Introduction by Ken Webb, Founding Partner
Article by Henry Martin, Transformation and Supply Chain Consultant
Like most people, many conversations I have at the moment include at least some mention of COVID-19.
Recently I was speaking to Transformation and Supply Chain Consultant Henry Martin. Our chat started about fishing but soon turned to the impact the pandemic was having on suppliers and retailers.
Trade in the grocery area has increased dramatically, which has affected the whole supply chain. While most smaller retailers have been unable to operate, suppliers have struggled at times to keep up with unprecedented demand from supermarkets.
It will be interesting to see what the new “normal” looks like and how consumers will respond over the longer term. In these unprecedented times, understanding your cost to serve and profitability is critical.
In this article below, Henry outlines why this is so.
Understanding customer profitability is even more important post COVID-19
In the past six weeks suppliers will have noticed the impact of a high grocery mix on their P&L. If the “true” cost to serve of the grocery channel was not clearly understood via a cost to serve model before COVID-19, CFOs and CEOs will most likely want to understand more now!
Now is the time to make sure that you do understand the “true” cost to serve of each channel. It is also the time to think about building direct to consumer channels – if not on your own, then with other suppliers to reduce cost to serve and offer consumers better value.
During the Level 4 lockdown, most Kiwis had to stay at home and rely on a few essential services to keep us going. In the FMCG sector, this saw a major swing in volumes away from route, foodservice and convenience channels into grocery. Nielson figures showed that total supermarket sales increased by 27% on prior year for the four weeks to 27 April, although there are reports that supermarkets sales increased by as much as 60%. Consumers had no option to eat out so ended up eating at home and buying more of their food and supplies from supermarkets.
To help manage shortages and inventory levels, supermarkets reduced promotions and discounting – which still led to high volume growth. Supermarkets have been experiencing Christmas trading volumes, without the need to invest in trade-spend and discounts (when did you last see a mailer in your letterbox?). You can imagine that the profit margins were extremely healthy for the supermarkets – however they may not have been as healthy for all suppliers.
To understand the impact on your profitability you need to have a good understanding of customer profitability and the cost to serve of each channel. I would like to refer you to a previous interview where I talked about understanding cost to serve and customer profitability. In the interview, I discussed the link between trading terms and supply chain costs and how it can be easy to think that the grocery channel is a low cost channel to serve because your warehouse and freight costs are a low percentage value of sales. When you include trading terms into the full customer profitability analysis, a grocery customer may not be as profitable as you initially thought.
Now, more so than ever, is the time to make sure that you do understand the full cost to serve of your business and develop a customer profitability view of your main customers. Not only can you explain why your P&L looks the way it does, you can identify plans to increase profit.
Investing and looking to grow in channels that provide a higher return is one option – this might include investing in a direct to consumer channel. COVID-19 has created an environment where online shopping and delivery is a more normal way of doing business. It has also created an environment where Kiwis are keen to support local manufacturers and get better value. If your business cannot get the scale to get the cost to serve working on your own, is there an option to group together with other suppliers to make it work?
Click here to read the interview with Henry on the benefit of understanding your true cost to serve.
About Henry Martin
Henry Martin has spent nearly two decades working across senior Supply Chain, Transformation and Change Management roles. This includes extensive experience in the FMCG industry in supply chain and sales roles. Henry has assisted a range of clients with developing and executing their supply chain strategy, cost to serve modelling, make or buy procurement analysis and other Transformation and Supply Chain support.
For further information on how you can better understand your customer profitability, please contact Henry on firstname.lastname@example.org or 0275 416 685.