Given the choice of brands and products available to retailers, coupled with media fragmentation making it difficult to build brand equity, it seems idealistic to expect to achieve a state of mutual interdependence in a supplier-retailer relationship. If, on the other hand, the relationship becomes one-sided over time, usually with the supplier becoming increasingly dependent upon the retailer, this high-dependency situation may represent a level of risk that is undesirable for either party….
For this reason it is perhaps more realistic to strive for a relationship of ‘mutual independence’, where each party expects, even encourages, the partner to develop their independence within a strong partnership of equals. This means that the customer will accept that the supplier needs to develop its independence, but not necessarily at the customer’s expense. Strong retailers need financially independent and stable suppliers in order to ensure continuous availability.
The detailed treatment of building independence is dealt with in KAMTips but in principle everything starts with establishing the dimensions of the financial relationship between supplier and retailer. In other words, the combination of percentage sales and net profit that the partnership represents for each party, has to be placed in the context of total company business in each case. This means that a customer accounting for 15% of sales and 15% of net profits is probably returning a fair reward for effort. However, if the share of supplier profits is 10% or less, against sales of 15%, then the supplier has hopefully placed the customer in invest-mode, and is being supplemented by ‘excess’ profits being made on another customer. In the long term, unless the customer can be brought up to parity with share of supplier sales, it will eventually dilute supplier profits overall.
In the same way, it can be useful to place the customer’s total financial gain from the supplier’s product portfolio in context by comparing the portfolio’s performance with the customer’s sales and net profit, totally and by category if possible. It is important to have this contribution acknowledged by the customer. Comparing this performance with the retailer’s market performance versus its competitors in terms of ROCE, margin and capital rotation will help to reveal opportunities to assist the customer in achieving fair share on most measures.
Given this base-line, the supplier compares its key products performance with retailer’s averages in terms of gross margin, stock rotation, GMROII, space utilisation and any other ratio for which open domain data is available. This helps to establish and demonstrate whether the supplier is diluting or concentrating the customer’s performance with each SKU. Overall, this insight will help the supplier demonstrate a positive and demonstrable impact upon the customer’s business and thus justify moves to independence. The supplier is then in a position to place other major customers in context, and to set achievable targets in terms of optimising its own ROCE, net margin and stock rotation, based upon comparison with competitors’ performance in the same marketplace.
In practice, the above model will also place the issue of survival of independent retailers in context. Does anyone seriously believe that the Boards of the major multiples are spending time plotting the demise of independents or indeed any other customer groups… The Big 4 are focused on remaining independent, growing adequately, and staying alive… As a result of their increasing efficiency and obvious effectiveness, in a zero-sum game, the resulting pressure on other retailers will result in casualties. In other words, in the final analysis, we are all in this together, by ourselves…..
* Lily Tomlin
