FD Q&A: what to expect in 2011

Financial Director recently caught up with five FDS – David Tilston, group finance director, Mouchel Group; Paul Pomroy, vice president, finance, McDonald’s; Andy Blackstone, finance director, M&C Saatchi; Neil McConachie, finance director, Lancashire Holdings; and Giles David, finance director, Brighthouse – to find out their views on 2011.

What is the most pressing priority as an FD in 2011?

Paul Pomroy (PP): To ensure we continue to provide great value for our customers. With the VAT increase in January, increased economic uncertainty, consumer confidence levels low and austerity measures about to bite, our customers will be searching for value more than ever.

Our approach to pricing needs to be sensitive to this backdrop but value means more than just price. We must continue to maximise the experience in every one of our restaurants for every customer.

Andy Blackstone (AB): Revenue expansion and to carry on with our global expansion. It will be important to be very cautious. I have a gut feeling that this year will be a bit like last year. Everyone is going to be nervous.

David Tilston (DT): It is how we will go about completing a refinancing exercise that was launched late last year, whereby we are extending the maturity of our existing facility.

Neil McConachie (NM): For us it is a softening insurance market where we are paid less money for every dollar of risk. It is about maintaining margin. We must be willing to reduce the topline and shed accounts that don’t have sufficient margin.

What are the chief risks your business will face?

AB: We have got economic risk and then there is the whole issue of the Bribery Bill. It is yet another system the government has put in place but lawyers can’t give a definitive answer on what actually constitutes a bribe [in terms of non-monetary items] under the new rules. Bribes are generally 95 percent fraud, but some of the other areas are quite grey.

DT: We are very heavily exposed to government procurement and therefore the decisions taken as a result of the Comprehensive Spending Review (CSR) will have a major impact on trading. I think you will find that, while many decisions taken are positive for us in the long term, during the next 12 months there may be a hiatus on decisions on government spending and I anticipate lower trading.

Giles David (GD): For us it’s all about controlling growth. We have opened 30 stores in the last 12 months and have grown rapidly in the past five years. The skill is not to be knocked off that growth trajectory.

PP: Our business momentum over the past four years has been strong and, although we continue to outperform retail footfall trends, the risk of reduced consumer spending as a result of the austerity measures is an area of real concern.

The other area of risk to our business is inflation through our supply chain. Although we do all we can to achieve cost certainty across our key expense lines, like other businesses we are subjected to national and global pressures on commodity prices in particular.

NM: There are always the external insurance risks: earthquakes and hurricanes don’t go away. The other risk is that you worry too much about volume and market share. It is about pricing discipline and concentrating on return on equity.

What do you think will characterise the business world in 2011 – and why?

AB: It will be the impact of the internet as companies move online. In publishing you moved from print to online. If you look at the companies in our building, out of the seven floors, two of those are writing web and phone apps. There is a convergence going on with marketing and communications. We need to facilitate where it sits – is it PR or direct marketing?

DT: I think there will be continued uncertainty in the UK and the developed economies arising from the austerity measures governments have introduced. There will be very low growth and a recessionary environment. In less developed countries, there are opportunities and the potential for continued growth. There is going to be a balancing of the outlook driven by the spread of business between developed and less developed economies.

GD: I am naturally an optimist but it is going to be very tough to be an optimist. It will be a very tough year and the environment will be very difficult. The people that will succeed are the ones who can differentiate themselves.

NM: It will be confusion over the health of the economy. I expect different messages to come through with good news one week and bad news the next. The danger is overreacting in any one direction when that news hits.

PP: Successful companies will be those that continue to invest in their brand to build loyalty and trust. Customers will reward businesses that are relevant, affordable and consistent but at the same time show leadership and make progressive, innovative moves. I would expect to see more businesses struggle to survive through 2011 as the fight for value intensifies.

 

What crucial advice would you give a fellow FD for surviving 2011?

PP: It is vital to never become complacent and to never compromise on your values and strengths as a business and a brand. Discounting, lowering the quality of your offering or chasing short-term gains can damage your brand for the long-term. For 2011, those that stick to their core values and plan and invest for the long term will prosper – but 2011 will be a difficult year for the UK.

AB: Don’t ignore the Bribery Bill – it will be a high risk to businesses. And cash is still king.

NM: I would advise not to bet the farm in any one direction. To be cautious on strategy and be prepared to sacrifice a little bit of return on equity to reduce the risk of making a decision that turn out to be bad call on the economy or your business prospects and make you look like a fool.

DT: If you have any refinancing requirements coming up over the next 18 months to two years you should be working on it now, as the process will take longer than may have been experienced in the past. The banks are still clearly cautious about the outlook in certain territories because of the tough economic environment.

GD: You need to have the fundamentals right, the ones that no one else will do. Cash management, legal compliance etc are the ones no one else will take off your shoulders. Get the basics right then you can get on with more strategic things.

What valuable lesson did you learn about business in 2010?

AB: That there is quite a lot of resilience in the great people working for us. I have also learnt the importance of making proper decisions quickly.

GD: I have learned to be more prepared to change my mind, to believe the worst. It is easy to become too optimistic. Optimism is good to drive enthusiasm and as a turnaround skill but it needs to be on a steady trajectory. You need to look for pitfalls.

NM: Our share price has gone up 40 percent despite us pulling back in our market share. I learned that our shareholders and analysts, if you educate them about your strategy, can see reduced market share to be a good thing. It means that by communicating your strategy clearly it doesn’t matter if it is different to the market norm.

PP: The importance of staying close to your customer, investing in your brand and not forgetting your people. The fundamentals of business have not changed in 2010 but the fight for market share has intensified. We have seen all successful businesses look for ways to differentiate and those that have seen most success have been those that have continued to listen to their customers.

DT: My perception is that there are not many people in senior positions that have experience navigating through such an extremely tough downturn. The last one in the UK was arguably in 1990. The skills required to navigate a market like this are not as widespread. People have been used to generally experiencing a growth environment.

What will be your most important professional relationship in 2011?

DT: Given that I am undertaking a refinancing project at present, banking relationships are the most important relationship I have. It is also critical that we continue to service our existing customer base well in a period where we expect a pretty dry market.

GD: For the FD it is always the CEO as a starting point; you can’t let that relationship slip. Banks are more important than ever. We try our hardest to get them on side and keep them on side.

PP: McDonald’s system ethos centres around its relationships between its suppliers, its franchisees and its employees and in 2011 these relationships will continue to be key. The support of the franchisees, and in particular their ongoing commitment to investing in their businesses, will be vital. To this end, the franchisees have enjoyed access to capital from the key banks throughout the economic crisis and this is expected to continue to be central to success in 2011.

NM: Broker relationships are always important, particularly in a softening market. We are having difficult conversations with our brokers. Where we have supported clients in the last few years but cannot do so this year is a difficult message. You need a good relationship to be able to give bad news and still get support.

 

How will spending cuts announced in the CSR impact your business?

GD: Many of our customers rely on benefits and customer affordability will reduce. The timing of the CSR and the review of the benefit system will be negative, but it is manageable. There is enough time to change our activity in line with affordability.

AB: The Conservatives announced that all media budgets would be slashed before the CSR. We knew advertising would be seen as an easy, low-hanging fruit. We will now see the opposite of a zero-based budget so anything you get is a positive. The issue is allowing government debt to get rid of uncertainty so that business can get back to normal.

PP: The main impact to our business will be the effect that the review has on unemployment levels and ultimately on consumer spending. We will need to stay closer than ever to our customers to ensure we are providing the great value that they demand.

DT: The CSR is a positive thing for us in the longer term. There will be an increased move to outsource.

Given our experience in helping local authorities to manage and reduce their cost base, I think that there is a significant growth opportunity in the long term. However, the time taken to take such outsourcing decisions will be long.

What are your expectations for the economic climate over the next 12 months – and how will it shape your business strategy?

NM: Honestly, I have no idea! That is an answer more people should give. It is so hard to predict that we will not make business decisions based on where we think the economic climate will be. It will unfold as it unfolds. It is too uncertain to make a call.

PP: It will be a challenging economic climate characterised by increasing unemployment, low consumer confidence and a fight for market share. Our business strategy will not change. We will continue to stay connected to our customers, strive to be the employer of choice and aim to further improve the restaurant experience with great food and service in a contemporary environment at an affordable price.

AB: We expect the climate to be as difficult as it has been although there may be some mild improvement. The question is what will happen to overseas trade. The risk we have is cash risk. Will countries like Brazil and China shut their cash market borders? There is more international risk than last year.

DT: In our sector we expect a tough economic environment. For the next 12 months we will focus on continuing to reduce our cost base where possible and keep a high focus on cash generation and working capital management.

GD: It will be a tough year. We will plan for worst and be conservative in our projections. You must make sure there are enough things in your control to deliver the bottom line. It may be that 2011 will be better but to expect it will be bad is a good starting point.