In the News
August 27, 2015
Asset sell-offs and employee layoffs this week mark the latest chapter in the unwinding of the A&P grocery chain following its second bankruptcy filing in five years. Although few other small- or medium-sized chains are rumored to be facing the brink of insolvency, increasing top-down competition is tops among factors that should cause creditors of such chains to consider this an Industry to Watch.
A&P's primary issue was an inability to grow its market share during the current decade. Like others in the space that have not realized gains or stemmed losses, the timing coincides with more aggressive pursuit of grocery consumers by giants Target and, even more so, Walmart.
"The biggest problem is the competition," said Bruce Nathan, Esq., a partner with Lowenstein Sandler LLP and a long-standing member of NACM's Government Affairs Committee. "This wasn't a botched prepack bankruptcy. There weren't highly questionable management judgments. They just couldn't compete with big box stores. With more Walmarts and Targets popping up and being more focused on the grocery business, it puts pressure on the independent stores and smaller chains for sure. When you have to compete in price with those people, it shrinks your margins so much."
Walmart's and Target's bulk buying power helps them lean on suppliers for more favorable credit terms, which in turn lowers prices in ways competitors like A&P cannot. In Walmart's case, it appears conditions are about to get worse for suppliers and competitors.
In June, a Walmart mass correspondence to suppliers noted that it would require simplified payment terms to better align with its average total days of on-hand delivery as well as more flexibility on warehouse allowances and defective allowances, according to a memorandum obtained by NACM. In addition, Walmart is offering a supply chain financing program to its suppliersâ€”whom the company at the same time is refusing to pay more quickly without significant discountingâ€”with an option of borrowing money from Walmart, with interest, if the slower collections are hurting the suppliers' cash position. Those who seek gap financing through any other institution will not be allowed to participate in the Walmart Supplier Alliance, the memo warns. At least one supplier representative, who wished to remain anonymous, told NACM the move is "absolutely galling." However, from a business perspective, it will help Walmart's profit margins significantly in a number of areas, including its food sales business.
"Walmart is in a unique position in that they have a financial arm that can lend suppliers money at below-market rates," said Harvest Revenue Group President Boyd Evert, presenter of the NACM webinar Negotiating Your Walmart Supplier Agreement scheduled for Sept. 2. "Walmart has historically always been difficult to deal with because of their buying power. Now it is about to get worse."
This adds to numerous existing market disadvantages that traditional small and medium chains faceâ€”though trendy, niche-type chains Whole Foods and Trader Joe's appear somewhat shielded from these. Recently, credit managers for food-based suppliers noted the brand-name value and marketing expertise gaps between the smaller players and the Walmarts/Targets continues to grow. In addition, grocery chains and their key suppliers are industries most affected by the growing number of problems with electronic fund transfers (as noted in the edition of July 16 edition of eNews) because frequent payments and high turn are inherent in such businesses.
- Brian Shappell, CBA, CICP, NACM managing editor
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Since the turn of the century, advanced and developing economies have become more connected. But, have the two become so intertwined that emerging countries could cause great harm to developed economies? At least one new report seems to indicate that is the case.
Emerging markets absolutely affect developed countries, said Ron Shepherd, director of membership and business development at FCIB (The Finance, Credit & International Business Association). "China's slowing economy, their stock market selloff and the dramatic drop in global commodity prices are causing funds to flow out of emerging market countries and their currencies to plummet, creating issues of confidence for the global economy," Shepherd said. In developed economies, it will come down to consumer spending, "driven by how consumers feel about the impact of these events on the security of their employment and the impact on their nest eggs. If financial markets continue to sell off and companies begin to adjust, then consumers could postpone planned spending and elect to save or pay down debt, which could reduce consumer spending, which in the U.S. is 70% of GDP."
An Aug. 21 Wells Fargo commentary takes a look at the issue from the trade perspective by posing the question of whether slower growth in many developing countries threatens the economic outlook for advanced economies.
"The economic heft of the developing world ... accounted for about 20% of global GDP at the turn of the century," states Global Economist Jay Bryson in the report. Over the past 15 years, that ratio has nearly doubled, Bryson pointed out. Developing countries also receive about 25% of developed countries' exports, up from 17% in 2000.
However, "simple export-to-GDP ratios are not the best way to measure the economic effect that one country has on another economy," he explained. "What we really want to know is how much effect final spending in a given country has on value added in another country."
Based on Wells Fargo's analysis, the firm found that emerging countries didn't have much affect on developed economies 20 years ago. The most recent data available (from 2011) suggest "the proportion of value added in advanced economies that was attributable to final spending in developing countries had nearly doubled to 6%."
"Domestic spending accounts for the lion's share of value added in most economies," Bryson said, but "the economic exposure of advanced economies to final spending in developing countries has increased over the past 20 years."
Although 6% might not seem like a large amount, "most advanced economies are growing at a slower pace today than they were when the last wave of economic and financial crises swept through the developing world in the late 1990s," he said. Thus, advanced economies "can ill afford much of a negative shock from slower growth in final spending in the developing world."
The commentary points out that the eurozone and Japan have the most to lose because both economies derive 6% to 7% of their value added from the developing world, and their real GDP has grown by approximately 1% during the past year. The United States, however, derives less than 4% and is currently growing at more than 2%. Despite having less economic exposure to developing countries and more of an economic cushion, Shepherd cautioned, "When you're at 2% growth, it doesn't take much to knock that to zero."
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A recent court case brought to light an ongoing issue that many merchants face daily when doing business: the rising use of credit cards as a primary form of payment by various customer classes. While convenient for the buyer, credit cards engender a 1% to 3%, sometimes more, surcharge fee that automatically reduces a merchant's profit. "The fees themselves continue to be a big deal because we don't have the margin of B2B [business to business] space to deal with them," said NACM-National Executive Vice President Rudet Fountain, previously of United TranzActions. "Merchants don't feel like they can up the price enough to cover the cost for competitive reasons."
Surcharge fees are unregulated and are frequently manipulated by credit card companies, potentially resulting in significant amounts of misplaced costs to a business, said Robert Day, managing partner of WeAudit.com. "Because of a lack of regulation, you're completely at their mercy," Day said. "If the credit card company took out $50,000, you just hope it's what you owed."
In early August, U.S. District Court Nicholas Garaufis denied the final approval of a $79 million antitrust class action settlement between American Express (Amex) and a group of merchants. The decision followed the discovery that an attorney representing a group of merchants shared privileged information and confidential documents with his colleague, an attorney representing MasterCard in a similar court proceeding. Along with the multimillion dollar settlement, the agreement would have allowed retailers to impose a surcharge on customers who use Amex cards, as long as they place a fee on customers who use other credit cards as well, according to an Aug. 4 Reuters article.
In a parallel court case involving MasterCard and Visa, Reuters reported that merchants are seeking the dismissal of a $5.7 billion class action antitrust settlement due to the lawyer's misconduct in the Amex case. The next step for both cases will be determined in the coming months.
Amex issued a statement on its website saying it is disappointed by the court's decision and believes that the settlement is fair to the merchants. "The defendantsâ€”MasterCard, Visa, and Amexâ€”are actually eager to settle the case," said Gerald Gardner, Esq., chief legal officer and partner at WeAudit.com. "If they are eager to pay billions of dollars, it makes you wonder how much money they actually made from these customers."
Fountain says that charging fees to customers may give some relief to the merchants in the short term, but is not a viable long-term solutionâ€”especially since the use of credit cards in B2B transactions will continue to rise. "The convenience of credit cards is not going to go away," Fountain said. "I think what merchants really have to do is build the cost into their goods. ... and then say, 'if you want to pay with cash, we can give you a discount.'"
Day said he, like many in the credit and retail industries, would like to see more transparency from credit card companies and regulation going forward to ensure that the numbers cannot be manipulated.
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New figures from the Association of British Insurers (ABI) show an increase in trade credit insurance. Insuring turnoverâ€”the total volume of sales that British companies are insuringâ€”reached ÂŁ315 billion in 2014, a 6.6% increase from the previous year. The average premium for a trade credit insurance policy, however, fell by more than 2% over the same period.
"Trade credit insurance promotes financial growth by giving businesses the confidence to extend credit to companies they are trading with," ABI said.
Businesses took out nearly 10,600 policies, according to ABI data. While insured turnover was higher, businesses made fewer claimsâ€”approximately 10,300, a 1.9% drop compared with 2013.
The increase stems from suppliers offering "better products, which brings back to the market customers who had stopped buying" as well as improvements in the economy and an increase in customers' sales, said Mike Holley, CEO of London-based Equinox Global Limited. "It is encouraging that our industry is growing its market share in the U.K." The increased competition makes "the overall market bigger for everyone."
ABI noted, "This reflects improvements in the U.K. economy, with total company insolvencies in England at the lowest level since 2007." Trade exports also rose 4% since the previous year.
"In 2014, small businesses made more than 3,900 claims, or 38% of the total claims made to trade credit insurers," ABI stated. "Insurers paid out ÂŁ30.2 million to these businesses, 25% of the total amount, which was worth ÂŁ120 million." Small businesses received 25% of the total value of claims paid, while paying only 12% of the total premium.
In the aftermath of the bomb blast in Bangkok, another type of insurance has gained some interest: political violence policies, which covers terrorism and business disruption. Premiums are low compared with the sum insured because the chance of an incident occurring is considered minimal, according to an article in Thailand's The Nation.
"Though Equinox does not write this form of cover, the Lloyd's syndicates that provide our cover do," Holley said. "The product has been around for many years. Perhaps the situation in Ukraine best illustrates the value because this was not an isolated bomb blast, but rather a whole area of the country where law and order has broken down. There have been a number of claims in Ukraine for this reason."
While insurers in the U.K. are doing well, industry success isn't universal. Romania's second-largest insurer, Astra Asigurari, was recently declared insolvent. The company has been under special administration since early 2014, according to a Reuters article, and it had a liquidity coverage ratio of 0.03 in June and capital needs of $240.19 million.
Regarding the difference in prospects, this insurance company appears to be a general insurance company with millions of retail policies, Holley said. "It seems to have had a long standing problem of lack of capital and an inability to raise the additional equity." In addition, Romania is a former communist state with a struggling economy and ongoing problems of corruption, he noted. "It is very different from the typical western European country."
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The election that will occur in response to Greece's Prime Minster Alexis Tsipras announced resignation could cause further uncertainty in an already rocky country.
So far, the impending elections have not impacted the job of the credit manager, said Lampros Koutsinis, credit analysis assistant manager for Samsung Electronics in Greece. "The problem in our job is still the weak banking system," he said. "My real concern is that new elections will lead to another round of political uncertainty, causing difficulties and delays to the crucial issue of the bank recapitalization process."
The agreement between the government and its creditors provides up to â‚¬25 billion (US$28.4 billion) for the recapitalization of Greek banks, according to an Aug. 23 article from GR Reporter. While a portion will be transferred to a special account, the remaining amount will depend on capital needs. "The alarm point is not to lose time in [the] banking system recapitalization plan due to new elections," Koutsinis pointed out.
Greek bank equity is at historic lows, Koutsinis confirmed, and bank bonds have also faced a significant decline. "The hope is that the election results lead to the formation of a strong pro-European government, which will resolutely implement the reforms [to] the third bailout program," said Koutsinis.
Mexico's economy grew at a mere 0.5% in its second quarter and at 2.2% on a year-over-year basisâ€”a lower rate than the anticipated 2.6% year-over-year rate in its first quarter, according to a Wells Fargo report.
"The most disappointing result during the second quarter was a flat performance from the industrial sector compared to the first quarter of the year," the report states. "The manufacturing and construction sectors continue to grow steadily, but mining has continued its weakness, rending other sectors' efforts almost futile."
While Wells Fargo anticipates weak economic ratings in Mexico's third quarter, it still expects to see some improvement by the end of the year.
The risk of doing business in Kazakhstan remains high, according to a recently updated Country Report from Euler Hermes. The trade credit insurance company gave Kazakhstan a "D4" rating, noting the country possesses an authoritarian political regime, vulnerability to the Russian business cycle, a weak monetary policy track record and a high external debt burden.
Euler analysts project that real gross domestic product (GDP) growth will slow to 1.8%. "This reflects ongoing oil output problems, much lower average oil prices than in 2014, economic weakness in Russia, and the loss of competitiveness," the report states.
Next year, Euler Hermes anticipates that growth in Kazakhstan will increase to 3%, "as the economy adjusts to lower oil prices and fiscal stimulus takes effect."
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