KamLibrary - Certain Basics in Uncertain Times...

A general response to the global financial crisis has been confusion at most levels. This will be followed by fear in the New Year, as it becomes evident that the knee-jerk reactive moves by the system have failed to produce adequate results… Those in doubt should refer to the Begbies Traynor ‘critical watch-list’, containing 323 retailers having a 70% plus chance of going bust in the New Year, probably accelerating the structural shift from town centres to the giant malls in the process.

Onerous inflation-linked retail rental terms, with upward-only rent reviews are hangovers from the past, and will cause properties to revert to landlords as retailers go bust. Landlords will then have to cut rents to levels that represent value-for-money for prospective tenants. In fact, demonstrable value for money will become a key certainty in all aspects of the supplier-retailer relationship, with fair-share of risk and reward a given component of all trade partnerships. In other words, all the chips are now down...

Given the rapid rate of change, it is tempting, but risky, to await a return to ‘normal’ before resuming a strategic approach to managing major customers. Better to focus upon what is certain, while others await the arrival of a new business model in order to redefine what remains of their future. However, success in business is about finding ways around negative turns in a market. It is by no means all ‘doom and gloom’. Neither is it about ‘business as usual’. In fact, it could be said that the past 15-20 years have been very unusual...

Some suppliers have responded to the financial chaos by keeping busy doing what seemed to work in the past. Others have simply cut costs, everywhere. However, pro-active suppliers recognise that significant opportunities always exist amidst confusion, especially when others are facing the other way, caught in the headlights. In fact, pragmatic NAMs & KAMs are finding a way forward by isolating and reverting to the few certainties that remain in uncertain times, the business basics, the most important of which is the relationship between risk and reward.

With the UK Bank Rate heading towards 1%, and eventually 0%, perhaps by January/February ‘09, it could seem that Return on Capital Employed, the universal KPI, should follow downwards. In other words, because ROCE measures the relationship between risk and reward in business, the ultimate benchmark was traditionally the interest rate for safe deposits. In practice, this meant that when 5% was available on safe deposit, an ROCE rate of 12-15% was a reasonable return on money placed at risk in a business. This level of performance drove the share price upwards, ensuring autonomy and independence, lower costs of credit from banks, and the active support of suppliers...

Given that the UK banks were bailed out by the Government with loans costing an unrealistic 12% ‘interest’, in contrast with Germany, France and the US at approximately 7%, the ‘real’ rate for money on deposit is probably 5-8%, despite the 1% currently available. Thus, a reasonable rate of ROCE for business remains at 12-15%, minimum. This level of ROCE performance thus becomes a crucial and primary measure of a customer’s suitability as a trade partner. The first move therefore has to be to ensure that ‘invest’ trade partners are currently achieving acceptable levels of ROCE, i.e. 12-15%. This means that if a supplier decides to invest in a trade partner of lower ROCE, there has to be a real possibility of raising that performance to over 10%, fast enough to justify the additional risk involved...

Next, the suppliers have to ensure that their own businesses operate at 12-15% ROCE, in order to ensure that they maintain their freedom to invest in key customers, safely. This provides a basis for developing a mutually productive trade partnership for both parties that reflects the current real-world economic environment.

Essentially, what has changed radically for trade partners is demand for value-for-money at each stage in the supply chain, all the way from green field to the consumer. This means that each element of the supplier-offering has to be examined in terms of its impact on the financial performance of each element of the retailer’s portion of the supply chain, and sold actively on a fair-share basis, on a multi-level and multi-functional basis to both parties.

Anything less will be all ‘doom and gloom’, the final certainty….

Date article published: December 2008

For KamTips on 'Making ROCE Work, in Uncertain Times' see Namnews – December 2008

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