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….
