As South African retailers contend with sluggish consumer demand, rising operating costs and persistent margin pressure, the next major opportunity for cost optimisation may have less to do with what sits on store shelves and more to do with everything required to keep those shelves, stores and businesses running.
Image supplied
From store fittings and staff uniforms to marketing materials, technology, logistics, facilities management and packaging, procurement of goods not for resale (GNFR) is emerging as an increasingly important lever for improving retail profitability.
Unlike merchandise procurement, which typically receives significant executive attention, GNFR spending is often fragmented across departments.
Marketing, operations, IT, HR and finance may each manage their own suppliers and purchasing decisions, creating a complex web of expenditure that can be difficult to see, measure and optimise at a group level.
According to global consulting firm McKinsey, indirect procurement can account for 10-15% of a retailer’s sales, yet remains significantly under-optimised. Retailers that take a strategic, cross-functional approach to these categories can reduce indirect expenditure by 10-15%, potentially improving return on sales by 1-2%.
For retailers operating on already thin net margins, those gains can have a meaningful impact on the bottom line.
Malcolm Herbert, chief financial officer at Sapphire. Image supplied
“Retailers have become exceptionally sophisticated at negotiating the products they sell, but far fewer apply that same discipline to the thousands of purchases required simply to operate the business,” says Malcolm Herbert, chief financial officer at Sapphire.
“GNFR procurement has traditionally been viewed as an administrative function. In reality, it is a strategic financial lever, where every rand saved on non-merchandise expenditure flows directly to the bottom line without requiring a single additional sale.”
Beyond negotiating lower prices
The opportunity in GNFR procurement extends well beyond securing better prices from suppliers.
Increasingly, procurement specialists are applying spend analytics, supplier consolidation, specification reviews and demand management to identify opportunities to reduce costs while improving operational performance.
That could mean redesigning packaging to reduce transport costs, consolidating fragmented supplier bases, standardising specifications across a national store network or sourcing products that improve employee engagement and brand consistency.
The focus, in other words, is shifting from simply asking suppliers to charge less to questioning whether businesses are buying the right products, in the right quantities and through the most efficient channels.
McKinsey has similarly highlighted a shift among leading retailers from procurement as a transactional buying function towards a business-wide capability that brings together finance, operations and commercial decision-making.
For South African retailers, this approach could prove particularly valuable as businesses look for savings that do not depend on increasing sales in an increasingly constrained consumer environment.
The hidden cost centre
The challenge is that GNFR expenditure is often spread across hundreds of categories and suppliers, making individual costs appear relatively insignificant.
But the cumulative impact can be substantial.
“Sapphire has seen this shift play out across several of South Africa’s largest retailers and corporates,” says Herbert.
“One major national retailer has realised more than R150m in procurement savings through our GNFR programme over the lifetime of the partnership, while similar procurement optimisation programmes for leading banking and energy companies have delivered significant savings through strategic sourcing, bulk purchasing, print management and national distribution.”
The example illustrates the potential scale of optimisation when businesses take a holistic view of indirect expenditure rather than examining individual categories in isolation.
“The misconception is that these categories are individually too small to matter, but collectively, they often represent one of the largest unmanaged cost centres in the business,” Herbert says.
“Businesses often focus on the largest line items because that’s where the spend is most visible. But when you aggregate hundreds of categories across marketing, uniforms, office supplies, logistics, facilities and technology, the opportunity becomes substantial.”
Procurement meets risk management
The case for strategic GNFR procurement is also moving beyond cost reduction.
As supply chains become more complex, retailers are increasingly considering whether suppliers can deliver consistently, support sustainability objectives, provide innovation and simplify procurement requirements across multiple business functions.
That makes supplier consolidation and strategic sourcing potentially valuable not only from a financial perspective, but also from a risk-management standpoint.
A more coordinated procurement model can give retailers greater visibility into who they buy from, what they spend, where supply vulnerabilities exist and whether suppliers are aligned with broader business objectives.
For a retailer operating hundreds of stores, even seemingly minor inefficiencies can multiply rapidly across the network.
A strategic lever for retailers
The broader shift is reflective of a changing retail environment. With inflationary pressures, constrained consumer spending and continued economic uncertainty, retailers have fewer easy options when it comes to protecting profitability.
Raising prices risks damaging demand. Cutting frontline resources can affect customer experience. Reducing merchandise investment can undermine competitiveness.
GNFR optimisation offers a different proposition: improving the economics of the business without necessarily requiring retailers to sell more or compromise the customer proposition.
“Small percentage improvements across multiple categories quickly translate into millions of rand,” says Herbert.
The next stage of procurement is therefore likely to involve more data, greater technology adoption and stronger cross-functional governance. Rather than operating as a back-office purchasing function, procurement is increasingly becoming part of the strategic conversation around profitability, resilience and operational efficiency.
For retailers, the biggest savings opportunity may ultimately not be found in negotiating the cost of the products customers put into their baskets.
It may be hidden in everything the business purchases before the customer ever walks through the door.
