TO SAY THAT the past few months have been interesting for the retail sector would be an understatement. While online retailers and supermarkets continue to make gains, high street chains are in deep trouble. We have said our goodbyes to TJ Hughes and Jane Norman, while Thorntons and Carpetright have announced shop closures, and HMV has given up its fight against iTunes as well. The UK high street is changing before our eyes and there are some valuable lessons we can all learn from it.
No doubt online sales create some of the pressure but the picture is not consistent as some chains are thriving. And if you take a snapshot of the European shopping landscape, it’s tough too, but retailers are surviving. So one can’t help but wonder how much of this damage is self-inflicted? Is it possible that some retailers are just missing a trick?
In retail, typically between 60% and 70% of costs are purchased goods and services, so with the majority of sales turnover going to suppliers, the financial impact of getting procurement right is huge. In simple terms, success is a factor of selecting the right products and then buying them at the lowest possible cost. With tight profit margins, it is the latter that is vital. Every pound saved is a pound of margin improvement; and a retail company has to make a large multiple of sales turnover to have the equivalent profit impact.
Large profit improvements are possible if retailers can improve their procurement. Retailers assume they are good at buying, but we find there is very considerable room for improvement. Often retailers simply continue to work with the same suppliers that they have always had relationships with, trying to make incremental annual improvements. But they’re often failing to capitalise on the fact that the global supply base is dynamically changing, offering cheaper, better, faster opportunities. Significant savings are possible and the impact is both tangible and sustainable.
A lot of the money spent goes on the products that are later put in the shopping windows and on the shelves, and sold on to customers. But retailers also spend a lot of money on goods-not-for-resale also known as ‘indirect spend’. These are the purchases that keep the company running, like marketing, logistics, building, installation and fixtures, facilities management and utilities.
On average, one sixth of a retailer’s turnover goes on indirect spend and this is the area where there is the potential to make significant savings. Our research into the procurement practices of 16 major retail chain stores shows that, despite its financial importance, this area of business is largely ignored by senior management in the retail sector.
The study also found that:-
• two-thirds of companies do not have a company-wide strategy for the procurement and control of indirect spend
• indirect spend features regularly on the management’s agenda at only one out of 16 companies
• three-quarters of the FDs questioned underestimated their indirect spend by more than 50%
• in 81% of the companies, over 20% of the indirect spend was bought without consulting the procurement department
Retailers are simply failing to tap into a huge potential for profit improvement. Further analysis identified four main reasons why companies were missing a trick: a straightforward lack of resources, an incorrect organisational structure, the dominance of specialist departments such as marketing and facilities, and finally a lack of specialist expertise to manage these categories of spend.
However, focusing on indirect spend can help to deliver significant savings, and therefore profit improvement, quickly and easily. When the right approach to procurement was introduced, the companies that featured in our study achieved average savings of 12.4% in the top six cost areas, which corresponds to an increase in profit margin of approximately 2%. That’s something worth fighting for.
So what’s the FD’s role in this? There are four key areas that finance directors should focus on to get their retail houses in shape.
First, quantify it. FDs have the information at their fingertips to analyse their accounts payable data and understand the scale of their indirect spend. Find out what you spend; on what, how much and with whom.
Second, make it visible. Make a program of savings from indirect spend a high-visibility initiative and put it on the executive agenda.
Third, add expertise, and focus on savings delivery. Execution will require resources, knowledge, tools, process and expertise. This might come from existing resources already within the procurement function or the wider business, while many FDs use specialist external support to maximise and accelerate the impact. Either way, a saving is not a saving until it hits the P&L, and implementation will require effort and drive.
Finally, target, measure and drive every pound of saving. The FD is in a unique position to drive a savings programme; their executive position, cross-company perspective and responsibility for financial control combine to provide a powerful force to achieve savings. Something that is overlooked but incredibly powerful.
Times are tough, and for retailers even more so, which is why it is critical that every opportunity for profit improvement must be leveraged. Clearly, there’s room for improvement and it’s the FDs job to help their organisations not only survive, but actually thrive.
Kiran Mazumdar is a founding partner at management consultancy Inverto
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