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The Profits in the Detail

Where are we?

We are going back to the 1990’s in the way the grocery trade is structured. Back then the major retailers had around 50% of the market. Savvy industry commentators are expecting this to be the place they end up, with all that ensues in the way brands will need to restructure their sales approach. If you want growth you will need to talk to more retailers and more buyers, who are all demanding more money than last year – often in the certain knowledge they will deliver less
Brands are also going back that far with shoppers as the number of stores they shop in is increasing up to nearly 4 a month. The brand destined for success needs to be visible in as many as possible. Back then shoppers were coming from a background of shopping in local butchers, green grocers and bakers. Now it is more likely to be for other types of meal or larder fill.
Effective distribution (working for your core shoppers) must come right at the top of your agenda, as must targeted messaging – reaching your core shoppers on the way to, or as they, shop. Targeting these will improve brand growth, the effectiveness of marketing investment AND your profile with the majors, all at a significant ROI in the year you invest.

Is price really the big issue?

Right pricing is the approach brands need to take, for the multiple they are negotiating with, since most people shop for convenience. Retailers need discounting to boost the image of their stores. Brands need to find the best way to profit from the footfall generated by all this noise.
The neglected loyalist can be reached in other ways than discounting, so a growth strategy needs to be developed by retailer that builds loyal shoppers for your brand. That objective will not be reached by discounting. The key value for discounting is volume, and building alongside retailer plans. So investing where you get the best value discount ROI is vital.
However, the Lidl/Aldi small store/restricted range format has bags of room for becoming local to many more people, as does the Waitrose/Booths end of the market. And don’t forget Amazon with their millions of existing customers, and Ocado with a now-profitable model with much more scope for growth and range extension than the Tesco store based supply.
All this adds up to more choice for shoppers, and a greater need for retailer differentiation. The Workshop looks at what this might be.
We can confidently expect that the majors, with their me-too strategies, will remain under pressure for some years to come.

Workshop Contents

What are the measures that brands and retailers need to focus on?

(Ideally these illustrations are drawn from a brands own data – illustrations we offer free contact )
Brands Need;
  1. To identify new benchmarks for success with their retail partners and within the company to get long term change. Two only are vital – stock cover and locating core shopper areas, and the stores in them. These two measures help driving hundreds of thousands of pounds value (millions for big brands)
  2. To identify the most profitable investment outside of discounting to gain growth. This requires investing in parallel in all distribution channels (including food services and online) in core areas
  3. To have a measure to evaluate the ROI from their discount activity – and be able to target better the next activity they undertake.

1. Benchmarking for success

 Do you know where your core stores are? They are the stores that really overperform for their size, and allocated shelf space. They are also the ones that struggle to keep their shoppers happy when demand ramps up.
What typifies them?
They sell more from the same space as their similar sized colleagues
They are much more likely to run out of stock at critical times

 Core measure 1

Stock cover (what you get when you divide weekly stock with weekly sales.)
sales price and stock
Stock cover is a mirror of sales success/shopper demand. However sales success will be limited if stock cover drops below a level at which an individual store can keep shelves full. You need to learn by product, the stock cover each product needs, and at that point you can see exactly which stores need to give you more space, and which really need central negotiation. Like this brand.
The Y axis is average sales y store. The X axis is distribution (how many stores are you in). By and large the high stock cover is the brands with lower sales.  Retailers do not range by anticipated demand, but by store size. Brand space is allocated by retailers based on their perception of your brand strength.
They often get this wrong. The grey blobs are own brands – and you can see that typically they perform less well, and have greater stock cover than the brands.
Bongrain relay
Yes, and these core stores also have the potential to respond really well promotionally – see this profile which is for thousands of products. They need more stock to be able to succeed. On the other hand the standard allocation leads to poor stores having excess stock simple because they don’t sell it.

Core measure 2

Coreness – how well does it perform vs similar sized average stores. Core stores cluster together as core people cluster together, and you can stick pins into them on a map.
 Seabrook map
 Core stores will always have the least stock cover, the greatest risk of being out of stock and a disproportionate share of your business. There are clients much more skewed than this. Your core stores can become category drivers for your retailers. 
Core Store Strength
Core stores are core simply because they have a much higher percentage of the right kind of people in their catchment area. This means they could be situated regionally (As this brand was) or geo-demographically, such as along the South Coast where older, better off people might buy you.
One more thing – perhaps obvious – but core stores are much more sensitive to promotion offers whether money, or other appeals. The average core store across many thousands of products can give you a 10 times uplift, while non-core delivers 2. Most stores fall under the heading of average or poor stores. Core stores are a much higher percentage of your business the moment you incentivise their shoppers. Promotion performance
So you can identify a core store either by poor stock cover or higher sales.
ILLUSTRATION AND DISCUSSION
Tesco have now expressed their stock objective in stock turn terms. ie 4 days stock out of 7 on the now expanded shelves (stock cover .44) knowing what you know – will this meet the needs of their shoppers for all brands. Will increased availability overcome additional variety.

Summary

Core Stores have the potential to do much better than the average, and you can identify them because they are struggling
If you advertise they are the stores that will deliver you the uplift OR they will irritate your existing customers simply because the new users empty the shelves
DISCUSSION Asda have removed any and all store specific ability to support local demand. How much do you feel that this has contributed to their faster than average rate of decline for your brands. They no longer respond to reasonable requests for demand related allocations.
Is their supply chain actually fit for purpose? What can be done to overcome this barrier?

2. What are the most profitable investments outside price to gain growth?

Step 1 Satisfy your existing customers
Identify the level of stock cover that does not result in out of stocks – and the brands that need the help, and where. Use these insights to drive both immediate action and central negotiation.
Work with core stores on profitable actions to build their growth. (See three step approach)
Step 2

Retailers are very poor at managing your brand. Make sure you get at least what they offer you, and target more relevant products in core stores. Click on details to regain £680,000 per annum from stores that should sell – but don’t. (see the variability in stores selling in the chart above).

You can support them in a variety of ways that do not include field visits. Here simple additional central allocations will deliver £680,000 additional annual sales.
missing stores
Step 3
Going for Growth
Understand that any good shopper marketing investment into core areas will deliver great returns.
On pack promotions bring in new core users, that discounts don’t. If you want to build, discounts won’t do it.
Click here for shopper marketing ROI that you can gain if you understand supply and demand targeting  >> Case Studies

What about new products?

Mintel data shows the number of new food launches fell 33.6% year on year [12 months to June 2015], an acceleration of a three-year trend that saw food NPD fall 18.7% in 2014, and 10.7% in 2013. The last time food launches grew was in 2012. On top of this the market for brand innovation is shrinking fast as discounters take increasing shares of the market, and the major retailers shrink in proportion.
New products have to work fast or they will be dumped fast. We believe you will need to add promotions to build new core users. Check out the Case Studies to see example uplifts and ROI.
Step 4 Allocating your current budget
Strategically, you may want to allocate more investment overall to core areas, and to supply chain initiatives with the majors to build stock, in particular promotionally.
Different retailers will give you different ROI from investment in discounting. This can all be measured, as can any other directed activity, to identify best practice.

 

Building in Tesco – A view from the sharp end – and where to look for brand growth June 2015

The top section is an article by Brian Moore – editor of NAMNEWS, and expert on the category management process. It gives you an inside track on the very real difficulties that brands of all sizes face this year – and ongoing – in building a brand in all of the majors. He stresses the need to be sure that the investment Tesco will expect you to make will definitely work. When you have reviewed where sales negotiation can take you – you will find you need to look away from where you may be spending now, and look at investing in different, but guaranteed approaches. Which is what the second section gives you. 

Given that Tesco plans to reduce the negotiating elements of Back Margin from 24 to just three by 2017 (volume, prominent positioning, and compensation payments in the event of product recalls), it may be useful for NAMs to work this through in terms of the financial impact on their Tesco relationship, especially given the latest £6.4bn loss…

Essentially, it is probable that the total Tesco take from your brand will remain the same i.e. they are unlikely to surrender any income currently coming from Back Margin; a proportion of this will simply move into Front Margin. In other words, say the current 20% of trade price represented by trade investment will translate into 15% of ex VAT shelf price, assuming a 25% retail margin.

The issues for suppliers include:
– What will happen to shelf prices if Tesco want to drive sales really hard via an extra 15% price cut, using the ‘excess’ Back Margin?
– Will the resulting scale economies be sufficient to satisfy Tesco (i.e. their January price-cut test appeared to be profit-neutral, according to a Dave Lewis interview in The Grocer)?

In practice, given Tesco’s need for cash, it is probable that they will simply absorb the ‘freed-up’ Back Margin within the business, and finance price-cuts via current Front Margins. One of the remaining Back Margin elements – Volume Rebates – will hopefully be sufficient to help make the price-cuts profit neutral…

On balance, Tesco’s move from Back to Front Margin represents a quantum leap for suppliers in that their Front Margin income will be a direct result of sales made and all Back Margin will be sales-based and paid in arrears.

This is a major breakthrough in UK supplier-retailer relationships and should not be underestimated. However, we are now at a point where suppliers could lose control of some historical Back Margin monies.

Negotiating ownership and usage of Back Margin

Given that supplier investment in Back Margin was originally intended to stimulate sustainable sales of the brand and should always have been conditional, many suppliers will be reluctant to simply surrender the allocation and use of trade investment monies – other than the three permitted buckets – to a retail partner working to a different set of priorities.

This issue goes to the heart of fair-share partnerships in UK retail, whereas continental players have always had the protection of supplier-retailer contracts as a basis for establishing and maintaining the integrity of trade investment.
Moreover, as the surrender of any influence over the use of trade investment by the supplier could result in elimination of any discussion re KPIs and compliance conditions in monitoring retailer performance, even the effectiveness of the three permitted buckets could be compromised. This could possibly result in either additional transfers to Front Margin, or even delisting in extreme cases of poor performance.

It is therefore imperative that suppliers and Tesco find ways of jointly optimising the discretionary use of trade investment budgets by the two partners.

In other words, assuming that the three permitted Back Margin buckets account for half of a supplier’s 20% trade investment in Tesco, this leaves the ownership/control of the remaining 10% subject to further negotiation….

In order to convince Tesco of the bona fides of such trade investment retention, a supplier has to be able to guarantee that the monies are fully allocated to the development of supplier’s business with Tesco. The funds will need to be invested in initiatives that drive traffic to the retailer’s stores, where incremental sales of the supplier’s brands will reward Tesco via a combination of Front Margin and Volume Rebates.

It is unlikely that a retailer in Tesco’s current condition would agree to anything less…

What does this mean for a company needing sustainable growth?

One thing should be clear to companies wanting growth. The Tesco promoted ways of getting them are designed more to stimulate revenue into Tesco centrally than they are through the tills. This rules out anything that does not give you guaranteed space and product on the floor (dunnhumby coupons etc). However, there  

However there are well proven techniques that RVS have checked delivering very positive ROI and barnd growth for you and your partner retailers Case Studies


Incidentally, it is also unlikely that these seismic shifts will be confined to supplier-Tesco relationships, in that if successful, other retailers will be placed at a competitive disadvantage unless they follow suit… So, getting it right with Tesco should provide a useful template for the rest of the trade.
By the way, whilst the current Tesco team are obviously focused on a clear path forward, it might be wise for suppliers to hold back some funds in case a change of Tesco management at some stage concludes that your category’s in-store presence needs a little ‘livening-up’ via an additional injection of trade investment…