A CFO s guide to understanding retail s best kept secret.

Transcription

1 A CFO s guide to understanding retail s best kept secret. Achieving sustainable profit improvement through better management of GNFR costs Proxima. All rights reserved. 1

2 Contents 4 The UK Retail sector: an analysis 6 GNFR: A new opportunity for UK Retailers 8 Case study: 80 million in bankable savings over 2 years 9 Bridging the gap between challenges and opportunities 12 Benefits of better managed GNFR 12 Recommendations for realising true benefits 14 About Proxima Proxima. All rights reserved.

3 Summary Deteriorating consumer confidence, in tandem with rising supply chain costs, has forced UK retailers to scrutinise every penny spent. Research has shown that 66% of costs incurred by UK businesses are procured on some level. However, as retailers look to maintain profits and retain margins, this statistic is often ignored and the more common cost-cutting initiatives are pursued (such as reducing head count, closing stores, cutting budgets). These quick-win initiatives achieve what they set out to and between aided the release of cash. However, this short term view means that few retailers have actually looked to fundamentally change buying behaviour. As such, with all the low hanging fruit (in terms of cost cutting initiatives) now picked, there s little left that is relatively simple to achieve leaving many retailers asking themselves What now?!. For the foreseeable future, revenues are not going to increase easily for most UK retailers. Now is the time to therefore follow in the tracks of all other sectors, and make some more dramatic changes to the way the cost base is managed. In particular, a much closer scrutinisation of how non-core / indirect / Goods not for Resale (GNFR) expenditure is managed. Proxima, in conjunction with NelsonHall, recently ran a study with 120 CFOs/CPOs across Europe and North America to uncover how procurement is viewed by the wider business. The research found that many retailers Senior Management teams give GNFR little attention in comparison to other priorities, resulting in a general lack of awareness as to the importance and true value that better managed GNFR expenditure can deliver. Thus a major opportunity lays relatively unknown and underexploited for many UK retailers - that is, sustainable profit improvement through better management of GNFR costs Proxima. All rights reserved. 3

4 Analysis Store closures 2008/9 Woolworths (all 807 stores, thousands of jobs lost) Marks + Spencer (27 stores, 1,250 jobs) Whittard (130 stores) Morgan (575 stores) and many more (with 14 profit warnings in Q1, 2011 alone for 14 retailers in the UK the third highest ever recorded, and the highest level since Q ). Plus more recently KESA Electricals selling Comet to a private equity firm for 2. The UK retail sector The recent past In the 10 years leading up to the recession, consumer spending was a key driving force behind overall UK economic growth. UK retailers were beneficiaries of the strong GBP, high consumer confidence and increasing disposable income with a lot of supermarket giants building their go-to-market strategies on hard promotional activities focused around pricing (huge discounts, BOGOFs and bundled packages) ultimately fighting for more market share by selling more units. Margins were kept high particularly within bigger retailers (such as supermarkets) primarily due to their economies of scale, enabling these bigger retailers to negotiate large discounts from their primary suppliers of Goods for Resale (GFR or Directs) in exchange for a greater volume of business. However in 2008, the world felt the start of what was the greatest economic downturn since the recession of the late 80s / early 90s with retail being among the first wave of sectors to feel its full force. Increasing inflation and declining consumer confidence began to impact top-line growth for many UK retailers. Fearing for loss of market share, many responded with more aggressive promotional activities and cost reduction strategies taking the form of store closures and heavy redundancies and between 2008 and 2009 we saw some of our much loved and respected brands starting to close their doors: Woolworths (all 807 stores, thousands of jobs lost) Marks + Spencer (27 stores, 1,250 jobs) Whittard (130 stores) Morgan (575 stores) and many more (with 14 profit warnings in Q1, 2011 alone for 14 retailers in the UK the third highest ever recorded, and the highest level since Q ). Plus more recently KESA Electricals selling Comet to a private equity firm for 2. Following on closely from store closures and quick-cash releasing initiatives, retailers began to investigate how else margins could be improved or stabilised through a closer scrutinisation of their supply networks. Not only were retailers feeling the pinch, so too were their primary (direct) suppliers and major links down the supply chain. Commodity fluctuations, currency movements and outstanding payables (debt), meant that suppliers also needed to improve or maintain their existing margins to stay afloat and as such, those who were able to weather the knock-on impact from their primary customers difficulties, are now facing increasingly challenging decisions surrounding retailers demands for price reductions with limited room to lower their prices any further, retailers and suppliers are now fighting it out as to who will absorb the most cost. The situation today UK retailers face ever-increasing pressure to retain/grow their market share, drive value and differentiate their offering through innovation or promotion. Margins are constantly under strain and retailers must be creative when looking to cut costs and grow revenues. An Ernst & Young ITEM Club report forecasts UK consumer spending growth rates slowing to 2.0% p.a. until 2020, which (no doubt) will have major implications on UK retailers top-line growth figures. With recent reports that sales volumes dropped 1.4% between May and April this year and continued into August (with growth contracting by 0.2% year-on-year) further, it is clear that customer s willingness to spend is still battered as we emerge from the economic recession. Transportation: Record high price of petrol of was felt during May 2011, with prices as of October coming in at In addition, the timing of Easter, impacting air and sea transportation costs (where air fares rose by 29% and Sea fares rose by 22.3% between March and April 2011) Tobacco and alcoholic beverages: Saw price increases of 5.3% plus (between March and April 2011) and increasing excise duties on alcohol and tobacco Housing and household services: Increases in energy bills and sewage collection plus an overall increase in rental costs Proxima. All rights reserved.

5 2.50% Increase in VAT 1.5% Decrease in Total Pay 0.5% Constant YoY interest Rate 13% Traditionally, retailers have been able to overcome inflation, as it has been internal (UK) driven inflation. However, for the first time in 35 years, the increasing inflation rate was largely driven by import costs stemming from producers and commodity owners pushing their prices up. Then add into the mix 2.5% VAT increase and most importantly Total Pay decreasing by 1.5% from 2010 to All of this has led to an increased level of consumer price sensitivity and fear of job security (particularly mortgage owners, although Interest Rates remain constant (YoY) at 0.5%). In addition to decreasing consumer confidence, retailers are also being forced to use their existing store floor space more creatively due to saturation in the market (the UK market alone has absorbed around 1.4million sqm additional retail space per annum over the past 20 years) alongside increasingly stringent new planning restrictions. This has resulted in many UK retailers either toying with the concept or have begun to move more aggressively into the digital marketplace (with European online retail sales forecast to grow 13% over the course of 2011). For some this decision was a response to: Consumer shopping behaviours (focus on convenience and finding the best deal) Technology advancements in e-commerce backed websites Further move towards becoming a true multi-channel retailer For others, such as HMV and Borders, this decision towards digital was forced from the absolute need to evolve alongside media consumption trends. Over the past 5 years, this rapid evolution has highlighted several opportunities for many UK retailers, it has also highlighted many weaknesses with HMV failing to adapt fast enough to the rise of digital music and its impact on CD sales (consistently declining YoY since 2007). A key reason many UK retailers were unable to adapt to shifting consumer trends fast enough was due to the dynamic nature of operating in the digital environment (i.e. open for 24 hours / 7 days a week, being more responsive to customers, ensuring stock control is impeccable etc). Many larger, more established retailers were/are finding that their archaic supply networks are not equipped to handle this new dynamism that the digital marketplace brings. Overcoming these legacy systems and processes built into the business (and more specifically the supply chain) requires: Greater investment into people (ensuring there is technical knowledge within the business to keep up with digital advancements plus commercial knowledge of operating in a digital market-space) Becoming more efficient through the development of more sophisticated back office IT systems (P2P and ERP tools) and customer facing systems (increasing use of self-service terminal and scanning solutions) which can automate processes reducing reliance on front-of-house labour More sophisticated demand management processes (which go through the entire process from front of house to back, encompassing Goods for Resale (GFR) as well as Goods Not for Resale (GNFR) Ultimately, the greatest challenge for UK retailers is ensuring all cash coming in and going out of the business is being managed right through to the bottom-line with less focus on continually adding to the top-line. As such, the greatest opportunity for UK retailers lies within better management and control of cash flow. Growth in online European retail sales In 2008, the world felt the start of what was greatest economic downturn since the recession of the late 80s/early 90s with retail being among the first sector to feel its full force Proxima. All rights reserved. 5

6 Opportunities GNFR: A new opportunity for UK retailers Many retailers have spent decades engineering their primary (direct) supply chain ensuring: The Goods for Resale (GFR) margin is at or above industry standard Risk is kept to a minimum Long term supply has been assured with preferred suppliers Relationships have been built and developed over time Processes have been engrained into the core business Senior executives and Board members acknowledge the value of the supply chain in light of business objectives With the increasing focus on improving margins, a major opportunity (whether by lack of knowledge/expertise, investment, internal capability or understanding of importance) remains uderutilised across the industry driving efficiencies out of Goods not for Resale (GNFR) expenditure. When embarking on this journey, many in-house procurement functions have tried to simply overlay the rules, processes and methodologies of GFR which led to the failure in achieving the same efficiencies and ROI from GNFR. Over the past decade GNFR has continually slipped down the list of business leaders priorities and herein lies the opportunity. Defining GNFR Procurement GNFR procurement is the sourcing of all goods and services for a retailer that enable it to run as a business. Or looking at it another way, the goods and services classified under the umbrella of GNFR are commonly bought for consumption by internal stakeholders (business units or functions) rather than the external customer. GNFR categories include marketing related services (media buying, agencies), professional services (consultants, advisors), travel management, IT related services (hardware, software), HR related services (recruitment agencies, training), facilities management and office services (Telecoms, furniture, cleaning, catering, printers) and utilities (gas, electricity, water). When embarking on this journey, many inhouse procurement functions have tried to simply overlay the rules, processes and methodologies of GFR which led to the failure in achieving the same efficiencies and ROI from GNFR Proxima. All rights reserved.

7 Fig. 1 outlines several differences between GFR and GNFR. Firstly, within the GNFR supply market there are hundreds of categories, all of which require deep knowledge to procure effectively. Also, there are tens of thousands of suppliers, all who invest heavily in selling to you (the buyer) for large contracts it is not unusual for a supplier s account management team to be larger than the entire procurement function it is selling to. Secondly, given the relatively high turnover of GNFR, it s not uncommon to see large numbers of low value transactions being carried out. GNFR deals with thousands of stakeholders (internal and external), all with knowledge about their area but need procurement s support. This is turn means that procurement must act as an internal advisor, influencing functional decision makers and budget holders about their spend, something which GFR buyers don t face. And let s not forget, GNFR procurement professionals do not actually have any mandate over internal stakeholders budgets. They have to influence and persuade they can not dictate. Finally, being that GNFR is the spend which enables the business to operate, procurement professionals looking after this element of expenditure must constantly look at the internal and external supply market and determine which products solve the business needs changing internal behaviours if need be. Taking all of this into account, the seemingly insurmountable challenge that internal procurement functions face becomes evident, reinforcing why many retailers have failed to drive the greatest benefit and ROI from their GNFR expenditure to date. As such, over the past decade GNFR has continually slipped down the list of business leaders priorities and herein lies the opportunity. Fig. 1 Difference between GFR (direct) and GNFR (Indirect) procurement within Retail Supply market Factor Goods Not for Resale (GNFR) or Indirects Goods for Resale (GFR) or Directs # of suppliers used High Medium # of potential suppliers in the market High Low # of categories of spend High Medium # of supply chain integration issues Low High Process Average transaction Low High # of transactions High Low # of decision makers High Low Influences Procurement is the decision maker No Yes # of requisitioners High Low # of suppliers per Procurement Manager High Low Maverick spend issues Yes No Business driver Enabling the business to run Gross margin Business Procurement s main focus Internal & supply market Supply market & consumer Source of most value Changing internal behaviours Supply market Ability to see savings hit the bottom line Difficult Easy 2012 Proxima. All rights reserved. 7

8 Case study 80 million in bankable savings over two years A major retailer, looking to drive maximum benefit out of their GNFR expenditure, as an enabler to support aggressive top-line growth, approached Proxima to discuss a sustainable, tailored solution to their unique and complex business model. It was recognised that competition, inflation and the stagnating economy were putting pressure on the retail market and that competition for market share would only intensify. In response this retailer recognised that Goods Not For Resale (GNFR) procurement could be the driving force behind a business wide initiative to change the way it operates and thus engaged with Proxima to support this. The GNFR Purchasing team was responsible for less than 5% of total GNFR spend, the majority being managed by individual business divisions. It was evident that an inconsistent approach to procurement could lead to business risk, especially when the decision was made that the Code of Conduct relating to Goods For Resale suppliers would also be applied to GNFR suppliers. Proxima was charged with the role of repositioning and redefining procurement within the business to improve operational performance and bottom line profitability. A first year target of 30 million in-year savings was set, though considerable emphasis was also placed on the need to mitigate supplier risk and embed bestpractice procurement throughout the business. Within the space of six short weeks, the GNFR team went from being a necessary evil to a service provider massively in demand. Over the course of our 24 month engagement with the retailer, total project savings of 80m have been delivered back to the business. In addition to this significant bottom line saving number risk mitigation and process improvements, were also delivered exceeding expectations. What is significant about these achievements, is not only that the GNFR team was able to overcome what had previously been an inwardly focused culture, but it is the speed and scale at which this was achieved Proxima. All rights reserved.

9 Findings Bridging the gap between challenges and opportunities We recently ran a study in conjunction with NelsonHall which included the views of 120 CFOs/CPOs from Europe and North America to uncover how procurement (more specifically GNFR procurement) is viewed by the wider business, including senior executives. We identified that GNFR procurement is valued relatively highly by business operating units and functional heads, implying a mandate at business operating unit level to take on the role of strategic business partner, but this value is less recognised at senior executive level and by the CFO/COO. As such, where GNFR sits on the senior executives and CFO s/coo s agenda means that little attention has been placed on developing and driving maximum value for money out of this element of business expenditure. The study found that the primary reasons for the low or moderate contribution from the team responsible for GNFR A lack of visibility of the GNFR team The relatively low status of GNFR procurement A lack of awareness of its contribution to driving business performance The GNFR team typically covers routinely purchased items, but usually lacks the capacity or the resources to provide full sourcing support for non-routine items The typical senior executive within the retail environment may not understand the importance of (or true value that can be delivered by) investing more resources (human and cash) into GNFR nor care to when looking at a long list of priorities. Fig. 2 Perceived Value Brought by the GNFR team High Medium Low Business operating units 80% 17% 3% Functional heads/directors 83% 17% 0% Chief Financial Officer 43% 33% 24% Board members 43% 33% 24% GNFR procurement needs to be better understood. I have no day-to-day visibility of the function so it is difficult to understand the value in the function. Other senior executives are more involved but it is always in the shadow of direct procurement Proxima. All rights reserved. 9

10 Overall there are 3 components in bridging the gap between challenges and opportunities: 1 Expertise and skills Managing GNFR expenditure effectively requires a huge variety of skillsets. Skillsets such as category expertise, change management, stakeholder engagement from senior executives down, facilitation, negotiation, supplier management, data analysis, technological know-how and so the list goes on. Participants from our study, advised they are satisfied with the calibre of personnel responsible for GNFR, focusing on their ability to drive cost efficiencies from the supply market. However an underwhelming level of satisfaction is given to procurement s ability to influence and improve buying behaviours and internal attitudes, which includes winning over senior executives. Coincidently, the degree to which CFO, COO and senior executives are satisfied with GNFR procurement s level of business engagement and change management was the lowest out of all sectors in the study further highlighting a severe gap in procurement s ability to engage effectively with internal stakeholders. To make matters even worse, indeed insurmountable, the demands on a business, and the skillsets required to effectively management GNFR, change from one week to the next. The odds therefore are heavily stacked against any in-house procurement function looking to centralise and consolidate GNFR (in the same way as GFR or directs) or in fact even being able to consistently meet an organisation s growing needs. 2 Accountability and responsibility In terms of reporting structure, our study found that 63% of GNFR expenditure was managed within individual business units, often geographically dispersed. This non-centralised approach not only encourages rogue spending behaviour and increases risk but also severely reduces any economies of scale, which GFR takes advantage of through a centralised approach. Digging deeper, the study found that retail was the only sector where the COO was primarily accountable for GNFR spend (in comparison to Financial Services, Manufacturing and CPG where the accountability was split almost evenly between operations and finance) which implies a natural focus on cost efficiency rather than a holistic business view of value. This continual focus on cost as a key driver, from a leadership perspective, often encourages the wrong (usually short term) behaviours and is not sustainable. This narrow perspective on cost limits procurement s ability to effectively challenge usage/demand (questioning whether something needs to be bought in the first place), add value outside of pure year-on-year savings (by truly understanding stakeholders needs) and align with the wider issues of the business (being able to flex skills and knowledge when and where needed). Fig. 3 Satisfaction with GNFR Teams High Medium Low Calibre of personnel 60% 37% 3% Ability to influence other departments 43% 47% 10% Ability to influence and improve buying behaviour and internal attitudes towards indirect procurement 13% 67% 20% Fig. 4 Satisfaction with GNFR Procurement Capabilities High Medium Low Business engagement and change management 27% 33% 40% Proxima. All rights reserved.

11 3 Inertia to look outside the organisation Finally, the study highlighted that retail was an anomaly across all sectors involved with a severe reluctance to outsource GNFR (furthermore, the study highlighted retail s reluctance to outsource in general). The lack of outsourcing implies a view (across the industry) to keep capabilities retained inhouse. Referring back to our summary around the number of categories, suppliers and internal stakeholders a GNFR procurement team must deal with, also implies retailers will either have: A large GNFR procurement team, with team member s productivity peaking in periods of high demand and dipping when there is minimal work; Or A relatively small GNFR procurement team, covering multiple categories (spreading themselves thin across each one) Another implied inhibitor for retail s reluctance towards outsourcing, is the lack of successful experience / success stories banded around the UK retail community. To date, outsourcing vendors have done a rather meagre job of aligning and integrating with retailers often trying to overlay a process or system taken from another sector. UK retailers require a certain level of Intimacy to not only understand the needs of the procurement operation, but the needs, challenges, goals and drivers of all stakeholders, internal and external to each business acting as a true business partner rather than another supplier. Overall, regardless of the fact that procurement is valued relatively highly by business units, the limited penetration into Board level agendas has meant that this facet of business expenditure remains under invested and under exploited. The lack of senior executive buy-in combined with the inability to effectively engage and influence internal stakeholders means that accountability and responsibility usually falls under the remit of the operations team who have a strong bias towards efficiency and cost minimisation. The true value and benefit that is realized through better managed GNFR tends to happen when there is accountability at the CFO or CEO level, which shifts the focus from efficiency to effectiveness delivering value back to the business as defined by the various stakeholder communities which doesn t always mean a % of savings negotiated off last year s contract Proxima. All rights reserved. 11

12 Benefits Benefits of better managed GNFR Most obviously, the headline benefit of better managed GNFR for any retailer is increasing the availability of cash. If we look at this in the terms of profit: Company ABC, a retailer with 100m annual turnover (with a net profit currently 10% of turnover and total expenditure of 80m) wants to increase profit by 1m Company ABC would need to increase sales by 10% (which they have been doing since 2008, without much success) or alternatively they could reduce costs by 1.25% through procurement. This 1m saving that procurement has brought to the table also has a direct impact on Market Capitalisation, further improving Company ABCs share value in the market. Company ABC has a P/E (price-to-earnings) ratio of 15 which means the 1m saved and banked as profit has just increased the MCAP of Company ABC by 15m. The law of diminishing returns applies to the above example, in that purely focusing on continually cutting costs will result in smaller savings with each negotiation as suppliers and providers defend their own margins. Thus we need to understand (and communicate back to the business) the additional benefits better managed GNFR can bring on top of pure cost savings which are: Improved market competitiveness Improved supplier selection, management and performance Procurement strategy aligned with business strategy Improved value through greater TCO management Reduced number of invoices Risk mitigation Improved compliance Control and visibility of your spending activity Overall a better managed GNFR procurement operation offers a more holistic understanding of your total cost base enabling you to forecast more accurately, reduce risk associated with on-boarding a new supplier, ensure compliance and control cost. Human resource utilisation is also enhanced due to increased transparency into effective time management and team focus. The biggest benefit from managing GNFR expenditure more effectively is getting this element of business spend under control and working harder towards the core business objectives. Recommendations for realising true benefits The research, along with our own experiences, found that there is a huge opportunity for many retailers to improve cash flow, gain better spend visibility across their business and ultimately return greater value back to their shareholders by managing GNFR spend better. However, in order to realise the true benefits UK retailers must be prepared to make some significant changes Proxima. All rights reserved.

13 1Management of GNFR requires a fundamentally new approach Managing GNFR expenditure effectively requires a huge variety of skillsets stakeholder management and business skillsets (including change management, stakeholder engagement) as well as the traditional facilitation, category expertise, negotiation, supplier management, data analysis, contract management skills. In addition to this, our own experience has shown that trying to overlay the rules, systems, processes and technologies used in GFR onto GNFR simply does not work. The study highlighted an underwhelming level of satisfaction, from senior executives, given to procurement s ability to influence and improve buying behaviours and internal attitudes across the business. As such, UK retailers need to be investing more into how GNFR is managed taking into account the current skill sets, expertise, experience and capabilities of their inhouse procurement teams. 2Ensure Procurement has board level sponsorship (and the total benefits are understood) The research found that 63% of GNFR expenditure was managed within individual business units, often geographically dispersed. This lack of central ownership means there is a strong bias towards efficiency and cost minimisation as effectively managing this element of business spend is secondary to the business units primary purpose and function. This non-centralised approach not only encourages rogue spending behaviour and increases risk being introduced to the organisation but often encourages the wrong (usually short term) behaviours which are not sustainable. True value and benefit is realised when there is accountability for GNFR at the CFO or CEO level, which shifts the focus from efficiency to effectiveness delivering value back to the business as defined by the various stakeholder communities which doesn t always mean a % of savings negotiated off last year s contract. 3Become more willing to look externally for support A key finding from the research was that retail s reluctance to outsource GNFR (in fact, retails reluctance to outsource at all) was an anomaly across all sectors involved. The lack of outsourcing implies a view (across the industry) of retaining control and capabilities in-house. Referring back to our summary around the number of categories, suppliers and internal stakeholders a GNFR procurement team must deal with, also implies retailers will either have: A large procurement team, with team member s productivity peaking in periods of high demand and dipping when there is minimal work (meaning underutilisation); Or A relatively small GNFR team, covering multiple categories, with team members acting as generalists in supporting the business (spreading themselves thin across each category) Looking externally can bring fresh perspectives, different experiences, new processes, and innovation which simply cannot be attained (cost affectively) internally. Partnering with a specialist, particularly for GNFR expenditure, also enables retailers to flex procurement resources up and down to mirror the peaks and toughs in business demand (with the added benefit that all resources are specialists and being utilised only when the business requires them) Proxima. All rights reserved. 13

14 About Proxima Proxima is a provider of end-to-end procurement services. We believe that better management of non-core expenditure can deliver significant profit and operational improvements. However, the diverse skills and expertise required to effectively manage your non-core spend internally is simply too costly. What we offer addresses this issue. Our core business is to fundamentally transform the way our clients think about the management of non-core (or indirect) expenditure. Through a combination of flexible category expertise, a strong focus on influencing and change management, technology and a relentless desire to challenge ineffective ways of working, our managed service is able to support and deliver your business objectives. Client intimacy Key to our approach and a major strength is the way in which we take great care to foster deep connections with our clients and gain an acute understanding of their needs and organisations. This intimacy is fundamental to delivering extraordinary results. And when we talk about extraordinary results let s be clear: we re talking about something very different from a traditional BPO arrangement or one size fits all approach. We re different because we deliver massive benefits through evaluating and reshaping your practices and behaviours to match your specific needs. Ultimately, Proxima brings the same capability, diligence and commercial rigour to GNFR that you have built for GFR. Benefits of our model In addition to significant savings, our approach enables diverse and capable global businesses to realise additional benefits including: Clients include Improved business performance through our unique, and fundamentally different, approach to managing non-core spend Improved spend visibility and control reducing contractual and operational risk Increased compliance over third party expenditure A tailored solution built specifically to meet your businesses demands Best use of technology from invoice processing automation and Purchase to Pay (P2P) platforms to complete sourcing systems Improved capital management focusing on optimising your working capital, looking at payment terms and processing options Mobilised suppliers bringing more innovation Refined, best-in-class processes and procedures from across industries Ultimately, Proxima brings the same capability, diligence and commercial rigour to GNFR that you have built for GFR Proxima. All rights reserved.

15 2012 Proxima. All rights reserved. 15

16 For more information, contact us at: T: +44 (0) E: Proxima. All rights reserved.