Profit maximisation often arises from the way that organisations buy, writes Nick Shanagher.
Commenting to the Financial Times recently a major supplier to Aldi said that it asked for 5% to 10% lower terms than the supermarkets but after agreeing the price they were much less demanding and this made the overall economics “pretty attractive”.
But the discounters are also opportunistic. Barry Russell of Russell Marketing says that Aldi and Lidl have one day a week when their buyers will see anyone. They will make an instant decision and place an order, which is completely different to how wholesalers buy, or the multiples who smother innovation in process.
My discussion with Russell centred on how good buying underpins the work of commodity trading, as highlighted in The Secret Club that Runs the World. This book by US journalist Kate Kelly covers the fraternity of commodity traders who “gamble with our future every day”.
The book offers a fascinating mirror to the world of wholesale because there is money to be made in getting product X from A to B.
“Lying miserably at the bottom of the commodity-trading power structure were the Coca-Colas, Starbucks, Delta Air Lines and small farmers of the world. Those actors were paralisingly dependent on aluminium, sugar, coffee and jet fuel for survival but were almost without exception unable to keep up with the commodity traders at banks and hedge funds,” Kelly writes.
Coca-Cola lying miserably at the bottom of a power structure? Kelly highlights Goldman Sachs and its stockpiling of aluminium to take advantage of future prices being much higher than current prices. At the same time soda makers could not get enough metal for their beverage containers.
“The situation has been organised artificially to drive premiums up. It takes two weeks to put aluminium in and six months to get it out,” a senior Coke executive a conference in 2011. In 2013 MillerCoors told a US Senate committee that aluminium was its single biggest risk as bank holding companies had created a bottleneck that limited supply.
Kelly asks what was Goldman Sachs was doing owning warehouses and buying hundreds of millions of dollars worth of metal? Then she explains it was exploiting a market loophole created by the financial derivatives. Did it do something wrong? Under close scrutiny the accusations that middlemen are making extraordinary profits tend to melt away.
This happens throughout the book. For example, Kelly highlights Bart Chilton who served as a commissioner on the US Commodities Futures Trading Commission. He had “worked for a family farm union and spent time at cattle auctions…where after hearing a series of public bids the price of a head of cattle was settled
by a couple of guys whispering to each other at auction. Even on that tiny scale the fact that a private oligopoly could decide cattle prices had always bugged Chilton…Now he believed a cabal of traders were pushing around commodity prices in the oil and agriculture markets to benefit their own bank balances.” The CFTC was poised on act on oil prices. But then a press statement from its chairman returned everything to the status quo.
Ultimately we learn that some smart people make a lot of money from exploiting market inefficiencies, sometimes because they are prepared to work on the margins of the system. They may use rocket science to calculate their margins but what they do is not rocket science. Their skills usually come from knowing what really matters in their industry. This is similar to sort of skill that clever people in wholesale use all the time to build business for their companies and themselves.
You make money by having a clear view of the world and backing your judgement to get the call right. The brave usually win. And then fade out of public view.