Clicks versus Bricks the ongoing battle for market share

Amazon predicted to be 9^th biggest retailer in the world by 2018 has no stores.

In the UK the impact of Amazon’s business model on leading High St retailers has been devastating. Groups such as Comet has disappeared and HMV have gone into administration.

Amazon now has just under 25% share of the UK entertainment industry. Forbes recently listed Amazon at number 33 in the world’s most valuable brands.

Amazon are focussed on playing the long game and one of the keys to their future strategy is the latest buzzword "personalisation".

bbThis is the mechanism of presenting customers with tailored, relevant content as they shop and in doing so increase conversion and generate loyalty

Despite the increased usage of this technology, it is still relatively new to the market but will undoubtedly evolve to become a prime factor in driving the future of ecommerce.

More ecommerce companies are devoting increasing resources to develop personalisation software.

Several leading brands are assigning more internal resource to creating a truly personal customer experience by appointing teams of ‘personalisation experts’.

As with traditional retailers ecommerce companies are now placing greater emphasis on using real insight to make customers feel like valued individuals as they spend time shopping on line.

All of this blurs the traditional lines and retailers face a common problem delivering what the consumer demands efficiently and free of delivery charge at prices which reflect ever squeezed profit margins.

 

A regular review of the company’s business plan is a necessary discipline

 

As business practices change and external factors come into play a regular review of the company’s business plan will ensure that the company stays ahead of the game.

The review if done correctly should result a realistic, objective and clinical appraisal of the business.

Following an analysis of the business plan it should be easier to communicate objectives and strategies to those funding the operation and also to the company’s employees.

The review will serve as a reference point when determining the effects of alternative courses of action on business operations.

A clear assessment of current working practices should highlight areas where the company may require outside assistance.

An analysis of the current inventory levels and receivables will provide the answer to the future growth and capital requirements of the business.

As business practices change and external factors come into play a regular review of the company’s business plan will ensure that the company stays ahead of the game.

The review if done correctly should result a realistic, objective and clinical appraisal of the business.

Following an analysis of the business plan it should be easier to communicate objectives and strategies to those funding the operation and also to the company’s employees.

The review will serve as a reference point when determining the effects of alternative courses of action on business operations.

A clear assessment of current working practices should highlight areas where the company may require outside assistance.

An analysis of the current inventory levels and receivables will provide the answer to the future growth and capital requirements of the business.

Turning stock back into cash

Stock turnover ratio equals cost of goods sold during a specific time frame, divided by the average stock holding during the period.

The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere.

An stock turnover ratio of 20 means that the average amount of stock holding during the year has been renewed, or turned over, 20 times over the course of the year.

Dividing the number of days in the period under consideration by the turnover ratio tells you how many days it takes, on average, for the warehouse to empty and then be refilled. The number of days in a year, 365, divided by 20 is 18.25. So the entire stock is fully sold and replenished every 18.5 days, on average.

As a general rule, the higher the stock turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales.

Carrying stock ties up money. This money is either borrowed and carries an interest charge, or represents funds that could otherwise be better used in servicing other elements of the business.

There are additional costs in holding stocks such as storage and the risk of getting spoiled, breaking, being stolen, or simply going out of style.

Wherever possible companies need to reduce stock holdings and there are various means by which to achieve this aim:

Liquidate slow-moving or obsolete stocks.

Introduce more efficient production techniques to reduce stock holdings.

Rationalise the product range weeding out the under performers and thereby reduce stock carried.

Negotiate sale or return with suppliers in order to avoid being stuck with unwanted product.

 

Boosting sales performance

 

Here are a few tips by which you can drive sales:

Focus on niche markets - there is an advantage in positioning your company as a market leader in a niche market.

Target a niche market that drives the greatest sales, profitability and quickest sales cycle.

This will produce sales growth with the least amount of effort. Niche market leaders generate strong sales revenue and profit growth driving up the value of their business.

Promote your products - deliver increased sales growth by offering customers bespoke packages such as volume discounts, extended contracts or product bundles.

There is no merit to be gained from discount pricing on your offerings if they truly provide the value described.

Develop your brand - unique design, functionality and technology can make your products proprietary, which can increase the desirability of your products/services and the price a buyer is willing to pay. Branded products offer protection from the competition and enabling sales of products at a higher price and profitability.

Highlight your USP - even if your company are offering products that are not proprietary, it is vital that customers recognise what makes your company different to the herd.

When you do this successfully, your company becomes the first choice and achieving sales targets will not be an issue.

Jettison underperformers - the best way to dramatically lower your costs and improve profitability is to shed underperformers. Evaluate all of your products and services and delist them if they are not profitable or helping to drive sales of your other products.

Ensure that marketing is delivering a positive return on investment. Less easy is the evaluation of the sales team but in reality underperformers are a luxury no organisation can afford.

 

A gun to the head

 

As more and more companies struggle with their cash-flow issues, they are revisiting their payment terms with their suppliers.

A case in point is the recent review by Marks and Spencer which resulted in them imposing extended payment terms from Freight-on-board (FOB) suppliers who have seen their payment terms extended from 60 days to 75 days, while full-service-vendors (FSV), who transport, store and deliver goods for M&S, saw their payment delayed from five weeks to seven weeks.

The changes, aimed to boost Marks & Spencer's cash flow, further angered suppliers. M&S's major suppliers were upset in October 2011 when the firm asked them to make a one-off contribution of 1.25% of their annual turnover with the retailer to its store revamp programme and associated advertising.

In reality the suppliers have little alternative – if you want to keep trading then you have to accept the “realpolitik”.

The key is to make the most of available cash resources which inevitably leads to some hard commercial decisions. Late payers are a luxury that no company can afford in this climate. Stock must be turned into cash as quickly and efficiently as possible.

Those who either will not or cannot adapt to the demands of today’s business will go the way of the dodo.

 

A leviathan for our times

The recent commissioning of the world’s largest container ship the Maersk's Majestic underscores the competitive nature of international shipping.

The vessel is a quarter of a mile long and has the capacity to transport 18,000 20-foot containers.

Manufacturers of electronics and mobile phones are shipping cargo by sea because competition was eroding their profit margins focussing their attention on cutting delivery costs.

Each 20 foot container can hold 13,000 smart phones with a transportation cost from China to Europe of 7 pence per unit and a transit time of approximately 25 days.

Currently there are over 6000 container vessels operating with a significant number engaged in the East to West trade routes.

China’s economic success remains export driven as illustrated by the cost of shipping a container. Inward from China to Europe costs around US$1500 with the reverse journey only commanding a rate of around US$700.

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel makes air freight too expensive.

 

Macho management style – rather passé

 
The media like nothing better than to bombard us with negative news in respect of job losses, scale of personal and government indebtedness etc.

A case in point is the recent reporting that cereal firm Weetabix are being consulted over possible cuts to pay and working hours.

Management are planning a 10% cut in production staff wages and a wage freeze for other staff.

The company said it needed to be able to "adapt to meet the changing needs of today's modern families".

From interaction with companies across a broad spectrum of business there is no doubt that negative news is having a significant impact on morale and therefore impacting bottom line results.

It is important that managers take on board the effect of these outside inputs on staff and wherever possible reduce the "fear factor".

All too often the default position from management style is to rely on pressurising people to attain often unrealistic targets. Far from improving performance it has the opposite effect.

It is time for a rethink - instead of relying on the stick approach, how about hitting with a carrot?

 

The person on the spot is baffled, whereas the onlooker sees clearly

 
Based upon my experience across a variety of sectors and businesses one observation holds true – whilst some companies are doomed to fail there are many whose survival and future profitability could be secured from a fresh input.

Many companies fail to adapt to changing developments in the market and find out too late that their business model is tired and obsolete.

It is particularly hard for owners of SME’s to change direction. When you are personally involved it is not always easy to pursue a new path or take appropriate remedial action.

This is where an “outsider” can be of assistance – an objective appraisal can  often mean the difference between merely drifting as opposed to decisively moving forward.

 

Who's taking advantage?

 

There is a growing tendency on the part of companies to actively delay payment to their suppliers.

Slow payers monopolise profits and starve creditors of much needed cash which makes policing of receivables critical.

When a customer exceeds the agreed payment terms, they are in reality using the supplier as an alternate (unsecured overdraft).

Left unchecked this situation can easily spiral out of control so that in a worst case scenario the supplier is forced to keep “supporting” the errant customer for fear of realising a bad debt.

Think of the parallel to the Greek bail out situation – it is a slippery path.

Take a long hard look at your accounts receivable – are you happy to see 30 days drift into 60 and beyond? Have you considered the damage that is being done to your company’s financial position?

Ask yourself “who is getting a free ride?”

It may well be that you conclude that an overall appraisal of your business is overdue -this is where I can help.

Why not get in touch with me at gordon.blackburn1@btinternet.com and I’ll help you take back control.

 

Up close and personal

Business practises have changed markedly in recent years.

Although many operations are completed electronically in this virtual world we should never forget that essentially commerce is about people trading together.

The reality of the real world is that goods need to be moved from point of production to point of consumption and obviously the diverse elements which make up this chain cannot be achieved solely via a computer terminal.

It makes sound economic sense to foster and maintain good customer relationships.

It has been determined that it costs up to five times as much to win a new customer as it does to retain one.

There is an old adage “know your customer,” this dictate has never been more important than in these competitive times.

Food price inflation

 

Various inflationary factors are pushing up the costs of food.

Following drought conditions in Brazil Coffee prices have risen by 70%, in the US Pork prices are up 40% in the past 12 months. Similarly Fruit has risen by 10% and Vegetables 5% over that period. In the UK this is translating into an annualised rate of food price inflation of 3.8%.

By 2018 it is estimated that the average UK Household will be paying an extra £850 per year for food. 

As affluent consumers in China and India demand a more Western style diet we are seeing the effects on the price of meat and other foodstuffs.

In the longer term the growing world population now around 7.25 billion is forecast to rise to 9.6 billion by 2050 further fuelling demand.

Food manufacturers are caught in a vice; the buying pattern for many continues to be “just in time” reflecting the need to keep inventories as low as possible.

However without the safeguard of a “buffer stock” they are now more than ever exposed to the harsh reality of having to “pay up” in order to secure the raw materials to keep their facilities in production.

At the same time suppliers will continue to face the problems of operating in the current economic background with buyers seeking to delay payment, renegotiate contracts etc.

The era of cheap food has long passed and with consumers still having to closely watch their expenditure companies will now more than ever be required to ensure they are operating at optimum efficiency.

 

Cheap food – who foots the bill?

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.

Some operators will attempt to cut corners whilst the purchasing policies of local councils can also be blamed for driving down food quality with cheap food contracts for schools and hospitals.

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand as was evidenced in last year’s horse meat scandal there will be accompanying risks.

For supermarkets focussing on market share food prices must be kept down, at all costs. But in the case of farming it is such a long cycle and there is little account taken of retrospective costs for the producer.

Looking back 25 years ago, British people probably spent about 22% of their disposable income on food.

Now the spend is roughly between 4 and 8%, so food has actually become cheaper.

The reality is that the 'bog-offs' - the buy-one-get-one-free deals are not actually sponsored by supermarkets. They are paid for by the producer who has to agree to them under tight terms and conditions.

 

Greek recovery a slow and painful process

 

Eurozone ministers have signed off the next 8.3bn euro (£6.8bn; $11.4bn) instalment of Greece's bailout.

A first tranche of 6.3bn euros will be paid at the end of April, with two more payments of 1bn euros being made in June and July

The latest bailout announcement comes amid renewed optimism about Greece's economic recovery.

Greece has wiped out its deficit, except for interest on its debt, and is forecast to exit six years of recession this year.

The Greek government hopes the progress will spur the Eurozone to consider debt relief in the coming months, by lowering the interest rate on its loans or extending the repayment period.

Whilst the recovery continues there has been a very high social cost. Greeks have lost about one third of their disposable income over the past 4 years. Unemployment is currently standing at 27% with many people in Greece seeing a decline in their living standards due to the effects of spending cuts and austerity measures implemented under the bailout terms. In the past few weeks a further 11,000 public sector workers were sacked. 

There is serious pain accompanying the economic gain.

Everything but the squeal

In 2013 the UK food and drink exports to China were up 82% with demand for Pork and Salmon products particularly strong.

Much of the pork will be in the form of parts that are popular in China but not with British diners, such as offal and trotters.

China is the most lucrative grocery market in the world and this is just another signal of the growing emergence of China in the international commodity markets.

That influence continues to grow as Chinese import demand tied to population growth and increased annual income broadens into corn, meat, nuts, and dairy and other food products.

China is the leading producer of many agricultural commodities, supplying more than half of the world’s pork; one-third of the world’s horticultural products, rice and cotton; and close to 20 percent of the world’s wheat, corn and poultry.

With about one-fifth of the world’s population, China is also the largest consumer of many agricultural products; its current share of global pork consumption is 50 percent, 40 percent for cotton, 30 percent for rice and more than 25 percent for soybeans and soybean oil.

A burgeoning middle class population and a shift in dietary patterns will combine to produce widespread buying of agri products.

Consequently sales to this destination will become a rapidly increasingly important price determinant in the coming years.

 

A rose by any other name

Following the financial crisis of 2008 there was much talk of a collective reigning in and return to the principles of sound business.

However memories are short and it is never long before the blurring starts again and risky practices again become more and more the norm.

There is now a concerted move afoot to rehabilitate the image of leverage.

This was the mechanism which more than any other precipitated the disaster in the financial system.

Companies no longer speak of leveraged deals but are now taking on “sponsor finance”.

This re-branding has in-built danger as witnessed previously, complacency has resulted in the demise of numerous organisations.

As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

The high cost of complacency

One recurring theme from the analysis of losses made in the financial sector is that management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often corporate culture is dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore.

Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

It is always worth remembering that if something looks too good to be true it invariably is.

 

Getting ahead of the game

 

As evidenced by the rise of the discount grocery retailers such as Lidl and Aldi consumers are seeking value for money as never before.

Domestic budgets continued to be squeezed with the resulting knock on effect for businesses across the board.

This is an appropriate time to conduct a thorough analysis of your business.

Undoubtedly there are areas which would benefit from some radical adjustments and or change of direction.

The consequence is not acting now could have very negative effects in the coming months.

Now is the opportunity to tackle difficult issues rather than adopting an ostrich "head in the sand" attitude. There is undoubted value in a pre-emptive strike.

When trying to explain the outcome of a failing strategy to either your shareholders or bankers there is little merit in trotting out the tired old defence that “it seemed like a good idea at the time”.

Plus ça change

 

It is over five years since the world was caught up in a financial tsunami the consequences of which are still being felt today.

The irony of the situation is that the architects of the crisis have by and large remained insulated from the results of the problems they created.

They are benefitting from the cover provided by the “too big to fail” position which they occupy.

Following the fall out in summer 2008 the widely heard mantra was “never again” and the banking community was told to put its house in order and build up sufficient reserves to support itself.

In reality the banks knew that whilst paying lip-service they could carry on very much as before in the knowledge that they had a safety net i.e. the tax payer. As an example, this year Barclays Bank paid over 400 of their bankers bonuses in excess of £1 million.

The reality is that despite the rhetoric banks continue to be afforded protection by the “too big to fail subsidy”.

In the UK for the financial year 2011-12 this subsidy amounted to £66 billion. The IMF have now warned that plans to reduce bailout costs for a bank in distress “may not be viewed as effective and that announcements to eschew bailouts are not considered credible”.

Driving your sales

There are some basic but proven tactics which companies can employ to increase sales.

Companies that are increasing their sales turnover usually have an attractive staff incentive system in place. Make sure you keep track of what type of “carrot” your competitors are offering to their sales force.

Upselling is a cost effective way to boost bottom line returns.

Essentially, upselling involves adding related products and or services to your sales portfolio and making it convenient and necessary for customer to buy them. Crucially when upselling the customer has to be persuaded of the benefit.

Give your customers the inside track.

Try to stay ahead of the competition by having up to date brand and market information combined with technical back-up. For example if a new product launch is imminent it is better to keep the customer’s interest “warm” rather than push them into a purchase which they shortly will become dissatisfied with.

Differentiate your customers.

There should be a clear and obvious difference between your regular customers and others – a difference that your regular customers perceive as showing that you recognise and appreciate their value.

Repeat business is the life blood of any sales force.

Loyalty cuts both ways and becomes meaningless if all customers are treated as “someone off the street”.

 

Diversification – sometimes silver bullet, often poisoned chalice

 
Without doubt one of the most difficult challenges a business confronts is to diversify.

Often a company is faced with the dilemma of diminishing revenue returns and a tired business model which is either irrelevant or obsolete.

Diversification is seen as the solution to these problems.

However, the mechanism for achieving this objective can be particularly difficult. The first step is examining why the current business model is not working. This requires an honest appraisal from management in respect of their performance.

Then the areas of diversification have to be closely considered. It is a common mistake for people to plunge into businesses in which they have little knowledge or experience and the results pretty quickly show up these deficiencies.

Thirdly one should always respect geography, it may be very tempting to consider that there are opportunities just waiting to be picked up but to underestimate the advantage of local knowledge and conditions can again prove costly.

In essence diversification can provide the answer to a company’s need for increased revenue but without a clearly defined strategy it can equally provide another drain on an already embattled balance sheet.