Optimising Goods Not For Resale (GNFR)
spend to navigate through the aftermath of the COVID pandemic
Today, brick and mortar stores personal touchpoints with customers have slowly become outdated. Alongside online retailers such as Amazon, traditional retailers are increasingly seeking to gain more access routes to consumers. This change has long been underway and the COVID crisis has only fuelled the need for flexibility and adaptability.
Retailers need to quickly adapt to changes in customer behaviour to recover and remain relevant
The outbreak of the COVID-19 crisis has hit sales in various industries. One of the most affected sectors is textiles, which faced a decrease in sales volume of 22% in July 2020 compared to February 2020 (Exhibit 1).
The cost base for operating physical locations has increased due to new health and safety regulations while changes in customer behaviour towards online shopping has shifted significantly.
Manoeuvring the shift towards e-commerce requires an entirely new skillset from online fulfilment capabilities to automated processes. In its 2018/19 annual results, the retailer Next said, “the digital evolution has not been easy and nor is it without cost”. It estimates that every pound spent online costs an additional 6p in overheads deriving from order fulfilment.
Diminishing disposal income will create price wars amongst retailers
It is estimated that the ending of the furlough scheme’s could result in up to 700,000 job losses alone. Rise in unemployment will diminish disposable income and erode non-necessity spending. To protect cash flow, retailers will have to fight for market share through price wars under these difficult circumstances.
In a nutshell, sales are at an all-time low, evolving customer behaviour requires investment in technology, and possible price wars are likely to endanger margins. Retailers need to find alternative ways to raise capital quickly to secure their businesses’ future whilst adapting to the new normal.
GNFR spend often unleashes untapped opportunities
GNFR [Goods Not For Resale] spend within retail typically represents 15-20% of the total operating costs. It is often overlooked due to a lack of transparency or fragmented supplier ownership. and it is often limited to operational procurement.
GNFR is usually split into three 3 types of spend buckets
- Capex, which includes categories such as shop fittings and IT hardware spend
- Consumables which includes categories such as packaging and store merchandise
- Services which includes costs such as logistics and marketing
All of these spend areas bring different challenges and require a unique procurement approach. Nevertheless, savings between 8 to 15% can be generated when the right procurement levers are applied.
Reduce operating cost through competitive tendering, supplier collaboration and demand management
In order to maximise quick and sustainable results within GNFR spend, retailers can choose to apply one of three approaches, which are directly associated with impactful levers to optimise costs. They can either decide to buy cheaper, buy smarter or buy less.
Spend reduction approaches to optimise Procurement Spend
- Buy cheaper: Reviewing prices for goods and services currently being bought and reducing unit costs. This approach is usually associated with popular levers such as competitive tendering, price negotiations and bundling volumes
- Buy smarter: By applying levers such as re-specification and supplier collaboration new products or services can bought with lower TCO costs
- Buy less: Eliminating non-necessary spend or postponing demand can reduce spend quickly
For each of these approaches, this article outlines one exemplary lever that can be applied easily and effectively to some of the main GNFR categories for retailers.
Applying competitive tendering within store fittings spend
Although competitive tendering is a rather traditional lever used in procurement, it can lead to significant savings within shop fittings by reducing procurement price alone as demands often tend to be unchallenged, due to long-term regional and local supplier relationships. In the midterm, a systematic tendering approach can be assisted by standardising specifications which can be bespoke to the individual store needs requiring high dependency on uncompetitive suppliers. Rationalising demands will generate economies of scale and improve the bargaining position with suppliers that go beyond the piece price reduction.
Decreasing marketing services by re-assessing demands through return-on-investment analysis
Demand management can be significantly impactful as it aims to cut non-necessary spend immediately without impacting existing quality. One of the second largest spend buckets within retail is marketing.
Marketing expenditures are key to a retailer’s positioning in the market; however, the COVID-19 crisis has accelerated the speed at which e-commerce has gained significance. Therefore, traditional marketing spend needs to be reassessed through a return-on-investment approach to determine “necessary” and “premium” spend, which can be decreased or eliminated. An example could include Christmas spend re-assessment, as in 2019, retailers in the UK spent a record number of £6.8 billion on Christmas advertisements alone. One of the top retail brands showcased a record-breaking Christmas advert. Despite the adverts popularity, sales dropped 28.4% YoY during this period showing that extensive advertising expenses do not necessarily convert linearly into higher sales.
JP Morgan points out that the UK ecommerce market is expected to grow by 9% to €231.2bn (£208bn) by 2021. As a result, traditional advertising expenditure can be cut and redirected into online media channels. Another retailer is said to have reduced its advertising expenditures during Christmas by half by shifting away from TV ads but using Twitter to promote their products instead.
Applying supplier collaboration could help reduce retailers TCO costs, especially as customer behaviour is rapidly shifting
Close supplier collaboration requires cooperation between both parties to unlock significant new sources of value that benefit them both.
A good and impactful example of collaborating with suppliers is within logistics and warehousing where many costs stem from accommodating last-minute orders and making daily deliveries of small quantities. By improving planning, sharing information and aligning the retailer’s order fulfilment schedule with the supplier’s delivery schedule, TCO costs can be reduced significantly.
Amazon patented Anticipatory Shipping patent in 2014, an algorithm that predicts products a customer is likely to buy and ships to the distribution hub closest to the customer. Through deeper supplier collaboration, customer orders are fulfilled efficiently and promptly.
Retailers need to act now
To navigate from the aftermath of the COVID-19 pandemic, the upcoming recession and customers’ behavioural changes, retailers will need to manage internal costs whilst adapting to the new normal.
How retailers look at GNFR over the coming period will be critical as this expenditure is becoming more and more important to the customer proposition and experience. Companies that discover GNFR value in Procurement can unlock competitive advantages that is often overlooked.
To discuss how you can implement an effective GNFR Procurement strategy at your company, contact Thibault Lecat & Rochelle Coutinho regarding further questions.