8. Ex 11 Background research on buying groups Flashcards
Why is WWL facing an expansion dilemma?
Expanding whilst doing so profitably & with healthy cash flow is difficult thing to achieve
- v large retailers (e.g. Tapis Carpets/Carpetright) can give national reach, but as they have significant buyer power they can demand large discounts & long credit periods. So WWL has avoided working with them, preferring larger gross margins
Found SME retailers are better channels for preserving margins & CF. but they typically have a local focus, so lack positioning of larger brands
So to grow, WWL needs to develop, maintain and manage increasingly large number of smaller clients. This means higher OH and more complex business model
What are the pros and cons of having v large retailers as customers?
Pro: give national reach
Con: they have greater buyer power so can command higher discounts and longer credit periods. Reduces profit margins & puts strain on CF
What are the pros and cons of SME retailers?
Pros: higher margins
Cons: they tend to have a more local focus,
Means need a larger number of SME clients, so resulted in higher overheads and more complex business model
Has WWL engaged with any buying groups yet?
No
Why are buying groups forming?
To address their competitive disadvantage, some smaller retailers are forming buying groups which act as intermediaries between retailers and manufacturers
Allows them to compete against the economies of scale enjoyed by some v large retailers
What are the services offered by buying groups?
Offer variety of services, ranging from bulk buying economies
Networking opportunities
Marketing support
Common branding (e.g. a buying group can offer unbranded carpets to its retail members, through a suitable commercial arrangements with 1+ of groups chosen suppliers
So smaller retailers can maintain their independence while enjoying many of the benefits of being a larger operation
How do buying groups benefit manufacturers?
- Don’t need to develop and manage relationships with large number of smaller retailers
- Benefit from large volume of purchases on behalf of many retail members
- Buying group can communicate promotions and product info across potentially hundreds of member companies quickly and consistently
- Can increase exposure if being promoted to collective of retail stores
- can create better brand awareness, higher sales volumes and wider market reach for carpet manufacturer
- While need to offer attractive trading terms to buying groups (periods of credit/discount), unlikely to be as costly as those demanded by very large national retail chains
What are rebates?
A particularly attractive feature of buying groups = discounts via rebates
Means carpet manufacturers offers a discount, but only earned if buying group achieves a certain threshold of purchases from manufacturer
What are the main advantages of rebates?
Discounting via rebates allows carpet manufacturers to gain a discount if they achieve a certain threshold of purchases
Advantage: means retailer works harder to achieve the threshold a which a higher rebate is earned
Provide an illustration of a rebate scenario
Rebate scheme operated by Broadloom Buying Group (BBG)
- Rebates paid annually in arrears by each carpet manufacturer on a sliding scale
Calculated by reference to a revenue threshold target with the supplier over a 12m period
E.g. if WWL makes sales of £500k to BBG over 12m to 30 Sept 22, BBG receives rebate of £18k at the end of that period
Rebate is higher if WWL makes sales of £750k to BBG, £15k extra rebate given.
Highest rebate (£90k) earned if sales to BBG = £1,500k in 12m ending 30 Sept 22
What is the complication with rebates for accounting purposes?
Thilo Keogh thinks the rebates should be accounted for as a cost of sales
But Dilanee Acharya (FD) stated IFRS perspective is to show the revenue net of the rebate. IFRS adj will be made for audited FS purposes, but board needs to consider whetre they want the rebate to be included in the P&L for the man accs
Additional judgement also arises on what rebate to set up if the 12m contractual period is different to WWL’s accounting year
