KamLibrary - Cost & Value Optimisation in Trade Partnership

Given the increasing difficulty in securing trade price increases to cover cost price inflation in the face of retailer resistance, coupled with increasing rates of buyer churn diminishing the value of supplier-customer relationships, it is becoming increasingly important to be able to calculate and demonstrate the real value of a supplier’s brand to a retail customers’ financial performance.

In order to place the retailer’s current business performance in context, it is important to compare their open domain financials with global, regional and local retail competition. Given that the global players Wal-Mart, Tesco, Alliance Boots and A.S. Watson already compete head-to-head in the UK, it only remains to add Sainsbury’s, Morrisons and the Co-op to the exercise in order to assess the effort required by any of these retailers to succeed in one of the world’s most competitive markets. As it happens, Tesco is setting the standards locally for leading-edge retail. Any retailer hoping to succeed in the UK has to compete with Tesco for stockmarket investment, credit from the banks, shoppers’ custom, and supplier collaboration.

Moreover, suppliers need to maintain a balanced customer portfolio in order to manage risk and dilute the potential impact of trade concentration. However, a supplier needs ways of measuring risk and reward in choosing to support one customer at the expense of another. Effectively, this means that financial performance, as communicated via the P&L and Balance Sheet, and expressed in terms of ROCE comparisons with other players, becomes a key business driver for all stakeholders.

The relative appeal, especially financial stability, of a supplier is in turn judged by the retailer in the context of the financial performance of other suppliers. It follows that the supplier needs to be able to analyse and understand its own open domain financials, in terms of understanding what it costs to invest in the retailer, relative to the ability of competing suppliers to invest similar amounts in the same customer. It follows that being available in the open domain, the supplier’s financials are also available to competitors, helping them anticipate trade strategies, but even more importantly, a retail customer can analyse a supplier’s financial performance and deduce the supplier’s ability to give more trade support in negotiation. This means that the supplier needs to be able to understand and ‘defend’ apparent excesses of profit when compared with those of other suppliers and the customer.

The value of a brand to a retailer is determined by its ability to attract traffic to the store, there to be confronted in the aisle by a choice between the ‘destination’ brand and a private-label alternative with an appeal driven by price and or quality. The supplier can only hope to counteract this potential ‘switch-sell’ either by supplying the private-label or investing in sufficient shopper-marketing in the aisle that the retailer reduces its dependence upon the private-label alternative.

However, the supplier’s key efforts have to be addressed to tracking and demonstrating the financial impact of all investment on the customer’s business. Whilst pound for pound a supplier currently achieving net profit margins of 10% can build a strong case upon the fact that an incentive costing the supplier £1k, requires a sales increment £10k to cover the cost; the same £1k received by the retailer having a net profit margin of 4%, is equivalent to achieving a sales increment of £25k. However, optimising value depends upon the ability to identify the monetary impact of a supplier’s brand on the retailer’s overall financial performance. In other words, it is important to assess how much money the retailer makes from every aspect of the supplier’s total offer package, and relate this directly to the customer’s ROCE performance.

Without the ability to plan and implement the above process in buyer-seller negotiation, all supplier relationships with customers will become short-term and transactional, resulting in a pre-occupation with lowest price... A supplier’s brand value deserves more….

For KamTips on 'Building on relative appeal as a supplier' see Namnews – January 2008

Date article published: 01/2008

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