Risk & Economy » Regulation » Retail finance directors have kept the tills ringing

Retail finance directors have kept the tills ringing

It’s been a slog, but retail FDs have kept cash coming in through recession

With consumers terrified into paying off their debts rather than spending, one would think the retail sector would be all doom and gloom. In fact, while life has been tough for many in the sector, retail also boasts some outstanding success stories – and finance directors across the sector have been presented with a real chance to demonstrate just how much value add the finance function can bring
to an organisation.

Keith Richardson, a relationship director at Lloyds Banking Group looking after retail clients with an excess of £500m, believes retail at that level is doing well.
“There is a real difference between organisations that have a very clear strategy, as opposed to those that had a good story for the good times, but have been found wanting in the downturn,” Richardson says.

Richardson spent 28 years with Tesco before joining Lloyds, so knows the industry well. For him, the big change for finance directors through the recession has been the way working capital has moved to centre stage.

“In the past, while working capital was important, there were always another five things that had a higher claim on the finance director’s attention,” he says. “Now it is at the top of most people’s lists and the retailers doing well are those who are focused on this, and on managing their cash and stock more efficiently than they might have done in the boom times.”

What differentiates retail from any other sector is the speed of innovation.

“Retailers challenge themselves constantly,” says Richardson. “What works today is not going to work tomorrow. This is an industry in constant change.”

Kingfisher, the DIY specialist and owner of B&Q, has managed to turn in a reasonable profit in extremely flat trading conditions. And the finance function under group finance director Kevin O’Byrne has played a leading role.

Before joining Kingfisher in October 2008, O’Byrne was FD of Dixons and has been European FD at Quaker Oats, so he is no stranger to high-pressure retailing and tight margins, and brings a range of experience to compare and contrast against the demands and challenges of retail.

For O’Byrne, retail – more than any other sector – lives and dies on its margins and cost control, with one of the prime metrics being the amount of revenue generated per square metre of store space. This sounds straightforward enough until you factor in the international dimension.

Kingfisher operates more than 800 sites in nine countries, including Russia and China. The company has more than £1.7bn of stock across all its locations and the finance function also leads on risk management in the broadest sense, taking charge of the health and safety of its 80,000-plus employees around the world.

Delegation and communication
So what processes does O’Byrne have in place to enable the finance function to keep a tight grip on the levers across such a sprawling structure? The two keys, he says, are delegation and communication.

Long before Sarbanes-Oxley became law in the US, O’Byrne had a system going back to his Quaker Oats days of insisting that people take ownership and responsibility for the numbers under their control.

“This really is about cascading responsibility down the line, right down to store level,” O’Byrne says. “It focuses people’s minds when they have to personally sign off on the key numbers and know that they will be held accountable for errors.”

There is an obvious tension in retail between store managers and the finance function. Any store manager is going to want to keep as much stock as possible so that the shelves never run out. The finance function knows that stock eats up working capital and that the more stock you have, the more wastage you have – and the more you have to run promotions discounting old stock to push it out the door.

One of the major successes that Kingfisher and O’Byrne have had is in stock management. Clearly, not all stock lines move at the same speed, but wherever Kingfisher has reasonably fast-moving stock it negotiates payment deals with its suppliers, which means the supplier only gets paid when the stock has been sold.

O’Byrne works on the basis of the number of days of paid stock that the company is holding and monitors this figure assiduously. The Holy Grail is to get days paid stock down to zero, meaning the company would incur no financing charges for stock flowing through its shelves.

Spreading the word
In many ways the past year has been a frustrating one for retail FDs as far as share price performance is concerned. When markets take fright they cease to discriminate on the basis of company fundamentals and all share prices plunge regardless.

So how much time does O’Byrne spend keeping the City onside?

“The business is run by a five-person committee, consisting of the CEO, myself and the three divisional CEOs. We discuss the numbers and talk through the areas that have some subjectivity about them. But when it comes to the plc main board and the City, the FD owns the numbers,” he says.

“Our stance here is that there are many excellent analysts covering the retail sector, so provided we communicate our strategy and performance as clearly as we can, we can then regard short-term price fluctuations as out of our control, and focus instead on the things we can control.”

He and the CEO spend two weeks twice a year doing roadshows both in the UK and in the US, which is home to about 40 percent of the company’s investors. For the rest of the time O’Byrne would rather be paying his weekly visit to stores abroad.

He makes a point of travelling every week to get face time with store managers and senior staff across Kingfisher’s portfolio.

To drive home the value of this, he cites his last visit to Ireland, which is currently a challenging economic environment for the company. “The chance to see our new lighting range in the store and to hear customer comments gave me a tremendous insight into the potential success of the range. You can’t get that level of insight from any number of meetings,” he says.

Time critical
My Wardrobe, the luxury designer-focused online fashion retailer, founded in 2006 by Sarah Curran, is at the other end of the scale. While DIY has some fast-moving lines, nothing compares with the dizzy speed of fashion, bought with one flick of a finger and consigned to the bin with the next.

Morgan Hay, FD at My Wardrobe, says that while the company faces similar logistical issues to any other retailer, the finance function has to grapple with the fact that web-based retailing is vastly more dynamic and more engaged with the customer.

“This whole business is hugely seasonally driven, so the ability to get your latest product in front of people very quickly is absolutely critical,” says Hay. “Our most popular day of the week, for example, is Tuesday, when we do our ‘new-in’ new season products. These have to be at the height of the current trend and there is a very brief window during which fashion-conscious people will buy. Everything is so much more time critical.”

This impacts spending, since the company has to really focus on personalised marketing. The venture capital company Balderton Capital, which also has investments in Betfair and LoveFilm, recently injected £6m into the company, funding a programme of direct marketing, customer relationship management and social media marketing, along with PR activity and live events.

Careful planning
The back-end supply side of running the My Wardrobe takes very careful planning and buying. Its buyers visited its portfolio of designers and bought most of its Spring 2011 range early. This means that Hay has to spend a good deal of his time sorting out trading terms with designers. But it did not help matters that amid the credit crunch, its credit insurance was withdrawn.

“This happened just at the point where we had grown sufficiently, with enough of a history with suppliers, to make it reasonable for us to expect to be able to get credit insurance. So that has been a challenge,” he says.

And its absence made trading terms with suppliers absolutely critical.

“We have myriad arrangements with suppliers, who range from small brands where I will literally give the designer a deposit to go out and buy the material to make the stock, to big multinationals where we can have more appropriate and sensible trading terms,” Hay says.

No two contracts are the same and Hay is conscious of the fact that the current economic climate has, in general, not dealt kindly with premium fashion brands. My Wardrobe has bucked the trend by doubling turnover every year since it started. This has given it some kudos in the fashion world and has made it easier for the company to attract a variety of high-profile designers.

“There is a macro-economic shift from the high street to online. Some of the brands have some online capacity, some don’t, and we can provide a one-stop shop giving instant access to those designers who do not have a high-profile online presence,” says Hay. “That is part of our attraction and it means that we can present a multi-brand portfolio to our customers. That is fundamental to our own brand.”

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