Kamcity Library - Standing up to the Reality of Retail…

Survival for suppliers in the current retail climate means being able to understand the realities of the retail business model and insisting upon a fair share of the risk-reward investment as equal business partners…

Essentially, good retailers work in the ultimate reality of open-market buying and selling. They operate in a ‘live-money’ environment, where they are paid in cash, and need to measure the financial impact of each element of the retail offering in terms of cost and value. They also attempt to pass all business risk back up the supplier pipeline.

Moreover, as they attempt to optimise shopper-visits and ensure return-visits, retailers are constantly looking for proof-of-value by their customer-base in real time. They need to be able to make and measure micro-adjustments to the retail offering, knowing that they are dealing with shoppers who vote with their feet if their needs are not being met…and all increasingly under the eyes of the Government and media…

In contrast, branded manufacturers are compelled to extrapolate ‘universal’ insights from sample-consumers, know less about their user-base and in the main have to operate through third party retail intermediaries. A supplier can therefore benefit significantly from the synergies resulting from combining shopper & consumer insights. However, understanding the retail financial model can convey real insights:

A retailer’s low net margin means that because of knife-edge financing, a 1% increase in sales transfers to the bottom line as a profit gain of 40% for a retailer with a 2.5% net margin. By the same token, a 1% cut in cost price, given a 75% average cost of goods, produces a 30% increase in net profit, for the same retailer.

Bearing in mind that a supplier provides up to 80% of a retailer’s working capital, free of charge, it could be said that good retailers need good suppliers….

This immediacy of retail not only makes for exciting business partnerships, but can also help a supplier to incorporate ‘real world’ elements into the supplier business model, identify mutual needs and provide a basis for a more equal relationship with retail customers.

However, facing up to the reality of retail means acknowledging that retailers view brands as ‘guarantees’ of financial performance, in terms of building consumer demand, allowing appropriate retail prices at even a 1% premium, generous margins, free credit and conduits for trade funding.

In addition, the brand attracts ‘its’ consumer to the store, to be confronted in the aisle by a private-label that can represent equal or better value for the ‘uncommitted’ shopper, thus generating incremental business for the retailer. Finally, zero-defect deliveries allow a retailer to operate on minimum levels of stock, and offer 100% availability.

Given this degree of mutual need it is imperative that all suppliers identify and measure their impact upon the retailer’s financial performance and insist upon deals that provide a fair share of risk and reward as a price for maintaining the business partnership.

This means reducing all aspects of the buyer-seller relationship to measures of cost and value, and insisting upon their acknowledgement within the partnership, or else….

KAMTips:Identifying and using the supplier’s contribution to the retailer’s business performance

Essentially, a retailer’s business performance is judged by its ability to generate an acceptable Return on Capital Employed, given level of perceived risk and peer-group performance.

In order to become equal trade partners, suppliers need to be able to identify and demonstrate their impact upon the retailer’s ability to deliver proof-of-value to the shopper, at all levels within both organisations. This ability is based upon a practical insight into how the supplier and retailer business models interact.

An ‘acceptable’ ROCE (say 15%) not only drives share-price performance, but also determines the rate of bank interest on the retailer’s borrowings, the supplier’s willingness to invest trade funds, develop invest-partnerships and provide working capital via free credit.

Incidentally, suppliers who still believe that their buyers are driven only by Gross Margin and Sales Performance need to consider that as their remuneration package now includes a high proportion of share options, buyers are increasingly motivated by the ROCE impact upon share price.

This means that suppliers can influence the retailer by understanding and being able to demonstrate their direct impact upon the retailer’s ROCE. As most suppliers know, Return on Capital Employed = Return on Sales x Sales/Capital Employed (details available free to Namnews subscribers on: www.kamcity.com/kamtips/NAMstats/stats12se.asp). This is essentially about the supplier’s ability to drive retail sales, reduce retail costs and enhance retail margin.

Return on Sales: It follows that the provision of strong brands, good quality own-label and practical category management can help the retailer to enhance shelf prices and overall sales performance. Effective negotiation between equal partners can then determine jointly profitable prices, terms and provide a basis for willing compliance. Good forecasting based upon shared shelf-data and shopper-insights can optimise factory productivity and supply chain efficiency, thereby enhancing supplier margin, in turn enabling adequate investment in the retail partner.

Sales/Capital Employed: a supplier drives a retailer’s capital rotation by enhancing sales performance via attracting appropriate customers to the store, improved shopping-basket performance and increasing yield from shelf space.

The supplier can also affect capital rotation by reducing the retailer’s levels of Capital Employed, i.e. improving Fixed Assets and Current Assets usage, and optimising Current Liabilities. This means enhancing fixed asset productivity via effective space-management and fair-share within the category.

The supplier affects the retailer’s Current Asset levels via zero-defect delivery at high frequency, enabling 100% availability on shelf at minimum levels of stock. The retailer’s Current Liabilities are optimised by the supplier’s willingness to provide free credit for up to 30 days combined with daily delivery.

It is obvious that a good supplier can materially enhance the retail-partner’s business performance, but it is crucial that KAMs articulate this impact financially, not only with the buyer and other functional contacts but also with members of the customer team within the supplier business. Each element of the supplier offering needs to be ‘costed & valued’ into the supplier-retailer equation in order to gain and maintain respect as equal business partners in what is currently a very unequal relationship in terms of investment and reward.

Only in this way can a supplier demonstrate proof-of-value where it really matters…

Date article published: 01/06/2006

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