Essentially, in their role as vital gateways to significant numbers of a brand’s consumers, successful retailers often account for 15% or more of a supplier’s business. Therefore, a trade partnership with a major customer is by definition one-sided, in that a refusal to buy can result in the closure of a factory, or worse…
This therefore raises the issue of risk and reward in managing major customers in the current economic climate. Moreover, given that because of ‘natural compatibility’ some customers may grow to a point where they have an even greater share of a supplier’s business, and thus increase the risk, without necessarily providing commensurate reward.
It may also happen that a supplier’s conservative risk profile may cause them to seek ways of attempting to reduce their dependence on a customer that has more than 15% of the business, a strategy that may have unintended consequences in terms of missed opportunities.
In other words, given the continuing fallout from the global financial crisis, and the resulting demands and invitations for great collaboration being made by the trade, a step back to square one on the issue of relative dependence on customers may be appropriate.
Ideally, major customers’ share of a supplier’s business should replicate their retail market shares. In other words, a retailer’s share of a supplier’s business should approximate to the retailer’s share in the market for the category. To access the full potential of a brand, this suggests that a supplier should aim at achieving these relative shares in its customer portfolio.
However, given the differences in relative compatibility, a supplier can find that they ‘get along’ better with some customers, making it ‘easier’ to collaborate, resulting in the customer’s share of the business becoming greater than its market share. This can sometimes lead to a point where the customer can represent 30+% in the case of Tesco and more than 40% of the business where a H&B supplier is dealing with Boots. In private label a customer can represent over 50% of a supplier’s business, a position that is not always desirable for supplier or retailer, given the consequences of termination for each party, including possible negative, and often undeserved media coverage for the retailer…
However, in the event that a customer begins to ‘over perform’ in terms of share of business, it is obviously important to follow such potential all the way, at the same time diagnosing probable causes and attempting to replicate the process with other major customers.
The core problem with ‘over dependence’ lies in the fact that over the years, the balance of risk and reward in supply and retail has gradually become inappropriate for today’s market conditions. Essentially, the relationships between retail gross margin, credit period, and stock level needs to be re-examined in terms of how they reflect the realities of the current market environment, especially following the global financial crisis.
A product’s retail gross margin is meant to reward the retailer for the effort taken to make it available to the consumer, say 10% to 15% in the case of heavily advertised brands, or even less in the case of essential commodities, where rapid, efficient rotation, based on weekly and even daily delivery, makes GMROII a better measure of a brand’s value to a retailer. The credit period allowed by the supplier is intended to bridge the gap between delivery of the product and receipt of the shopper’s money by the retailer, say ten days, allowing for delays in the banking system. Finally, retail stock-levels are meant to be at quantities that ensure 100% availability on shelf, say three weeks maximum in many categories.
However, the current averages of 25% gross margin, and 30 days credit in combination with stock levels of 14 days, are more appropriate for market conditions that existed in the seventies.
As some categories such as cosmetics and toiletries can nowadays offer retail gross margins of 40+%, daily delivery of given SKUs and credit periods of 30+ days, it can be seen that the systematic re-assessment of these three indicators, in tandem with trade spend would reveal significant insights. This should result in a fundamental reassessment of the workings of the supplier-retailer business model, revealing opportunities for cost-reduction, and lead to improved returns on investment.
By understanding and being able to apply the numbers, suppliers can be in a better position not only to assess risk, but also to optimise the potential of their brands, working with willing and collaborative trade partners that have commercially appropriate shares of their business.
In the current climate, we may devote so much time to avoiding the possibility of a customer going bust; we may run the risk of a customer being too successful, with equally catastrophic consequences….
