KamLibrary - Dealing in Business Reality, the New Optimism…

In the current climate business success, and even survival, is about being able to optimise reality. Indeed, if you do not face up to reality in business, others will do it for you… Hence the reason why shareholders, bankers and even politicians gradually increase their influence on a faltering business until they eventually officiate in its liquidation.

Accepting business realities as a basis for business development is a way of moving forward, whilst doom ‘n’ gloom is a deeply pessimistic outlook or feeling that usually limits positive action because of fear and uncertainty about the future. Deep down, the ultimate reality is cash, with Return On Capital Employed (i.e. reward for risk) the ultimate KPI.

Suppliers and retailers operate in a real world where businesses that do not generate sufficient reward for risk eventually go bust. Although they are officially protected by legislation, in practice each business operates on its own, and is responsible for its own survival.

Incidentally, NAMs and KAMs that have become uncomfortable with this real world existence could possibly take evening classes in banking or local government and transfer to jobs where these realities do not apply…

Despite politicians’ daily assurances that we are at the beginning of an upturn, this ‘upturn’ is invariably contradicted by the reality of flat-line growth as we end each year. Moreover, their constant attempts to reassure us that the latest country-insolvency and bank insolvency (‘undercapitalisation’) are simply isolated incidents, well manageable, courtesy of the taxpayer, has destroyed what remained of political credibility, even for the unsavvy consumer…

Realistically, we are at the beginning of a flatline decade, minimum, with any business growth coming at the expense of the competition. Moreover, as we enter the New Year, it is probable that the death of the Age of Credit will be marked by a breakdown of the euro, or at least a radical change in the business-political model, everywhere…

These are radical changes in already fragile markets that will respond in panic despite warnings of their inevitably that were obvious to business realists as soon as the global financial crisis unfolded.

In these circumstances, simply ‘adding a bit’ to last year’s forecasts and hoping for the best, is no longer an option.

For suppliers this means reassessing the entire brand portfolio in terms of real demand for demonstrable value for money vs. available competition, and ruthlessly cutting away any excess, before the savvy consumer does it on your behalf.

On the high street, many retailers still struggle under excessively long leases with upward-only rental movement and no break-clauses. Here the game is about cutting costs faster than sales fall and defending the multiple’s share of the same higher-margin brands. This will inevitably lead to extra pressure on supplier selling prices. It will also mean increased trade concentration as the survivors demonstrate that facing up to market realities is the only way forward.

Retailers need to switch their focus from like-for-like sales to profit improvement. In the real world, the retail survivors will increasingly appreciate that they are cash-machines that happen to sell groceries. They will become more aware of the fact that being able to sell for cash, and pay in 45 days is a unique advantage in a flatline market where credit has become the first casualty, all courtesy of suppliers, the new ‘bankers’.

In these circumstances, retailers can be made to acknowledge that combining gross margin with rate of sale is a better measure of profitability than what happens to reach the bottom line. Given the right presentation by a realistic NAM, they will appreciate that net profit on incremental sales is a better measure of the value of trade funding than simply the size of the cheque… In other words, £1,000 in trade funding to a retailer making a 2.5% net profit is the equivalent of incremental sales of £40k…

Welcome to the real flatline world, a world where retailers accept the real value of brands, not because they want to, although they need to, but because NAMs are skilled in calculating and demonstrating the value of each part of the brand-package and refuse to proceed without an acknowledgement reflected in enthusiastic collaboration in the aisle.

In a flatline world there is simply neither time nor inclination to wallow in doom ‘n’ gloom, when so much can be gained by business realists while others succumb whilst awaiting a return to ‘normal’…

For KamTips on 'Demonstrating real-world profitability in flatline markets', see NamNews - November 2011

Date article published: November 2011

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