Working Around 'Bankrupt' Customers
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

Latest research indicates that recent downbeat reports from retailers including Mothercare, HMV, Currys and PC World parent Dixons Retail, are indicative of the current pressure on retailers in the UK.  In addition, other research revealed that more than 8,000 UK retailers were apparently in danger of going under last month. 

At the same time the unexpected fall in inflation in March was caused by a marked fall in food prices during the month.  As raw material and packaged goods prices continued to rise in this period, it would appear that the inflation dip was caused by genuine price wars the major multiples have been waging since the start of the year in an effort to kick-start demand.

In other words, retailers are under unprecedented pressure that will inevitably cause weaker players to go into liquidation.

Bearing in mind that if a customer owing £150k to a supplier on a 5% net margin goes bust, then the supplier needs incremental sales of £3m to recover the loss, it is obviously in NAMs’ interest to improve their ability to recognise the signs of a customer in financial distress (see KamTips, p33) and take adequate precautions.

In practice, this means assessing the financial health of the customer portfolio and conducting ‘what-ifs’ on possible casualties.  If replacement sales cannot be found via the stronger players or alternative channels, then the company will need to reduce forecasts and make appropriate budget adjustments.

At the same time, corporate recovery experts Begbies Traynor have just released their Red Flag Alert indicating that 186,544 firms experienced “significant” or “critical” distress in the first quarter of 2011, a rise of 15% on the previous year.  This not only means further reductions in consumer demand but it also indicates that some suppliers may be suffering cashflow issues and even fighting for survival.

For realistic NAMs, this unprecedented environment whilst painful, is simply another market scenario, and business is about being able to perform as well as, or better that competitors operating in the same market conditions. 

Despite the fact that confronting ‘doom and gloom’ may be seen as demotivating, we sincerely believe that in the current climate, the NAM role in 2011 is about being able to face up to and optimise reality, failing which someone will do it on their behalf.  It is about being able to perform as well as, or better than, equivalent companies in the marketplace, whatever the circumstances…

Having to manage customers in a bankrupt environment is not only unprecedented, but it should be borne in mind that operating under these conditions through the remainder of 2011 can provide the equivalent of twenty years of highly concentrated business experience for those prepared to take up the challenge.

The key to being able to survive and move forward is to have a firm understanding of how money works in business, both supply and retail.  As always, business survival and success is about achieving a balance of risk and reward, measured in terms of achieving an adequate profit on the money put at risk in a business.  In other words, being able to achieve at least 15% return on capital employed.  This is driven by net margin and rate of capital turn.  Businesses are either high margin coupled with relatively slow stockturn (cosmetics) or narrow margin and fast stockturn (dairy products), and the key for NAMs is to understand their business model and drive it appropriately.  Incidentally, comparisons with equivalent companies in supply and retail can be made via Companies House or other open domain data.

Either way, it is crucial that suppliers find ways of working around the problem of dealing with companies on the brink of liquidation.  The resultant mind-focus will make NAMs very decisive in terms of realistic assessment of customer risk, more sparing in their application of trade funding, more conscious of the incremental sales required to recover investment in their customers and ruthless in their demands for demonstrable compliance in a fair share partnership.

In other words, if you can make it in this environment, nothing, repeat nothing, will ever be more challenging….or satisfying.

For KamTips on 'Bankruptcy, spotting and acting on the signs', see NamNews - April 2011

Date article published: April 2011