Proxima — See the change

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Faltering growth means proactive supplier engagement is required

Greg Watt
May 13, 2013 10:05:00 AM

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Greg-New

Something has to change. Retailers face being subsumed by the economic conditions, drawing on increasingly limited funds for reinvestment back into their businesses. But sustained sector growth seems a small dot on the horizon. There will always be the trend-buckers and those that insulate themselves from the worst of the high street maelstrom, but for everyone else, it is time to think differently about how profits can be boosted from sources closer to home.

Costs are high – cost of production, cost of sale, wages, materials, marketing, you name it, the price tag is growing.  Even the high profile campaign to bring down business rates faced defeat in last month’s Budget, leaving retailers and landlords exposed to an increased rates bill of more than £175 million (source: FT).  In short, prospects for improved earnings rely increasingly on companies’ ability to innovate and develop their internal processes, rather than being able to capitalise on demand growth from consumers.

So, against this seemingly apocalyptic backdrop, what can retailers do, practically, to take matters into their own hands and boost their own prospects?  Recent moves hint at a couple of strategic directions – diversification and online enhancement.  The former, headlined by Tesco’s agreement to buy Giraffe, is designed to captivate consumers, in the same way as its Harris & Hoole coffee shop acquisition was intended, and keep them in store for longer, increasing the chances of higher residual spend per visit. 

Statistics indicate that an optimised online offer is increasingly essential to the long-term well-being of a retail business.  However, technology improvements should not be limited to consumer facing services.  The missing link for the retail sector appears to be the lack of progress in driving performance in goods not for resale supply lines. 

We found that, last year, retailers could unlock an additional 11% of annual net profitability by reducing its supplier cost base by just 1%.  Considering we have lost several high street stalwarts over recent months, this is a level of potential financial security that cannot be ignored.

The trick is bringing suppliers closer to your business.  As the head of procurement at a major high street retailer told me, there is much to be gained from thinking differently about the way suppliers are engaged:

“Supplier relationship management is an increasingly important area for [us] – but not just for the procurement team,” he said.  “We needed to get people who occasionally bought things educated – focusing on supplier engagement and driving innovation to create more value. The challenge is sustaining this education to ensure everyone is up-to-speed with latest market trends and developments in their areas.”

On several levels, recent examples point to the considerable benefits that could be delivered by aligning suppliers’ performance and reward with that of its clients.  The horsemeat scandal showed that, at a basic level, retailers/producers did not have enough knowledge of its suppliers’ delivery processes.  It’s the product of a lack of oversight and a lack of communication.  And, ultimately, the risk is for customers and suppliers both reputationally and operationally.  The full fall-out has yet to become sufficiently clear, but with new cases occurring on a weekly basis, a safe assumption would be that we are yet to see the end of it.

Companies with broad shoulders can take advantage of the depressed conditions to identify well-priced acquisition opportunities to deliver changes in their strategic direction, but those companies are fewer and farther between.  In reality, a major strategic change, more often than not, has to be driven from within and a greater root and branch analysis of supplier costs possesses considerable potential to deliver meaningful change to most organisations in the retail sector, small and large.  The knock-on effect of a deeper analysis of supplier costs brings with it inherent improvements in performance, quality and value for money.  Active management of suppliers tends to lead to improvements in both visibility and delivery, aligning operating cultures and standards, while ensuring that value for money is achieved at optimal levels.

High profile campaigns can only achieve so much, but often what is required is a more meaningful, analytical approach to identifying where businesses can perform more effectively.  Listening to customers, encouraging footfall back to the High Street and developing new products can all help.  But, options will be severely hampered if demand and supply matrices are not properly monitored.  And given that underlying demand cannot be increased artificially in a sustainable way, retailers must look inward to unlock new and innovative ways of improving financial performance and brightening their prospects for the future.

Greg Watt

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