Onshelf price discounts, Moscow-style

                                                                                                                           pic: Business Insider

With inflation in Russia running at 11.4%, maintaining the retail price represents a discount!

Meanwhile, in deflationary Western Europe, holding the price steady indicates a price increase!

Fortunately, in each case, the consumer is savvy, and understands these subtleties!

More on Russian pricing here at Business Insider

The Two Aldis - Some concerns for the future? - and a lot more anecdotal detail..

For decades the Albrechts, the billionaire dynasty behind the Aldi retail empire, have lived by two golden rules: live modestly and avoid publicity. Aldi founders Karl and Theo Albrecht were also as obsessive about thrift as privacy.

Having been accustomed to having access to far greater degrees of personal and business background re our other major customers, we have all watched the growth of Aldi with a mix of curiosity and frustration at the lack of anecdotal coverage to provide insight.

For this reason alone it may be worth a glance at this Irish Times article, revealing that Aldi are now just like most other family businesses, and perhaps a little easier to understand…

The Tesco 30% product cull: key issues arising

News first reported in The Grocer on Friday 30th January, of a cull of up to 30% of SKUs stocked by Tesco raises important issues for NAMs.

Given Dave Lewis marketing background, and an outside agency, Boston Consulting Group working to a brief, the starting point has to be the needs of the consumer-shopper.

Possible candidates for culling have to include:
- Obvious over-laps by function, and undifferentiated me-toos
- Products that are in the assortment because of back margin, rather than consumer demand
- Slow-yielding 'experimental' products outside the core Tesco offering

However, given the 30% culling target, it is unlikely that the above steps would generate sufficient numbers of discontinued SKUs, so it will probably be necessary to eliminate entire sub-categories to achieve the numbers...

In which case, candidates could include any sub-category that fails to reach Tesco's 25% average Gross Margins and ideal Net Margins of 5%. Other criteria could include minimum space productivity levels of 1,000/sq ft /annum. Finally, as regular store checks of Tesco Extra will reveal, those sub-categories that have been progressively reduced over the past three years in terms of instore presence, such as home entertainment software (CDs, DVDs, and games) and books, have to be due for re-assessment...

Also, if we add the idea of the long product tail in large space retail, accounting for insufficient sales levels, redundant space in-store arising from the onset of the 'squeezed middle', and reputed to be of the order of 20% of the selling area, any culling of assortment could generate additional redundancies in store space...

Private label - a special case?
Again, given the brand-marketing background of Dave Lewis, and the help of an agency tasked with meeting consumer-shopper need, profitably, we  would suggest that Tesco's private label will be granted no special privileges in the culling process. Accordingly, private label SKUs will have to fight their corner vs. established brands in order to justify their on-shelf facings...

Finally, given the presence of independent consultants, and the 'non-involvement' of buyers, NAMs will not be able to use the traditional supplier-buyer relationship to directly influence the process...

Accordingly, it will be necessary for NAMs to revert to the satisfaction of fundamental consumer demand within core Tesco traffic as a criterion for justifying their brand's presence in the assortment.

In practice, this means making an objective re-assessment of the appeal of their brand vs. alternatives available to the target consumer within the Tesco environment.

In addition, given Lewis' shift in emphasis from Back to Front margin, it is vital to re-assess and re-engineer their trade offering in order to optimise the appeal of the total offering vs. available alternatives, as viewed through the new Tesco lens..

Then find a way of getting the revised offering onto the Tesco table, before the cull shortlist is finalised...

In other words, an unprecedented set of assortment decisions is being made by Tesco using commercial logic based on demonstrable consumer demand and aimed at providing a simple choice for the consumer-shopper.

Suppliers would be well advised to adopt a similar approach... 

Argos-Sainsbury's Digital store test - an opportunity for two-pronged shopping missions?

News of Sainsbury’s addition to its concession portfolio (30 firms including Timpson, Jessops, Virgin Holidays and Thomas Cook) by opening ten pilot digital Argos stores in Sainsbury's that will aim to offer a broad range of general merchandise, in a combination of in-store purchase and click & collect.

The concessions route has to be a no-brainer for Sainsbury’s (or any other over-spaced squeezed middle player) especially as the quality of the partnership can be optimised using the old Kwik Save formula of a basic rent + a percentage of sales…

Whilst this is another way in which Sainsbury’s can optimise the 6% underutilised space in larger stores and add to its general merchandise offering, the real advantage for suppliers has to be the opportunities and scope for joint promotions that link Sainsbury’s and appropriate concessions in a multifaceted shopping mission.

Depending upon the category, promotions that lead on either the concession or Sainsbury’s products have to result in synergies and therefore increase their appeal for both retailers..

Other Sainsbury’s concession partners include Centre for Dentistry, Bupa, Johnsons Dry Cleaners, Explore Learning, Starbucks, RAC, and AA. Details on Sainsbury’s concession deal here

'Amazon Calling' - a new email delivery service to wake up corporate providers

News that Amazon have launched an email and calendar management service could be a surprise, but not a shock for wide-awake NAMs...

Aimed at the corporate sector in competition with Google and Microsoft, this has to be another example of Amazon checking through categories where complacency and the resulting pricing may provide an opportunity for simplicity and efficiency to gain a toe-hold.

Whilst we used to say that the major mults would eventually provide a means of satisfying our every need, Amazon are actually making it happen...

Apart from early adopters that may like to check out Amazon's Workmail now, the real issue for NAMs is where will Amazon strike next...?

In other words, why not check out if your, as yet untouched, category exhibits any of the Amazon-appeal criteria like complacency, inefficiency and the resulting pricing that may raise its profile with this 'virtual conglomerate'...and prepare for the inevitable...  

Unilever chief executive slams short-term profit mentality - the options for NAMs...

News that Paul Polman has criticised the traditional City benchmark of shareholder value raises important issues for NAMs.

As you know, 'shareholder value' is the value delivered to shareholders because of management's ability to grow earnings, dividends and share price, all driven by wise investment decisions and a healthy return on invested capital.

In practice, this means generating a steady ROCE of 15% per annum, a level that gives a company autonomy, freedom to make longer term decisions, and 'independence' of the City, who are essentially in the reward-for-risk business. The City will tend to leave successful companies alone to 'get on with the good work'...

'Acceptable' Returns
When it comes to type of business, branded suppliers need to generate between 5-10% Net Profit, and retailers 3-5% Net Profit, and because retailers rotate much of their capital (i.e. stock) faster than suppliers, both types of companies can deliver ROCE's of 15%+, all things being equal.

The problem has been the global financial crisis driving down net profits below these levels, and in turn the ROCE and thence the share price. This means greater pressure from the City to increase the bottom line, fast. And all in an increasingly high risk environment.

As you know, profit can be increased either by driving sales or cutting costs, or a mix of both, with cost-cutting being the fastest route in the short term. Hence the product content reductions/compromises, range rationalisations, sell-off of brands and properties, savings in working capital via extended trade credit, pulling forward commercial income and all the other issues that have come to haunt us all in recent times...

The ideal formula
The City are a vital source of funding and will only be encouraged to back off if the ROCE reaches, and is maintained at, acceptable levels.

Polman is right in that the starting point has to be the (savvy) consumer, via a combination of Product, Price, Presentation and Place that is demonstrably better than alternatives, made available to them however, whenever and wherever they choose to buy, resulting in a degree of satisfaction that causes them to willingly return for more and hopefully tell their friends... And all at a level of profit that satisfies the money men...

NAM action
However, in the short term, NAMs need to work in the here and now. They need to reassess their own finances - and those of the competition- but especially the financial health of their customers, in order to try to appreciate the degree of City pressure on all stakeholders.

Within this commercial reality, make an assessment of their relative competitive appeal to retailer and consumer, and strip out anything redundant.

Then check the cost to the business of each element of the offering and translate it into the incremental sales each represents to the retailer in terms of value. Then go in and make every pound count...

Alternatively, why not try asking the City to politely get out of the way...? 

The 120-day trade credit norm – an eventual turnoff for the consumer?

As Diageo become the latest major company to extend the credit taken from their suppliers to between 90 and 120 days, the law of unintended consequences begins to kick in...

Passing extended credit burdens back up the pipeline can be regarded as a way a supplier can attempt to neutralise the cost of the credit they have to give their customers. However, as you know, a high added value company can never hope to fully pass on to their suppliers the cost of credit they give their customers.

This is because, in the case of a supplier where bought-in ingredients represent say 10% of their £75 trade price, when their customer on a trade margin of 25% delays payment of that trade price, the supplier would have to delay payment of their suppliers by ten times to cover the cost of the customer’s credit.

The key issue here is not just the pain they inflict upon a trade partner who cannot afford to pass on the cost to their supplier, if any.

What really matters is that, as 120 days becomes 'a common industry norm', so too the major retailers will be tempted to extend their credit periods to 120 days, 150 days or even 180 days, with payment every six months becoming a possible settling point...until the major suppliers attempt to catch up.

When even a savvy consumer accepts that credit over 30 days (itself an abuse of power when value can be exchanged in five days) is unacceptable, and eventually results in higher prices on shelf, they will attempt to exercise their ‘walkaway’ option, probably en masse…

In the way consumers are becoming increasingly critical of global companies finding locally legal ways of side-stepping their tax obligations, so too they will eventually make a connection between supply chain abuse and what they have to pay on shelf, and begin to boycott both brands and retailers...

Meanwhile, the only answer for a supplier faced with excessive credit demands in this generic world is to offer a package so unique and of such value that one earns the ability to deal a ‘walk-away’ card onto the table, and mean it….

Tesco's New Supplier Network - some opportunities to miss?

Tesco’s interactive online supplier-collaboration platform is a step that could easily be converted into a leap forward.

How about Tesco becoming the first really transparent retailer, revealing aspects of the UK business that are usually kept hidden ‘because of commercial sensitivities’…?

Think what productive use suppliers could make of the following:

• UK Credit periods: average days, and proportional split of payments in advance, on delivery, and 20, 30, 45 and 45+ days… (+ rationale)
• Brand/Private-label split, overall and by category
• Sales/sq. ft. by category
• Gross & Net Margin split, by category
• Trade investment/Commercial Income: Tesco definitions of each bucket, their purpose, KPIs and method of accounting
• Split of back & front margin

Tesco have begun a refurbishment of their supplier-relationships, in what will continue to be a challenging and distracting environment (SFO fall-out, increasing consumer sensitivity to David-Goliath corporate relationships…). 

Instead, why not go for a fundamental fact-based renewal of those relationships, via a unique context of openness that will allow and encourage suppliers to design and deliver proposals that will directly address the fundamentals of the supplier-retailer partnership?

Naïve? Of course it is naïve, as with any leap in the dark…
...a darkness where suppliers currently operate, building in +/- buffers to cope with best guesses on key retailer drivers and measures, instead of being able to fine-tune proposals that are tailored to help trade partners to optimise ROCE, in the interest of meeting consumer-shopper need, a primary driver for both parties…