Changing landscape of the retail industry

I was born in Malaysia in 1960 and have stayed, studied and worked here all my life. I am a Malaysian citizen by law – this constitutional right is not given by any living or non-living politician, academician or racist bigot.

Since Malaysia achieved independence in 1957, those born in Malaysia and naturalised citizens of all races have played a part in the economic development of this country.

The nation’s rapid industrialisation was due to the hard work of responsible politicians, gung-ho entrepreneurs and diligent citizens who just wanted to build a better life for their families.

Capital was scarce in the 1960s. Fortunes were built by those who had access to capital, foreign companies (mostly British) which owned most of the plantation land and local entrepreneurs who pooled their capital to trade, manufacture and build houses.

Citizens needed food, clothing and a roof over their heads as basic necessities. Thus, it was a demand economy with tremendous opportunities for yesteryear entrepreneurs.

When I was young, I remember that my family would purchase our groceries from the local grocery shop on credit, with the details of each purchase like the date and amount being written in a small 555 notebook – a long way from the computers of today.

After receiving his meagre salary at the end of each month, my dad would pay the grocery bills just like any other creditor throughout the country.

The grocers got their supplies on 90-120 days’ credit terms from the wholesalers, who, in turn, got 90-120 days’ credit from the importers who managed to arrange trade financing of 90-120 days from their bankers.

My early trading days were spent arranging trade financing facilities, as I had to get my bankers to issue a letter of credit to purchase imported goods on 120-day trust receipts (30 days for shipping and 90-day for stock-keeping). Then, once the product was sold, there were another 90 days on average in accounts receivable. It was common then to work on a total trade financing of an average of six months for a single item purchased and sold.

The retail industry in Malaysia grew on a supply chain network used to working on long credit terms. As the retail formats evolved into air-conditioned supermarkets in the 1970s and 80s, consumers with better cash flows would buy their items in cash at the supermarkets.

Because of the easy credit terms offered by suppliers, it was easy to open supermarkets and convenience stores with minimum capital, as the immediate cash flow generated by daily sales was used to finance the merchandise stocked on long credit terms.

My first lesson in managing credit risk was in 1985/86 when I started my trading business. The collapse of the Emporium Supermarket and Department chain stores with a debt of RM290mil crippled the entire supply chain of grocery and clothing entrepreneurs.

The well-financed suppliers withstood the write-offs, but thousands of SMEs along the supply chain went bankrupt.

This practice of easy credit from suppliers continued into the 90s and only after the further collapse of local supermarkets and department stores like Super Komtar Group, etc, did the supply chain start to tighten credit policies with strict credit limits and a no payment-no supply policy. Managing credit risks is now a major concern even among SMEs.

With the introduction of credit cards, some of the easy credit risks have been transferred to banks. Retail outlets have to pay their suppliers on shorter credit terms. White goods suppliers and their chain stores sell direct to consumers on credit card installment plans.

Chain stores are better managed financially nowadays, traditional wholesalers and independent grocery stores have diminished in numbers and importance, and overall credit risks in the retail supply chain have reduced, leading to a healthier retail industry, going forward.

With the online shopping disruption underway, supermarket chain stores all over the world have to speed up internal transformation to meet new challenges.

Malaysian retailers and supply chain players should study supply chain format transformation practices of advanced countries, as they have a much longer history.

John James Sainsbury and his wife Mary Ann opened a grocery store in Drury Lane, Holborn, in 1869. A grand 150 years later, Sainsbury’s has a 16.9% market share of Britain’s grocery retail market.

Besides the chain of supermarkets and convenience stores selling groceries and fresh food, Sainsbury’s sells petrol at its gas stations normally situated next to its supermarkets. Sainsbury’s Argos sells general merchandise through a hybrid model of online and offline/high street stores.

My eldest son, who has lived in the UK for six years while pursuing his education, describes his experience with Argos and Sainsbury’s – if he needed general merchandise urgently, he would walk into an Argos high street store, place the order via the computer terminal placed at the shopfront and the staff would then pick up his order and hand it to him over the counter.

As an Amazon Prime member, he can order online from Amazon for next-day delivery. He can also check online and compare prices of the same merchandise in both market places.

When in Cambridge, he would buy his groceries and toiletry supplies from the Sainsbury’s mini market, located just across the street from his college dorm at Sidney Sussex. When in London’s Kensington High Street, he would walk across the street to either Sainsbury’s or Tesco Express. Shopping online or offline is all about convenience and lower prices to the Millennials.

Such shopping demands from the Millennials weigh heavily on Mike Coupe’s mind. As the CEO of Sainsbury’s, he has to constantly drive his team to improve his supply chain in terms of sourcing, quality and lower prices. He has to continuously tweak his store estates in terms of size and location, being mindful that the cost of last-mile delivery to customers is manageable without sacrificing the convenience and service quality required by his discerning customers.

To compete with the online grocery competition, Sainsbury’s now has to sell online while at the same time delivering to homes. Home delivery of groceries is not profitable, as it does not make economic sense due to small-sized purchases and poor routing efficiencies. The tipping point for cost-efficient home delivery will be when Sainsbury’s can fully fill up the truck with orders before it leaves its warehouse/supermarket. Still a long way to go.

To help Coupe and his team of buyers understand customer habits and preferences, Sainsbury’s employs 800 data analysts to crunch customer purchase data through loyalty cards and debit/credit card purchases. Besides the basic analysis of sales numbers, sophisticated software can help reveal minute details like the peak sales time for sandwiches by location, the delivery time of fresh sandwiches, the type of sandwiches needed, and the purchase patterns of these sandwiches.

With AI, you can actually predict consumer demand and stock the right kind of sandwiches by store, time and location. Real-time information can be given to sandwich suppliers the night before as they start to prepare the orders by store throughout the night, assuming deliveries start from 6am the next morning.

Centralised orders are written by computer softwares based on previous days’ sales figures, so no manual instructions need to be given. Shelf space is allocated by space management software based on a predicted sales volume for each individual store for the day. This is the future of efficient store operations.

With AI, Sainsbury’s will understand each individual customer’s purchase pattern, frequency and type of products purchased. AI can help predict when this individual customer will buy a particular product and at what price.

This information will help buyers plan strategically in terms of product stocking and maximising margins due to the criteria of availability and not product price.

As for Argos, I was curious as to how it competes with Amazon with its high cost of managing high street stores. Surprisingly, 40% of Argos sales come from walk-in customers.

The stores actually act as a fulfillment centre, where walk-in customers can purchase immediately, or for those who order online, pick up the items at the nearest store when there is no one at home to accept online deliveries.

With AI, Argos can expand its product range, as it will help predict the right mix of merchandise to be made available at its fulfillment centres. Stores that have fewer walk-in customers can be closed down, as the fulfillment can be done by online deliveries.

Some Argos stores have been moved to Sainsbury’s supermarkets for efficient space utilisation and cost-savings. From a catalogue sales company, Argos has morphed into an efficient and profitable general merchandise retailer hybrid – online and offline. To remain relevant and sustainable, Argos will continuously transform its distribution channel to fulfill changing consumer needs.

In 2018/19, Sainsbury PLC achieved annual sales of £29bil and an operating profit of £518mil. As the CEO, Coupe’s annual salary was £3.9mil. His annual salary requires approval from shareholders in their annual AGM. Being a transparent PLC, the board of directors and the CEO are open to public scrutiny.

When asked about his role and responsibility, Coupe told me that he is in a position of stewardship in Sainsbury, planning for the long-term sustainability of its retail business model and preserving shareholder value in this iconic company.

Biased as I may sound, “Honest” Mike is the consummate retailer who has morphed into an elegant corporate leader in the UK. Friendship will be put aside the next time we meet to discuss the supplier and retailer relationship. I might have lost the war but I intend to win a few battles yet. It is personal.

source: http://www.thestar.com.my