I’m making a prediction – Scan Based Trading (SBT) will gain popularity in 2011 and will emerge in categories not typically engaged in SBT. In an article today in the WSJ titled “Retailers Are Sold on Frugality”, Walmart, Home Depot and Lowe’s are predicting the upcoming holiday season may be poor. They believe consumers remain very cautious about spending. The good news, if there is any, is that retailers have successfully cut expenses during the downturn [see figure 1], so most are making a profit despite lower sales. The bad news is that they are doing that by tough price negotiations with vendors, more reliance on part time workers and generally lower spending across the board.
“How in the heck can you increase earnings with tighter revenue? The answer is that we [Home Depot] expect some expense relief.” Chief Financial Officer Carol Tome. If you are a vendor to a major retailer – take note of that quote.
Back to SBT. Scan Based Trade relationships with vendors have been around for a long time, but they have traditionally been reserved for fast moving food and consumer goods. Things like bread and milk, etc. However, savvy financial executives at retailers have realized moving from a traditional purchasing model to an SBT model removes inventory from their balance sheet, reduces their labor and shipping and therefore dramatically increases their bottom line. Let me give a real world example. Accelerated Analytics processes data for an SBT program at one of the largest drug store chains in the US. This retailer is in the process of moving their entire book department from a traditional model to SBT. In the past, the retailer had millions of dollars of book inventory on their balance sheet, but today they have no books on their balance sheet and their vendor handles all DSD shipping, in store merchandising and carries all the inventory on their balance sheet until sold. When the book goes through the cash register, the sale is split between the vendor and the retailer. The retailer essentially provides shelf space and the vendor handles the category from start to finish. The vendor benefits because they have more control on merchandise assortment and planning and they get paid faster. With daily sales and payments based on the actual sales, the vendor no longer has to wait for 90 days to be paid on a traditional invoice. The retailer wins because their balance sheet is dramatically improved, their labor is reduced, they avoid mark downs, etc, etc.
This is a huge paradigm shift, SBT in the book category is revolutionary. Think SBT will never apply to your category – think again. I’ve had conversations with retailers and vendors about moving cosmetics, electronics, clothing and hardware to SBT. It’s not a question of if, it’s simply a question of when. Start thinking today about when your organization can support and even recommend SBT to your retailer and you will be way ahead of your competitors. Trust me, your CFO would like to be paid daily instead of net 90.
Have you heard of “Blue Ocean” strategy? If not, I highly recommend looking up the Harvard Business Review article and you will see how SBT is a blue ocean strategy for your business.
I’d like to hear your thoughts on the challenges/opportunities for SBT in your category.
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