Given the impact of the global economic crisis on major retailers, with their ROCE and Net Margins reduced by a third or more, coping with structural changes in the market in terms of the growth of discounters, convenience and online in a multi-channel flatline environment, it could be said that the market dominance of the Big Four in the UK is being challenged…
In other words, suppliers that have anticipated the emergence of additional and varied routes to market are becoming less dependent upon the major players, in terms of share of sales, at least. Unless they generate ROCEs of 15%+, and net margins of over 5%, retailers cannot pay down debt, raise new capital, attract investors to fund business development, or even guarantee their own independence… A fundamental change has occurred.
Traditionally, retailers could use supplier resources, and even ‘request’ direct support from trade-partners, as per the recent alleged Halfords’ 10% contribution towards the cost of business development… Unfortunately, many retailers are already ‘maxed out’ on supplier funding in that they are less able to increase their gross margins by demanding lower cost-prices, or take longer to pay than the current 40+ days. Moreover, with many SKUs being delivered daily, there is less scope to increase stock rotation. With suppliers’ trade investment levels already at limits of 20% of retail purchases, deductions remain as the only other way of raising additional money in retail…
All of this means that major retailers need suppliers a little more than previously… Suppliers now need to assess the extent of this change in power-balance in their own trading relationships in order to recognise their strength and optimise the new opportunity with each customer.
Essentially, this means quantifying each element of their offering in terms of retail margin, days’ credit, settlement discount, trade investment and the average cost of deductions, all in terms of absolute cost to the supplier and also the incremental sales each represents for the retailer. Incremental sales impact is necessary in order to link investment with result, as a common KPI for both parties. The offering should obviously be benchmarked against equivalent measures available in published accounts of key competitors, both retail and supply.
Also, given that low financial ratios are a new and painful experience for many retailers, it is important that any solutions proposed by suppliers should be expressed in financial terms that directly demonstrate their impact on the retailer’s latest ROCE, Net Margin and Stockturn performances. In other words, we are way beyond shame and embarrassment in referring to open domain data, recognising that a NAM is a business problem-solver, with finance as a second language…
It is important that NAMs for each of the major customers be totally involved in this process, given the first-hand insight that will be required when they negotiate change with buyers. A retailer that calculates supplier P&Ls to assess their profitability by supplier, and lifetime value of each trading partner, should have already come to the same conclusion, but may need reminding…
Next, suppliers need to capture all of these terms and conditions in a robust, fair-share contract that they are prepared to enforce legally, if necessary. This means spelling out and quantifying each aspect of the trading relationship, building in achievable KPIs, compliance clauses, and details of penalty conditions where appropriate.
Now that retailers’ only source of additional funding is via deductions, it is vital that suppliers have full confidence in their ability to fulfil the service conditions of the contract in order to avoid their inadequacies resulting in deductions reaching US levels of 7%+ of supplier sales. At the same time, it is important that the contract should not become a bureaucratic barrier to implementing a fair-share Joint Business Plan.
The important idea, as in all negotiation, is not to flaunt or attempt to ‘abuse’ the new power, especially given the volatilities of the current climate, where yesterday’s ‘up’ can morph into today’s ‘down’, overnight…
What suppliers need is realistic fact-based and quiet confidence in their ability to quantify and demonstrate their new value to the retailer, a value that must be dependent upon a fair-share relationship, with willing compliance as a key requisite.
The shift in balance-of-power presents a unique opportunity for realistic trade partners to acknowledge mutual needs and dependencies, and elevate the relationship to new levels, where a common language and set of financial metrics are used to optimise state-of-art supplier and retailer business practices in a search for sustainable consumer satisfaction and a split of profit that reflects relative risk in the relationship…
A final chance to get it right?
