In a bewildering world of increasing complexity, NAMs often choose to delegate non-customer issues upwards and get on with the day-job. As this approach can result in constant fire-fighting and escalating levels of financial ‘fixes’ of account problems, perhaps understanding and factoring in the complexities can make the NAM role simpler and more productive…
Taking it from the top, given the falls in interest rates to 0.5% and even negative figures in some cases, it can be tempting to assume that current low rates of ROCE in terms of reward for risk in business are acceptable. For instance, the UK multiples (with the exception of Asda) are showing ROCE rates that range between 0% and minus 26% in latest accounts.
On the contrary, as money is now more at risk than before the financial crisis, a supplier or retailer needs ROCE levels of 15%+ to preserve its independence and autonomy. The degree of consolidation through takeovers is evidence of the fact that many companies in supply and retail have been getting it wrong these past eight years…
As ROCE is driven by net margin and capital rotation, it is obvious that companies have to focus on cutting costs and driving sales (in a flat-line demand environment) to preserve net margin, and turning goods as fast as possible to increase stockturn. Unless a NAM is connecting directly to these two ideas in the day job, there is a real danger of profit dilution.
In addition, seeing business through the eyes of a householder – money in, money out – is an approach that easily translates into cash generation and cashflow, another major indicator of financial health, and cash can be the only certainty in business when everything appears to be uncertain.
For instance, UK Multiples’ accounts show that Sainsbury’s lead with net cash generation of 5.4% of sales, followed by Asda at 5%, Tesco at 3.5% and Morrisons at 1.4%, clearly demonstrating the relative performances of these retailers as ‘money machines that happen to sell groceries’.
For a NAM, getting paid on time can be a major driver of cash generation. In the current climate, there can be an increasing risk of a customer going bust the longer a period of free credit. For simplicity, the importance of money at risk can be appreciated by calculating that a supplier on 5% net margin needs incremental sales of £1.5m to cover the cost of a customer going bust owing £75k.
Having understood the financials, NAMs can benefit from applying their financial common sense in understanding the following retailing dynamics.
Because home delivery fulfilment costs £20 per drop and consumers are unwilling to pay more than £4, online retailing is inherently less profitable than traditional Bricks & Mortar retail. Therefore, if a mixed retailer’s online sales are growing faster than its traditional business, then its net profit margin will be diluted. Simple!
Moreover, if multiples’ business is growing more slowly than that of the discounters, especially in a flat-line demand environment, then any growth by a multiple has to be at the expense of other multiples… all driven by relative competitive appeal, as seen through the eyes of an increasingly savvy and demanding consumer…
Why courageous?
Reducing an idea to realistic simplicities makes it easier to understand (!), increases engagement, and may even result in questions that might prove difficult to answer… Understanding retail finance well enough to explain the above concepts to colleagues and buyers obviously requires some application, bearing in mind that “If you can’t explain it to a six year old, you don’t understand it yourself.” (Albert Einstein)
Keep in mind that the buyer is bright, but is perhaps giving no more than 10% of their brain-power to your explanation, so the simpler the better.
The key is to apply these basics to a customer you know well, dive into their latest accounts and work out the implications of falling net margins in a narrow margin retail business, especially if they are cutting shelf prices… For instance, a retailer on 2.5% net margin has very little scope for giving much in return for your concessions. However, by the same token, if you express your ‘little’ £1,000 concession in terms of £40,000 in incremental retail sales, you may just get more of the buyer’s attention…
Keeping it simple is worth the trouble…
