Given the growth of ‘trade funding’ from something like 5% of a supplier’s sales twenty years ago, to current levels of 20%+, with relatively little in the way of robust results-based documentation, and inadequate tie-in between cause and effect in terms of timing and results achieved, it can be seen that the Tesco profit overstatement was an accident waiting to happen…
In terms of money, this 20% of supplier’s sales translates into 15% of the retail price ex VAT (see diagram on p2), meaning that trade funding is equivalent to an additional retail margin of 15%. In other words, for retailers enjoying an average gross margin of 25%, the addition of trade funding means they are making the equivalent of a total gross margin of 40% on ex VAT sales…
The SFO investigation of Tesco’s treatment of Commercial Income will rule that these significant sum-transfers in the supplier-retailer relationship need to be the subject of better controls, equivalent to those already in place to justify expenditure of similar sums in the factory.
Any NAM that asks for sight of a production colleague’s capital requisition proposal for a new item of plant/equipment for the factory will be surprised at the degree of detail, including:
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In addition, the proposal will reflect factors that could impact the capital investment decision, such as:
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And all of this for sums of money no greater than that invested in a national BOGOF promotion via a major retailer, by the same company…
The SFO investigation and its equivalents in other retailers will force these long-overdue changes in how suppliers and retailers calculate and account for discretionary monies. It would obviously be preferable if a company introduced such disciplines at their own pace and in their own terms, rather than await their imposition by a government agency.
Obviously, not all companies will be able/willing to take this route, or will not be able to implement this degree of change overnight. In fact it will become increasingly tempting for some retailers to remove the ambiguities associated with the booking of commercial income by negotiating its transfer into margin, resulting in moving their average gross margin from 25% to 40%, as per above. Suppliers will need to resist this move at all costs, literally….
Whilst including trade investment in the retail margin will undoubtedly remove the judgement calls required in terms of booking the monies in retail, it is possible that the invested monies may then be absorbed into retail running costs and price-cutting, with less available for in-store customer incentives. The supplier will thus lose control of implementation, and will have little or no means of withholding investments to reflect breaches in compliance. Eventually, additionally funding may even be requested in order to ‘create a bit of excitement’ in-store….
Unless these changes are implemented internally and enthusiastically embraced by NAMs, it is likely that, given its ‘newly appreciated’ scale following the SFO moves, the trade investment budget will move to another department (Finance?) where it can be managed via an adaptation of traditional investment process…
In other words, the trade investment bucket was never intended to grow to its current size, and unless suppliers and their NAMs refine and manage their trade investment process in ways comparable with the strict disciplines used by their production colleagues when making equivalent capital investment proposals, the NAM role will diminish.
A pity, especially when the application of some simple Return on Investment routines could so increase the impact of the Business Account Manager….
