Diversify and expand

diversify

Many cash & carries are still using 1960s business models. David Gilroy argues that to survive, they need to diversify and expand their customer bases.

Cash & carries came to prominence in the early 60s when price maintenance legislation was changed. The Resale Prices Act in 1964 enabled cash & carries to establish competitive advantage and they took serious business away from the outmoded delivered wholesalers. Their business model was simple: high volume, tight margins and strong cash flow from the multitude of thriving small shops and traders queuing up to make savings. All goods were bought and paid for at the time of purchase, with the customers driving away with their ‘shopping’.

Throughout the 70s, these giants were walking the Earth, bestriding the industry like a colossus. They seemed unassailable with all their cash rolling in. There were plenty of stock profit opportunities in a rampant inflationary market. The clever thing to do was to buy and keep invested in stock.

Their customers, too, were thriving on good margins in a benign competitive environment. Half-day closing on a Wednesday was still common.

Fast forward to 2014 and the grocery landscape is a scene straight out of  Terminator 2. The machines are destroying all before them and the discount hyenas are feeding on the carcasses. In the bones, dust and desert brush, the giants are wounded and their customers are being scattered to the four winds.

Today, cash & carries are finding that the original business model of high volume and low margins is buckling under the weight of the new world order. They are forced to go to extraordinary lengths to maintain their sales and to support the independent retailers. ­Inflation is low and the opportunity to forward buy on deals has been significantly constrained by suppliers. Price-marking has injected deflation into the mix for many categories, squeezing profit.

Cash & carries have miles of unnecessary shelving and storage, as their business switches to online ordering, with delivered or click & collect services.

The banks have reined in their debt exposures and small customers are increasingly looking to the cash & carries to support them with short-term loans and longer-term credit. Once a credit line is started, it is devilishly difficult to pull back. Debt has shifted to the cash & carries, as they have fought to retain business. There is a considerable cost to this. Credit cards offer another way for independents to secure credit. The killer is that the merchant fees can wipe out any gross profit made on low-margin categories such as tobacco.

In the retail world, everyone is down sizing in an effort to secure growth. The multiples, discounters and pound stores are moving in on territory hitherto occupied by independent shops. The health lobby is gaining traction in the tobacco, soft drinks, confectionery and crisps markets. Many cash & carries are stranded in the wrong categories.

The small independents are buying from the multiples and using the web to compare prices day to day. Many are driving around for hours seeking the best deals on offer.

Customers are promiscuous and the established trading channels are eroding. How to survive and emerge alive from the hostilities?

The days of ‘trade only’ have to end. Cash & carries must diversify, expand their customer bases and find new markets, new customers and new businesses. There is no future in a 1960s business model.

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David Gilroy is the founder and managing director of Store Excel. He was previously the convenience retail lead at W2 Commercial and held operations director roles at Bestway Wholesale and Nurdin & Peacock.

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