Kamcity Library - To Remain the Same, Everything has to Change*

If retailers want to continue to grow at current rates, using the same business model, they may have to do so without the help of some key suppliers. Given several years of zero price increases, many suppliers have now cut all the ‘fat’ from their end of the supply chain, have reached limits on their ability to absorb cost increases and are fast approaching the ‘walk-away’ point in dealing with key customers.

If retailers want to continue to rely upon high levels of availability, low levels of stock and extended free credit they will need to reassess and make radical changes in the retail business model.

The current small-business/political backlash against multiples’ power is merely a symptom of a fundamental change taking place in the marketplace. The real issue is the serious damage being done to supplier business profitability as a result of a growing imbalance in the way in which each end of the supply-chain is being funded. As a result, major multiples are growing share at the expense of smaller shops, but because prices are lower, political reaction is still minimal. However, this has not prevented a succession of retail and supplier casualties in the UK during 2005 (Allders, Food Brokers, Allsports, MVC, Unwins, Kookai and Golden Wonder).

Now, as more suppliers reach and go beyond their financial limits, each public liquidation will add to a build-up in a political tide that may become too strong to stem via a round of PR initiatives. Essentially, the problem of imbalance is based upon the fact that retail product margins and credit periods from suppliers are too high, given the other parts of typical product-offer packages. In the case of liquid milk, according to a presentation by Lord Haskins at the Semex dairy conference in Glasgow, The Grocer (21/01/2006), retailers have 25-35% margins on liquid milk, vs. 8% in France, turn stock up to twice a day and pay suppliers after 60 days.

If we accept that a retail gross margin on a product is meant to reflect the effort required to make it available to the public, and covers stocking costs, display and wastage, then it would appear that liquid milk suppliers are giving over-generous margins in providing a product that out of necessity has to be handled efficiently at retail level.

In the same way, if a credit period is meant to bridge the gap between delivery to the retailer and payment by the shopper, then a product turning daily should carry a credit period of say 5 days in order to allow for bank processing, etc. The same argument applies to a slightly lesser extent in the case of health, beauty and other packaged goods categories where retailer margins can be between 20 and 60% gross, suppliers are delivering some SKUs on a daily basis, and are being paid in 30 to 45 days.

The basic political fallout from this margin-credit issue is being compounded by apparently non-negotiable demands by some retailers for improvements in terms such as Sainsbury’s request in 2005 for an additional 4 weeks credit to correct an ‘over generous’ 3 weeks credit period previously available. In December 2005, Halfords’ apparent demands for a cost-price reduction of 5%, an increase of 2.5% in retrospective rebates and an extending of credit to 120 days actually made the national press. Finally, B&Q’s apparent demands in January 2006 to move from its current 49 days to payment of suppliers in 90 days will simply add to the rising political profile of these issues.

This will cause key suppliers to seriously re-assess what is reasonable in terms of margin and credit period, and then ‘demand’ appropriate changes in the retail business model.

Unless some large retailer regains competitive and political advantage by doing it first….

* The Leopard. (Lampedusa)

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Date article published: 01/02/2006

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