The retail revolution

 

Napoleon once dismissed England as a nation of shop keepers, fast forward to today and he would observe we are a nation of online shoppers.

 

Accompanying the rise of online shopping retail chains do not need as many stores as they did in the past, a trend that is accelerating rapidly.

 

Customers are becoming ever savvier in looking for value for money, employment is tight and also we've seen a massive growth in the supermarkets in terms of non-food retail.

 

Now further adding to the problems of the “bricks and mortar retailers” is the rise of “showrooming.”

 

Essentially this is customers going into a shop to browse but in reality an exercise to check out goods and then search on line for a more competitive deal.

 

 

The growth of online shopping is a juggernaut now accounting for 15% of retail sales - and forecast to be at least 30% by 2020.

 

This Christmas day is forecast to set a record for online shopping. The industry association for online retailers estimate that, a record £636m will be spent on Christmas Day this year, a 36 per cent increase on 2013.

 

Those retailers who fail to exploit all areas of multi channel marketing whilst finding themselves saddled with the burgeoning costs of maintaining retail outlets will continue to be squeezed.

Morale is the lynchpin of efficiency

 

 

Figures from the Office of National Statistics show that over 1.4 million UK workers are currently on zero-hours contracts.

 

Whilst employers cite this as a tool to enable flexibility in the workplace there is no doubt that this particular “employment contract” does have a negative impact on the morale of the workforce.

 

This seems not to have percolated into the mainstream of management thinking.

All too often the attitude of the management seems to be that the current backdrop will of itself be the motivating factor.

 

Obviously as companies struggle with their profitability, it is not a question of throwing money at the workforce but what is required is more of an attitudinal change.

 

Bringing the staff on board may well be as simple as communicating the company’s situation in a clear and concise manner rather than a throwback to the old Victorian style of management i.e. “if you don’t like it there are plenty of others ready to take the job”.

 

There is no better motivation than a clearly thought through strategy which is well communicated and executed.

 

It is no coincidence that the companies who emerge stronger from challenging times have been able to do so largely as a result of the efforts of a committed and diligent workforce.

 

 

A false sense of well being

Until such times that they are directly faced with a problem it is the nature of most companies to assume that all is well with their systems and operating procedures.

 

The reality is that these are the companies that are most likely to be blindsided.

 

Constant monitoring of counter party risk is the order of the day combined with disciplined inventory control.

It can prove costly to rely on past performance as a guide to reliability in the future. Be alert to tell-tale signs such as unusual ordering patterns, delays in payments etc.

 

In truth very few businesses fail overnight and there are usually enough warning signals which should enable a supplier to reduce its risk.

Current market conditions will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies.

 

Those companies who are alive to risks are far less likely to fail compared to those who bury their heads in the sand.

 

Caught in a vice

 

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.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand there is a price to pay.

 

The latest example was the furore caused by Premier Foods attempt to receive cash-payments from their suppliers the so called “pay to stay” policy. Such was the widespread criticism that Premier was forced to make a “u turn” but this was not the first company to implement a levy on its suppliers or else threaten to withdraw the business.

 

The combined effect of the recession, the growth in online retailing and the increased market share of discounters such as LIDL and ALDI has shaken the likes of Tesco, Sainsbury and Morrison’s.

 

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 average household spend on food is between 4 and 8%, so it 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.

 

Producers are under no illusion that in the desperate fight for market share they will be faced with ever squeezed margins in the months ahead.

 

 

Playing the game

 

The cornerstone in any business relationship is the question of trust.

 

The ultimate demonstration of trust and good faith is when a supplier delivers goods to a customer on deferred payment terms.

 

It therefore is incumbent on the buyer that they acknowledge this act of trust and observe the agreed payment terms.

 

With the current pressures it is easy to understand the temptation of “pinching” a few days extra credit but this type of behaviour soon begins to pall.

 

Once a supplier feels that their buyer is taking undue advantage the relationship is damaged sometimes irreparably.

 

For any relationship to be sustained there has to be mutual benefit.

 

When a buyer gains a reputation for persistently crossing the line the merit in maintaining the account is questionable.

 

Juggling jelly

Managing any business in today’s environment is a complex affair – it has been likened to spinning plates whilst juggling jelly.

 

Particularly for the owners of SME’s it has never been harder to keep track of the various elements which are buffeting the business.

 

Now might be an appropriate time to run a check over those areas of the business most likely to cause problems in the coming months. 

 

It is a self-evident truth that many a crisis could have been averted by timely intervention. 

 

This is where an independent appraisal can identify areas of potential concern but more importantly the ways and means by which to address them. 

 

The question that needs to be answered initially is – for how long can I keep all those plates spinning?

 

There is nothing new, only different

 

It is rare in life either privately or in a commercial environment to come across an entirely unique or new situation.

The financial crisis which last faced the world markets and business has parallels with previous financial crises such as the 18th century South Sea Bubble, the Victorian Banking crisis of Overend & Gurney, the Great Depression which followed the 1929 Wall St Crash, and the Dot Com Crash.

 

In all of these episodes the common denominators were reckless pursuit of profit whilst fundamentals were ignored, the so called “get rich quick” school of business.

Following each of these debacles there was a collective reigning in and return to the principles of sound business.

However memories are short and it is not long before the blurring starts again and risky practices again become more and more the norm.

Complacency has resulted in the demise of numerous organisations.

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

 

Battling for the customer – clicks v bricks

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

 

The Group reported Q3 losses of US$437 million.

 

In the UK the impact on leading High St retailers has been devastating.

 

Amazon now has just under 25% share of the UK entertainment industry.

Obviously they are playing the long game and of the keys to their future strategy is the latest buzzword "personalisation".

 

This 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.

 

 

 

Pointers to increase sales performance

 

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 - drive 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.

Everyman for himself

Faced with increased competition there is a growing trend from companies to press their suppliers into accepting lengthened payment terms.

Such terms can only be served by larger organisation with adequate cash reserves.

For the small to medium supplier it further ratchets up the pressure at a time when for the most part banks are unwilling to increase their credit lines.

For some time companies have sought to stretch the length of their payment terms by all manner of means both fair and foul.

As profit margins are further squeezed by increased operating costs the importance of maintaining cash flow is vital.

Business is hard-won in the current climate, but above all there has to be a commercial raison d’être for any transaction.

Mutual reciprocity has to be the basis on which the customer/supplier relationship is sustained.

One of the knock on effects of increased competition in the retail sector will be the erosion of profit margins and the further pressure on suppliers to absorb more of the pain.

 

Early warning systems

 

There are numerous tell-tale signs which point to the fact that a company may be heading into trouble.

 

The following is a basic check list which should help to determine whether the problems are of a temporary nature or have more serious implications for the future of the company:

 

The most important element in any business is maintaining a healthy cash flow. It is imperative that a strict control is maintained on all outstanding invoiced amounts.

 

The value of an efficient credit control system cannot be over emphasised.

 

Do not focus on generating sales with little margin in the belief that over time things will improve. Being the “cheapest supplier” will not provide an automatic route to more satisfactory profits in the long term. It is often better to keep your powder dry.

 

If you are constantly in danger of breaching your credit arrangements with the banks or suppliers this is a clear indication that the company is not trading satisfactorily.

 

As conditions deteriorate more and more time is spent focussing on the problems and not enough on to how to position the business for the future.

 

Particularly for owners of SME’s it is not easy to take the necessary remedial actions and very often this is where an outsider can be of assistance in repositioning the business before it is too late.

 

Effective management principles

In order to achieve success all organisations must have effective leadership. It is the responsibility of management to lay down a set of ideas and objectives that are articulated, understood and supported by the workforce .Good people do not like working for organisations whose values are muddled.

 

Managers have to take difficult and unpleasant decisions. These often need to be made swiftly balanced against conflicting demands. It is not always possible to access cast-iron evidence to support the decision making process. This is one of the tests of strong management.

 

A clear and defined vision are essential requirements. Managing a large company, and dealing swiftly with a variety of challenges and issues is a complex task.

 

The desire to succeed which provides the drive and focus on excellence is one of the hallmarks of a good manager.

 

The workforce is the company’s most precious asset. Accordingly the ability to judge people and value their contribution is an essential prerequisite for any manager.

 

To build a talented team requires working with people who may be better at their job than you are at yours, and to guide and motivate them. People learn far more about the art of leadership from a good mentor than from any course or training exercise.

 

The ability to respond quickly will prove invaluable when things go wrong. Surviving a reverse and changing direction is the utmost test of resilience and flexibility.

 

 

Cheap food, somebody’s footing 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.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand there is a price to pay.

 

The combined effect of the recession, the growth in online retailing and the increased market share of discounters such as LIDL and ALDI has shaken the likes of Tesco, Sainsbury and Morrison’s. 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.

 

In 2014 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.

 

As the margins of the big supermarkets fall from 5% to nearer 3% producers will be expected to absorb more of the pain.

 

This year there have been 146 food producers entering insolvency with the finger of blame pointed at the highly aggressive buying patterns of the supermarket chains.

 

Efficient stock turnaround

 

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.