Whilst Revenue Management evolved in the late Seventies as a way of maximising revenue from airline seat sales, for a number of FMCG organisations, Revenue Management really began its surge forward in 2009, a year after the global financial crisis changed everything.
The impact of unprecedented market confusion and uncertainty on suppliers’ and retailers’ P&Ls is now evident. Whilst this has caused many to resort to short term fire-fighting, such circumstances represent real opportunities for those that can adapt to business change, while others await a return to ‘normal’…
For those wishing to optimise their investment in Revenue Management, it is perhaps useful to place key changes in the market within a Revenue Management context in order that suppliers better understand the pressures on retailers and thereby pitch supplier Revenue Management initiatives in ways that enhance their appeal to retailers by emphasising positive impacts on their latest P&L.
In terms of where major retailers are now, it is evident from latest annual reports that UK net margins have fallen to 2% from highs of 5%+. This means that there is currently little, if any profit surplus available to pay down debt, a major priority for the multiples. In addition, several years of flat-line growth combined with low net margins means that UK retailers can only grow at the expense of competitors, who are also under serious financial pressure. For instance, if sales go down by £1, it means that the retailer loses two pence of profit each time.
In addition, with average gross margins of say 24%, it means that a lost sale of £1 loses the retailer 24p in gross profit i.e. a 12x multiplier of the 2p net profit. These are seriously distracting issues for retailers accustomed historically high levels of retail profitability.
Moreover, in the ‘good old days’ when big was best, it seemed logical to build 100,000 sq. ft. ‘palaces’, designed to last forever. In fact, an annual depreciation charge of 2% means a 50-year write-down, in practice a 50-year lock-in to the space.
Given that multiples were able to generate sales of £1,000 per sq. ft. per annum, the relatively recent discovery that 80% of sales are generated by 20% of a retailer’s SKUs meant that product culls were necessary in the short term. However, the longer-term impact of the 20% space redundancy caused potential dilution of the retail standard KPI of £1,000. This means that any alternative use (i.e. instore theatre) of the redundant space has to generate £1k/sq. ft./annum. This space KPI also means that the obvious option of surplus stores sell-off is compromised in that no other retail model can achieve UK multiples’ ‘norms’, apart from the fact that placing too many shops on the market at one time could seriously dilute property values, and thereby devalue retailers’ Balance Sheets.
Add to this the threat of online with Amazon offering a range comprising over 300m SKUs, and high entry level standards of 1-click ordering, returns as easy as ordering and fast zero-defect delivery of 4 hours to 1 hour within the M25.
Finally, add the discounters, Aldi and Lidl, who grew sales at 19.2% year-on-year and achieved a combined record market share of 12% in the 12 weeks ending 21 May 2017 (Kantar Worldpanel). The research group found that 62% of the UK population shopped in an Aldi or Lidl store during the 12-week period, compared to just 58% last year – meaning an additional 1.1 million households visited either of the two chains.
Meanwhile, many suppliers have embraced the operational applications of Revenue Management as a way forward. They have developed the ability to drive better visibility, control, decision-making and collaboration across their organisations, the entire cross-functional teams, through the use of tools like Exceedra*.
It is against the above retail reality back-drop that Revenue Management-ready suppliers need to attract the attention of seriously distracted retailers, by positioning Revenue Management not only as a way of directly contributing to a retailer’s sales, but also a means of improving their net margins. In doing so, a supplier’s Revenue Management team could provide a new and complementary way of relating supply and retail, adding a collaborative richness to their joint aims.
In terms of on-shelf execution, shelf-edge e-pricing will be an essential enabler. This final link in the chain will need to be positioned carefully, in order to minimise the media-driven ‘surge-pricing’ negatives already causing issues with the consumer. Instead, suppliers will need to begin the massive education job of convincing the consumer that demand-driven pricing is beneficial.
Reality-based Retail Revenue Management will make that possible….
