

• What discounter categories will Tesco tackle next via what brands, in order to address the full discounter portfolio?
• Given Dave’s generation, will this first cut be the deepest….?

Time for suppliers to run the numbers on the inevitable scenarios in order to anticipate and factor in Tesco’s obvious determination to meet their customers’ needs for “simpler, lower and more stable prices”?