KamLibrary - Fair Share Trading in Unequal Times

Whilst a government can attempt to legislate in cases of extreme abuse of a supplier’s rights, the difficulties in implementing the ‘new’ GSCOP legislation indicate that day-to-day the search for fair share is really determined by the quality of the supplier-retailer relationship, and has to be driven by the supplier. In other words, achievement of a fair share in trading relationships depends largely upon a supplier’s ability to calculate and demonstrate the real value of a brand to the retailer.

Given that major retailer businesses are usually significantly larger than their suppliers, the retailer can usually dictate terms on a take-it-or-leave-it basis. Again, when it comes to relative cashflows, the retailer is usually in a better position to ride out market turndowns, thereby adding to the imbalance of power. Moreover, as a market and economic downturn becomes even worse, so too the balance shifts even more in favour of the retailer. Thus, over time, a supplier’s profitability can be eroded, making it difficult to sustain service levels, maintain availability and eventually leads to delisting…

As the priorities of the supplier shift to maintaining the major retail business, so their business with medium and smaller retailers becomes vulnerable. In other words, failure to trade on a fair share basis can result in supply-side liquidation.

It is obviously in the interest of both parties to seek and achieve realistic levels of fair share trading in their relationship. Moreover, for survival of the relationship there has to be a reasonable opportunity for the supplier to optimise the risk-reward trade-off. This means that the supplier, as a fair share partner, can invest in the relationship in the knowledge that their share of profit is proportionate to the risk they are prepared to take with the brand.

In building a basis for optimising a mutually profitable trading relationship, the starting point obviously has to be the consumer-shopper… Whilst the retailer has a monopoly on consumer and shopper information, their lack of analytical resource and the sheer quantity of SKUs means that they need to outsource the analysis of data and shopper insight. The brand owner is obviously qualified to demand the right to be offered first refusal in such outsourcing. All that is required is the ability to demonstrate objectivity at each stage in the process.

If the brand owner can be relied upon to assess available category information as if they were an independent category consultant who happens to carry a specific brand – supplier’s bag, it becomes increasingly difficult for the retailer to spend time exploring alternative sources of shopper-insight. By deriving consumption insight based upon a strict evaluation of the brand’s ability to meet consumer real need better than the competition, and adding it to shopper insight, the supplier brings real synergies to the process… The brand owner thus becomes more important in the supplier-retailer mix, in ways that the retailer cannot easily replicate.

The key idea for suppliers is to define a category role that capitalises on their strengths, whilst building upon areas that the retailer is not inclined to, or has not the resources to replicate. The supplier is thus building a platform that makes it easier to justify a fair share of profit in unequal times.

Next it is important to assess the retailer’s ability to survive the combination of currency and financial crises using existing resources. Success in the current climate will be determined by a retailer’s ability to self-finance their expansion, meaning being sufficiently low geared (30% or lower) that a high proportion of its cashflow can be directed to internal investment. Moreover, a relatively high net margin, say 5%+, means that servicing costs of the low borrowing can be financed without over-dilution of net profits.

Finally, fast rotation means that stock financing costs are kept to a minimum, again preserving net margin. As retailers are cash machines that happen to sell groceries, the retail business model is best suited to survive current financial pressures. Retailers such as Tesco and Morrisons that have evolved the above financial profile, are likely to be more receptive to a supplier that can calculate and demonstrate the supplier’s impact upon their financial performance.

Thus a supplier that can build financial value on a solid base of consumer-shopper insight, wrapped around a brand that can demonstrate a competitive edge in a valuable category is uniquely placed to present a compelling case for fair share treatment by a leading-edge retailer, where a threat to walk away carries real weight.

All else is detail…

For KamTips on 'Tipping the Retailer-Supplier Power Balance', see NamNews - October 2011

Date published: October 2011

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