KamLibrary - RecessionKAM: Managing Major Customers in the Downturn

With business news worsening daily, it is tempting to await a return to some stability in the market before setting a trade strategy and moving forward. Apart from the futility of awaiting a return to ‘normal’, any delay can represent a lost opportunity. Business management of a customer is about treating the recession, however deep and long, as just another factor affecting the conduct of a business partnership. The key advantages of recession are the opportunities presented when most competitors are looking backwards...

Essentially, the current mix of uncertainty, financial turmoil, lack of liquidity and unprecedented political change means less competition, more talent available, and real opportunity for those who can manage to commit to a do-or-die attitude in implementing a realistic trade strategy.

The key is to face up to what makes this recession different: The recession is global, and the banking systems are compromised. Consumers who are able and prepared to spend will be more demanding of demonstrable value for money, able to compare like never before. The competition remaining will be more focused, and determined to secure a fair-share slice of the shrinking cake, via retailers who are in multi-channel mode, exploiting all prices and terms discrepancies.

Successful retailers will have broken down the three-month advance rental rule, saving two months impact on their cashflow in the process, while others will resort to pre-pack administration, and buy back their best assets, minus the creditors... There will be increased focus on the satisfaction of shopper-need via private label and tailored formats, and a drive to eliminate costs and push risk back up the supply chain. In essence, the good companies in both retail and supply will get bigger by making reduced monies work harder than before...

The real opportunity for suppliers exists in the political freedom to take radical steps that would have been inconceivable before the recession. In other words, because of the danger of continuing as before, and failing to respond radically and decisively to a totally new environment, companies are now prepared to tolerate fundamental steps in areas normally regarded as sacrosanct, in the absence of many alternatives. The key attributes are decisiveness, and a determination to do basic things very well.

In practice this means clearly defining consumer-shopper need and using this insight to drive a thorough and ruthless rationalisation of product and customer portfolios. Specifically, this means systematically auditing every SKU against real need, compared with available competition, ruthlessly eliminating overlap and focusing upon resulting core strengths. In the same way, it is crucial to apply the same principles in a systematic audit of the customer base in terms of available routes to consumer, classifying each customer and channel as either invest, maintain or divest, and using this classification to drive investment. Managing invest-partners via a fully informed and committed multifunctional team, based upon a firm determination to preserve brand equity, and optimising trade funding will help in demonstrating the supplier’s financial value to the customer. It is crucial that in return, the supplier receive guaranteed compliance in a fair-share partnership.

In the current climate, an effective four-year recession strategy requires that a supplier making a net profit of 10% achieves a minimum of £100k of incremental sales to cover a £10k investment. Otherwise the supplier will need to ‘milk’ an over-producing customer to make up the difference. In practice cash cows were amongst the first casualties of the recession. In terms of the value to the customer of a supplier’s trade investment, a customer making a 5% net profit, needs incremental sales of £200k to produce the equivalent of the £10k investment received from the supplier. The £10k investment thus has a ‘cost’ to the supplier of £100k and a ‘value’ to the customer of £200k. It is imperative that the supplier and retailer reach agreement on this point. It follows that a £10k investment is twice as valuable to a customer making a 2.5% net profit; the only issue being the extent to which it is better for the supplier to invest in a tougher but more profitable customer, in preference to helping a weaker customer to reach acceptable levels of profitability.

Finally, it is important to recognise the pivotal importance of two major customers in most suppliers’ trade strategies over the next four years. Tesco, because of their leading-edge status and global-reach via shops and own label, have to be a supplier’s key invest partner, and the Tesco strategy a template for managing all other customers.

Alliance Boots, because of their need for global scale in Health & Beauty, matched only by their ambitions, in order to implement a viable exit strategy via re-flotation, require very careful consideration in terms of classification as invest, maintain or divest and certainly cannot be ignored.

All else is detail….

Date article published: February 2009

For KamTips on 'KAM Tools Made for a Recession…' see Namnews – February 2009

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