It has been four years since Richard Pennycook was interviewed in these pages. The last time, he mused how much he was enjoying “the calmer, real world” of a non-turnaround job as group finance director of breakdown recovery firm RAC, after almost a decade continuously heading up turnaround teams.
Less than 12 months later, he was orchestrating the £1.25bn takeover of RAC by Aviva; six months afterwards, he joined Bradford-based grocer William Morrison Supermarkets, walking away from RAC having secured an offer price from Aviva that represented a 62% increase in the value of its shares in the two years he ran its finances.
He was supposed to take time out to go on holiday with his wife and two young children. But this is evidently a man with a storm-chasing gene: besides, in his view, two years in a firm that wasn’t on the brink was a holiday.
“When I joined RAC, I’d been in three big turnarounds and that was fairly exhausting. So it was good to operate in a normal business get a bit of a career break,” he says. “Aviva came along and bought RAC. Then I got the call about Morrisons. And it was irresistible.”
By that Christmas, his family had moved from south London to York, a 45-minute commute from Bradford, and Pennycook was taking on what turned out to be one of the UK’s toughest turnaround gigs: saving a £4.3bn (turnover 2003) grocer from being slowly strangled by the perilously misjudged takeover of an £8.6bn (turnover for the same period) rival, supermarket chain Safeway in every sense bigger and more sophisticated than its acquisitor.
“It was like showing the pilot of a Lancaster bomber the controls of the Starship Enterprise” was the way one Safeway insider described the reaction to one of its depots from Morrisons’ then-managing director, Bob Stott.
It was clear that founder Sir Ken Morrison underestimated the integration task and that his board was not ready. By the time Pennycook joined in autumn 2005, Morrisons had issued five profit warnings in 11 months, having seen pre-tax profits slump to £61.5m from £332.2m the previous year. The company had breached its banking covenants and flung £513.6m at an integration Pennycook says was simply “failed”.
Under closer City scrutiny, the company didn’t come up to scratch on corporate governance issues either, and only appointed its first ever non-executives, Next chairman David Jones and Persimmon chairman Duncan Davidson, the year before Pennycook joined. Added to that was Morrisons’ new customer base in southern England, who, until recently, turned up their noses at the Yorkshire-honed, family-founded brand of super-cheap foods and its ‘market street’ concept.
(Morrisons reported that store conversions were well received by shoppers in 2004, but as Pennycook concedes, snobbery still remains.)
“The businesses were so different and there wasn’t enough understanding of why Safeway was different and of what was involved in crunching these two businesses together. It was very much a take-over… a ‘this is going to be the Morrisons way of doing things’ approach, where the vast majority of the top management team were from Morrisons, which was what led to that very difficult period,” Pennycook says. “Although I didn’t find anything there that I didn’t expect to see, it was on such a vast scale that things had gone so badly off the rails. It would have been a difficult job if it had gone okay. When it went badly, it was horrible,” he admits.
Luckily for Morrisons, Pennycook’s reputation was founded on rescue missions
at a handful of well-known British retail outfits. Prior to joining RAC, he
spent a year at Hereford cider group HP Bulmer on its turnaround team before
selling it to Scottish & Newcastle and driving the value of its shares from
89p to £3.25 - a whopping 265% increase. Before that he was drafted in to lead a
business review and management restructure at motorway services firm Welcome
Break, following a stint at once-iconic retail outfit Laura Ashley in 1998 his
first turnaround job - as group finance director.
His first group finance director’s position, at pub retailer JD Wetherspoon, was a crucial introduction to the FTSE-250 world and its challenges; his achievements were an early indicator of his skill in raising the value of companies. On leaving the company, its shares had swelled in value from £4.62 to £16.50 an impressive 257% difference.
“If I hadn’t had those three turnaround experiences before arriving at Morrisons I wouldn’t have known where to start,” Pennycook says.
Curiously, Pennycooks’s experience with family-led companies to some extent in trouble because of typical problems with family-owned companies dominated his CV before arriving at Morrisons and he thinks these have been largely positive places to work.
“There has been a family theme through part of my career and they’ve been businesses that, when growing, were effectively benign dictatorships,” he concedes. “You get someone at the top with a clear vision and an understanding to the nth degree of what they want to achieve. So what you had in 2004 at Morrisons was a business that had been growing successfully for 40 years, with the best return on sales, the best return on capital in European growth rate. It was a fantastic business, as was everything about the culture and values. What it wasn’t was a business in any way geared up to make a massive acquisition. The culture and way of working was very particular and that’s where life got difficult.”
Four years on, Morrisons’ last annual results were its first set of strongly positive numbers since before the Safeway acquisition and Sir Ken’s last results before retiring revealing 2007 turnover up 6% to £13bn, pre-tax profits almost doubled to £612m and net debt slashed to £543m from £772m year-on-year.
A pariah not so long ago, harangued as an example of how not to do a corporate takeover, the enlarged Morrisons is sitting pretty at number two in the list of the UK’s biggest retailers by market cap, number four in grocery sales, Pennycook says.
The apocalyptic headlines and profit alerts are gone and the business has, it seems, turned around. But this could be troublesome. Pennycook’s CV makes it clear that this is a man who thrives on disaster recovery. He talks about the importance of staying detached from the companies he turns around (“You didn’t create this mess, and it can be very negative if you somehow assume all the guilt for what’s gone wrong”) and the problems he finds, focusing on finding solutions and putting out fires rather than stoking them with elaborate post-mortems.
This is all very exciting stuff, but Morrisons is now in phase two of a
three-phase recovery, namely, the optimisation phase, finishing systems
integration, completing distribution planning and, as Pennycook says, “getting
motoring again”. Less exciting than two years in charge of fire-fighting. Will
the easing of pressure equate to boredom for the perennial storm-chaser?
Not quite. “You do reach that point [where you can say that the business is turned around] but often you look back and see it, rather than when you’re in the process and then suddenly saying, ‘There we are, we’ve arrived’,” he says. “The bit which is always very high energy is to stabilise something which is out of control, but the timing starts to stretch out as different parts of the programme go at different paces and we’re now focused on distribution, systems and supply chain stuff that won’t get done until 2010-11,” he says.
“RAC was a chunky FD’s job, but compared with the pace and intensity of a turnaround… it’s different. I love turnarounds, I love retail. But I don’t think we are ever satisfied and UK grocery retailing is brutally competitive so we can’t take our eye off the ball. We’ve got to keep on delivering.” Pennycook predicts the company will spend about £1bn on furthering its optimisation plan in the next 12 months.
I notice that ‘I’ has turned to ‘we’ here. In reality, the FD’s detachment theory is being tested by an obvious commitment to seeing Morrisons beyond the point of being financially fixed and he talks about a raft of change programmes he’s leading that affect the roots of Morrisons’ work culture across the business.
“Morrisons is a culture that I have always respected. Sir Ken and the team had done a fantastic job up to the point where the business acquired Safeway and then got themselves into some difficulty. So going in I knew it was a big turnaround and that this would take time,” he says.
“But there’s a lot of work going on now around building the business for the longer term that I am involved in. In any retailer, you have those plates to balance on poles where part of you is driving for the longer term and a bit of you is also trading every day: coming in on a Monday morning asking, what’s happened over the weekend? What do we have to deal with in terms of competitor activities? So it’s a wonderfully immediate business.”
Settled on board
He also speaks of his confidence in the board, settled for the first time in his tenure with Sir Ian Gibson serving as chairman (he succeeded Sir Ken in March, bringing an end to four years of board changes) and CEO Marc Bolland, bedded in to executing his growth strategy with the secure financial framework put in place by Pennycook’s recovery work.
Pennycook is undoubtedly a team player. But what has helped him carve out a niche as a four-times corporate turnaround champion hasn’t been a talent for deference or falling in with consensus. An unblinking attitude to tackling big, complicated problems and leading change emanates from him. You could call it the confidence of experience.
“A colleague once said that sometimes all your past experiences come together at a moment in time. I think perhaps arriving at Morrisons, it was like that,” Pennycook says. “To be good in turnarounds, which are by definition tough situations, you have to have a degree of experience.
Most turnaround people will say that their first turnaround happened by accident they were in a business that got itself into difficulty and they stepped up to fix it. One of the fundamental lessons when you arrive in a turnaround situation is that you won’t have enough good people so you have to bring some. I got some very good people in here very quickly. If I hadn’t done that, I would have failed.”
He brings up his first turnaround job, Laura Ashley a potent mix of long-term financial straits and failure to respond to a changing market exacerbated by squabbling between the Ashley family and its financiers.
“I took a huge emotional burden on there. I was young and I learnt a lot, but it was also very painful and it shouldn’t be that way. When I arrived here, we reported a loss of £313m, we were in breach of our banking covenants and there was a constituency out there that wanted to say, ‘Let’s understand what went wrong. Let’s go back to the original business case with this merger and why has it all gone off the rails.’ But when you’re in survival mode, you have to say, ‘Sorry, that’s for another day. What we’re about here is how do we move forward,’ and that’s where you have to take the emotion out of it. It’s much more difficult for incumbent management who perhaps have been part of the problem to have that dispassionate relationship.”
There’s a great quote in a previous financial press interview with Pennycook in which he says that, when the kids start calling the builder Daddy, it’s time to take a break. But he never did take that holiday.
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One of the UK's most well-respected bosses talks about retail, governance, reputation, tax, his career - and that of CFOs – in a wide-ranging interview...
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