S&A Foods have been one of the East Midland’s hero stories so this was really shocking to hear. And with my mission to stop businesses failing I wanted to understand what had gone wrong and what we might learn from it.
If you don’t know who they were, they supplied Indian ready meals to supermarkets, mainly Asda. The founder Perween Warsi started the business over 28 years ago in her kitchen and grew the business into a huge success story.
And it seems that Asda represented 95% of their turnover. A pretty dangerous situation as we can now see, as Asda chose another supplier after using S&A Foods for 28 years.
What can we learn?
So the lesson here is pretty obvious, you should never become reliant on just one key customer and this is something I bang on to my clients about all the time.
But it’s often not that simple. A customer can become a key customer quite gradually over time, or they can bring extra work to you that catapults them to the top of your list. So what to do?
- The first step is knowing.As part of your management information, you should know the make-up of your clients – always looking at the 80:20 rule. Where does most of your business come from?If your monthly information doesn’t include this then I’d suggest you start reporting this.
- If you find you have a top customer, you need to know if you would survive if you lost them tomorrow.If the answer is “No” then you don’t really have a business, you’re just an extension of your customers business.In this case you need an urgent strategy to bring in other business that will dilute them.
Should you turn down business?This is something clients often ask me.Should they turn down extra work and take the risk their customer might find someone else, or take it and make the most of it whilst they have the work.Both carry risk of course, but in my view it’s far more dangerous to keep taking the work, knowing that you’re becoming completely reliant on that work. Especially as taking more work means growing your overheads to cope with it.If you lose them your cost base will be higher and it will be even more difficult to replace that customer.
When you rely on one key customer your business starts to become their business. Your strategy goes out of the window because almost everything you do is to keep that one customer happy. If you’re in this situation ask yourself was it your strategy to be reliant on someone else, or did you want your business to bring you freedom?
And inevitably that one key customer will be putting margin pressure on you; they’ll know they’re your biggest customer and so they effectively control you. It’s usual to find that the biggest customers have the lowest gross margin and take the most servicing. And is if that wasn’t enough, you’re probably being screwed on payment terms as well!
And one day you realise it doesn’t even feel like your business anymore – they dictate how things happen.
So if you want your business to be around for the long term, I say keep your business as your business and don’t let any one customer take control. This might mean growing a little more slowly, but it will be on your terms, with better quality margin work, and knowing that one customer doesn’t have the power to take your business down.