Competing With the Best and Worst…
(How to risk-manage a combination of strong and weak customers in the market)
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

When the trade is polarising rapidly, helped by spectacular performances of the top two retailers in contrast with the other players, a vendor is presented with a major dilemma…

The key issue for vendors is whether to drive the top performers in the customer portfolio and chase fair-share growth, or try to spread business risk by reducing support at the top end, and investing heavily in the other players in the hope of helping them to match top-end growth...

Much depends upon the vendor’s risk profile.

Matching resources by risk-profiling

• Risk-Seeking: taking a calculated gamble on a business investment, focus on sales building
• Risk-Neutral: more conservative approach, balance of careful sales building and cost control
• Risk-Averse: avoiding all business risk, focus on sales maintenance and cost-cutting

Essentially, a highly focused, risk-seeking vendor will find it easier to stand the internal and external ‘heat’ of fully supporting successful customers, and in the process accelerate the polarisation of their customer base…This makes it necessary to help multifunctional and multilevel colleagues to appreciate the pace of trade change in key customer performance and the consequences in terms of accelerating demands upon liquidity and service level.

Moreover, the company will have to simultaneously invest in or maintain its second-level trade partners, based upon a realistic assessment of each customer’s business potential. (For instance, given the rapid changes in the trade, historical performance in the UK provides little more that a reference point… Contrast the traditionally strong Sainsburys, Boots, M&S and WH Smith historical positions, as they each struggle to find a new formula, and as a result exhibit little upside potential, with Morrisons, who are currently struggling with the process of amalgamation. However, as the new owners of Safeway are merging the companies with a high degree of focus, combined with significant potential for growth, this combination will inevitably attract higher levels of vendor investment) 

At the same time, the independent trade and Cooperative  sector, historically in decline, are coming back from the edge by aggregating resources via buying and selling groups, using increasingly sophisticated convenience platforms, with the added ‘stimulus’ of  competition from the multiples. As a result, they now represent a viable and increasingly valuable alternative route to the consumer for many vendors and should be cultivated as such.

On the other hand, risk-neutral vendors are not only competing with best-in-class risk-seeking vendors, but their policy makers will also regard acceleration of top end retail polarisation as undesirable. As a result they may be tempted to spread company risk by focusing more resource on development of the rest of the trade, in an effort to counter-balance the power of the top multiples within their customer portfolios.  In addition, they may also be tempted to reduce service level to the top customers in an unconscious effort to slow their rate of progress in dominating the customer portfolio.

However, in practice this approach may in fact represent more of a risk than that posed by extreme trade concentration. Better that they settle for slower growth, develop an offer which complements that provided by highly focused, risk-seeking, leading-edge vendors, and become an essential supply-alternative in the eyes of their largest customers.  Moreover, in combining their risk-neutral approach with the customer’s calculated risk-taking, the careful vendor may also provide a restraining influence on the more extreme moves of their trade partners.

Incidentally, with the level of vendor risk and the effort required for survival in the current climate, it hopefully becomes obvious that the rapidly polarising UK trade represents little scope for risk-averse vendors. In fact, few opportunities will exist other than concentrating upon niche category opportunities and meeting the needs of the more threatened of the former key players, on the assumption that other vendors’ best efforts will be directed at customers with more obvious potential.  

In short, as an example of rapid polarisation, the accelerating rate of UK trade concentration is not only bringing out the best and worst in key vendors and retailers, but also providing real business opportunities for companies prepared to manage the risk…

How to match risk and opportunity in top end retail…

Given the rate of change in the trade, it is imperative that vendors measure and manage risk consistently, at all levels and multi-functionally in the company.

Risk analysis process

A quick wake-up call can be applied to the company by conducting a simple risk analysis as follows:

List seven things that could go wrong with the company in the next six months as a result of continuing trade polarisation. Label each risk as high, medium or low in terms of impact upon the business, and then label each risk as high, medium or low to reflect chance of occurrence. It follows that risks scoring high/high and high/medium require contingency plans, whilst those with low/low have been identified, but can safely be ignored. Incidentally, probability theory simply applies numbers to the above and fills in the gaps between high, medium and low, besides taking four times as long and making it difficult to communicate…

The main advantage of this analysis of risk will be to identify key threats and facilitate emergency treatment, but its real value is in introducing the concept of risk to the company, at all levels.

The shock value of this initial risk-presentation will help colleagues to see the need for increased sensitivity to trade change and the use of risk analysis as a means of exploring the implications and taking appropriate action.

Agreeing a corporate risk profile

Next it is important to agree a consistent corporate risk profile. In other words ask colleagues to label the company as risk-seeking, risk-neutral or risk-averse. (Incidentally, risk-seeking colleagues who as a result of a uniform response to the exercise then realise that they are working for a risk-averse company will at last have an answer to their increasing frustration over the years, if they are still working for the organisation…)

It may be necessary to point out that risk-seeking does not mean recklessness, but is merely a carefully calculated approach to taking business chances, albeit with other people’s money.

In practice the result of the corporate analysis will be a spread of risk profiles from risk-averse to risk-seeking, probably reflecting personalities and functions within the organisation, ideally providing the checks and balances in day-to-day operation of the company. However, it is important that key customer facing people have a consistent idea of the company risk profile, in order to minimise customer confusion.

Checking the customer’s risk profile

Next it is important to label the customer as risk-seeking, risk-neutral or risk averse. Again a corporate-wide exercise is useful, and again any major inconsistencies in assessment among the customer-facing team should be investigated and rationalised.

The customer will be found to be risk-seeking, risk-neutral or risk-averse.

It is important to appreciate that it is not essential that risk-seeking customers need vendors of similar profile.  In practice, the marriage of risk-seeking and risk- neutral partners may optimise outputs of the relationship, the one applying restraints to the potential excesses of the other. However, this particular combination of strengths may need to be sold within both organisations.

Finally, in order to place the management of risk within a realistic market context, it is necessary to complete the risk-circle by collectively labelling key competitors in terms of their risk seeking, neutrality and degree of adversity...and factoring the results into trade strategies

Moving from risk to opportunity

Having clearly established risk management as a tool in the process, it can be helpful to capitalise on the insight by corporately conducting an opportunity analysis. This means listing the top ten things that could go right for the company as a result of a positive relationship. Then, using the same high, medium and low labelling of impact upon the company, and chance of occurrence, the main opportunities are identified.

However, more importantly, there will now be a basis for seeking ways of enhancing the impact and increasing the chances of capitalising upon key opportunities in the marketplace.

A risk-averse stance may feel safer, but the company will be slower, darker and slightly boring......until reality kicks in.