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Retail FDs facing online and overseas challenge

Retailers constantly hear of rivals making huge profits in emerging markets, but for many FDs it is less clear how to take advantage

30 Jan 2013

By Alex Hawkes

UK shop

UNSEASONAL WEATHER, sales migrating online and the challenge of figuring out how to break into China. Finance directors in fashion retail have plenty on their plate.

For many, the headaches may be starting to lift as economic conditions in the UK loosen slightly. Many questions remain unanswerable, however – and big international opportunities may be harder to grasp than they seem. The Christmas season is over for retail FDs, and it is time to turn to challenges ahead. One of the biggest is how to expand what they do abroad.

“Most of my client base is looking at international expansion,” says Don Williams, partner at BDO and head of retail and wholesale.

Retailers are constantly hearing about how their rivals – names like Burberry and Mulberry, in particular – are making huge profits in emerging markets. But how to take advantage is less clear for others.

“The internet can help you to understand where you might have a resonance in terms of your brand. There are no international boundaries with internet ordering. TM Lewin has found out it had a £4m market in Australia with no marketing and no stores there,” says Williams.

Consultants talk relentlessly about the possibilities in BRIC countries – Brazil, Russia, India and China – but those markets are not for everyone. Mark Eve, head of global partnerships at New Look, recently told a Westminster Media Forum that the store had opened in Russia – but it was really finding huge success in Libya.

“I cannot supply enough product into that country – they just keep shopping. Yet we have opened in Russia, and I’m fighting for my space there – so I open up a shop in Libya and it takes as much money as three stores in Russia,” he said.

Rather than studying consultants’ opinions, Eve’s advice was more direct: “Get on a plane, go to the country, have a look around the malls and just see if you can compete – is there anything that you bring that’s unique to the market?”

Finding an opportunity may even be the easy bit. Stocking a business halfway round the world could be the real headache.

For example, Barry Knight, head of retail at Grant Thornton, says of China that the logistics infrastructure there is still developing, while expansion outside of the major cities leads to supply chain problems. Tax regimes vary from region to region – with 19 different taxes to consider.

There are specific tasks for the FD, Williams says: “There’s a systems challenge – can I capture data overseas, control the flow of goods and cash? Can I help inform the business? There’s a structuring challenge from a tax side. If I make money overseas, how can I get it back? How do I know the franchise partner is good for their money? One person [that franchise partner] can end up owing you a significant amount of money.”

Sanam Soufipour, chief financial officer at Karen Millen, which makes 60% of its sales from abroad and operates in 45 countries, says the important thing is to find local advisors to help with technical challenges: “Each new market we look to expand into comes with its own location-specific challenges, from understanding the local legislations and cultural differences, dealing with new currencies, to ensuring we’re serving the needs of local markets while complying with global company standards. No two countries operate in the same way – just because it works in Paris, it won’t neccessarily work in Beijing. Finding the right experts on the ground – whether this be in accounting, legal or other support – is the key to success.”

Retail therapy

Distribution can also be a big issue for the FD, he adds – especially in many smaller companies which do not have the size to hire someone specifically for that role.

Not everyone will even think this is a great opportunity, says Richard Fitzpatrick of Retailmap, a retail research company.

“In my view, it’s not quite as simple as thinking, ‘This is a big opportunity’. Burberry is different – it has shops, it does wholesale, and it does a lot of advertising and marketing campaigns,” he says.

“For mass market chains, it’s different. You can grow a mass market chain very quickly in the UK – there’s a big critical mass of population with good average income levels. For M&S, Debenhams, George at Asda – are all those characteristics available in international markets?”

Without a big global brand, what makes you a success is your slick distribution and economies of scale – and those aren’t necessarily easy to replicate in China, however big the opportunity.

“There are one billion people in China, but how many have disposable income, and how easy is it to have a distribution hub there? These are the skills UK retailers are very good at,” says Fitzpatrick.

Made in Great Britain

Cheap clothes are not everything, however, and there is increasing noise in the retail fashion industry about things being ‘made in Great Britain’.

“I have seen a re-awakening of that. There’s more confidence in the quality this country can produce,” explains Williams.

The British Fashion Council has said it wants the Made in Britain tag to “become synonymous with quality and luxury”.

“Our crafts should be protected and knowledge should be transferred to new generations,” says Caroline Rush, chief executive of the BFC.

Victoria Stapleton, founder of luxury cashmere chain Brora, is a passionate advocate, with 80% of last year’s autumn/winter collection made by UK suppliers. It is not just a matter of preference, she says.

“Quality control is incredibly easy; repeat orders are possible within season. You don’t have the travel costs; your designers and your production team can go to the factories really easily – they can see whether they are doing the right thing; are they following the pattern exactly as it should be? But also it’s this building of relationships,” she told the Westminster Media Forum.

She might, for instance, be able to negotiate later payment for a supplier – because she knows it and has been doing business with it for 20 years.

Government support

The fashion retail industry, unlike sectors such as car production, is not the recipient of big handouts. But the government is performing a role in championing British design – and the industry benefits from more generic initiatives pushing exports, specialist financing and apprenticeships.

“The government does have a number of initiatives for industry which are relevant to the UK fashion industries but are not always practical,” says John Miln, CEO of the UK Fashion & Textile Association.

Some trade funding has been cut, Miln says, while Employer Ownership Pilots, encouraging training in small businesses, are in their infancy.

“Other initiatives such as credit insurance, bank lending, etc. are worthwhile but subject to red tape. Profile and awareness – particularly for London Fashion Week via number 10 – is very good for the industry, but that only celebrates household designer names and there are many deserving cases that struggle to be heard,” he adds.

Of any government initiative, the thing that would best support British fashion would be revitalising the economy – something on every retail FD’s mind. “There’s no following wind in the UK,” says Williams, putting it bluntly.

Even Burberry, that international star, has had problems – with finance director Stacey Cartwright telling the Guardian in October that middle-class shoppers are feeling the pinch, even as the super-rich keep spending: “Aspirational luxury shoppers are more impacted by the macro economic environment. Higher-spending luxury consumers are more resilient and have carried on spending.”

British Retail Consortium figures released in January showed retail sales in December 2012 were up just 0.3% on the same month in 2011 on a like-for-like basis.

The big issue over Christmas was discounting – did fashion retailers slash their prices early to get customers in? Debenhams said in January that it thought the industry was cutting; Next said there were fewer promotions. Fitzpatrick, whose company analyses 350,000 square feet of retail space across the country to produce a promotional tracker, says there weren’t as many discounts as in 2011.

Some 17% of retailers’ space was on promotion at retailers surveyed for the week up to Saturday 15 December, down from 26% of space for the same week in 2011, according to Retailmap’s tracker. And the issue is important – as lower discounts might suggest the situation has improved slightly, that the pressure might be lifting on retailers. Fitzpatrick thinks so.

“2011 was a big year for discounting – the cotton price went up; the sentiment was doom and gloom; there was warm weather in the autumn [causing problems for those selling coats and jackets]; and there were several retailers getting close to going bust,” he says. This year none of that has happened, he explains.

It is a view shared by Ted Baker’s FD Lindsay Page, who told the Financial Times when reporting strong sales numbers in January that he thought “very slowly, personal balance sheets are improving”.

Online revolution

One final challenge for FDs is finding the balance between growing online sales and the costs of their retail portfolio.

“I think the biggest thing for any finance director at the moment is the question “have I got too much space?” There’s far too much capacity still on the high street, with women’s fashion in particular. The younger generation is becoming more used to buying online,” Knight says.

He thinks there will be a 30% reduction in the amount of space devoted to women’s clothing on the high street.

“The dynamics of online retailing are different. You don’t have any shop staff. Returns are a big problem. You have to have call centres. You have to have much more security for card-not-present frauds,” he says.

As Rachel Osborne, FD of John Lewis, said in an interview with Financial Director last year: “the financials are different; they are different business models. One is high fixed cost, high marginal contribution; one is low fixed cost but lower marginal contribution because the variable costs associated with online are higher. Marketing is more variable than it is with shops. When you set up with Google, you pay per click so you are paying all the time for people to come through to you. So there is leverage in that but more variable cost.”

Most retail FDs will have sophisticated provisions in place for returns to protect the proft and loss account, says Williams, with the real issue for many being trying to capture the data associated with returns.

“Is it because of a quality issue? If I am returning it because it’s the wrong size, is it because the cut is wrong? Why isn’t every size 12 the same?” he explains.

Finding the right ‘multi-channel’ solution – using click-and-collect, online sales, and other bricks versus clicks initiatives – is not easy for everyone.

“The number of shops you need if you are Boots or WHSmith is different if you are a luxury handbag business,” says Williams.

“Mainstream fashion can rely on the fact there are 60 town centres or cities. If you are in those 60, you are within half an hour’s drive time of 80 to 90% of the population. If you are Poundland, you need many more than 60. There’s no average retailer.”

As a result, FDs have to be more active monitoring retail leases and ensuring the business is making the right decisions when they come up for renewal. And however tough that challenge, it is within the finance team’s control. It is better, some might say, than worrying about the weather.

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