Keeping an eye on your business strategy

  • Opinion
  • January 3, 2016
  • Warren Head
Keeping an eye on your business strategy

“In all sectors of the economy, change is accelerating and companies have to re-examine their business strategy and operating model,” said Craig Boyce. His key message was that Smiths’ core business of furniture and appliance retail and customer finance is strong and will get through the downturn he expects over the next couple of years.

Smiths felt the impact of four poor months leading into Christmas last year and ran a hefty retail loss.

The core South Island area (80 percent of sales) traded well, but margins were under pressure in the test to retain market share. The South Island remains their “foundation rock” and is the focus for improved margins.

These days, the appliance-only stores like LV Martin and Powerstore simply make margins which are too low to be profitable. Boyce said competitors published poor results and a major Australian chain, The Good Guys, closed all its New Zealand stores and withdrew back to Australia.

The group closed four stores last year and a further three in Q1 2015 leaving only four appliance-only stores remaining. Boyce says the strategy is clear – unprofitable stores must have a business plan to be profitable or they close.

The brand-spanking-new flagship Colombo St store in Christchurch, rebuilt after the earthquakes, is being marketed for sale and leaseback as Smiths build balance sheet strength. This is to buffer forecasts of difficult trading ahead, as the intensified economic downturn leads to reduced consumer spending.

With the retail operations, Smith City’s new CEO Roy Campbell and his management team are working on customer service, revamping marketing and reviewing costs, particularly in buying and logistics.

Consumer finance provides back-end strength and to anchor that, there’s a noticeably increased effort going into marketing, operations and instore information. The new brand ambassador, All Black number eight Kieran Read, is helping build recognition of Smiths City’s finance brand.

Turners refining a gear change

Whilst an element of unpredictability inevitably accompanies store-based retail, some businesses have tapped into the reliability of providing finance for customers. The vehicle retail industry usually does so via an external intermediary, yet there is always room for innovation, as Turners Group is showing, and for fresh thoughts.

Over the past year, Turners found itself the takeover target of Dorchester Finance, which is chaired by entrepreneurial investor and change manager Grant Baker. The enlarged group has added other acquisitions in finance, credit and retail locations.

Finance and insurance operations are the engine of the business. Turners Group focuses on auction and fleet operations and with a household name, from its brand and market position, there are sustainable earnings. The strategy now is more focus on retail and end users.

Turners also provides customer finance to assist Turners’ retail customers with purchasing cars, trucks, plant and machinery.

As explained by chief executive Paul Byrnes, it is about “Controlling buying and selling transactions, delivering finance and insurance cross-selling opportunities, while EC Credit has a major presence in what might be thought of as the ‘back end’.”

What Baker and Byrnes like about Turners is that it makes money while they sleep, from lending across consumer (70 percent) and commercial (30 percent plant and equipment and other things). The margin off money flows from the interest rate positioning (14 percent to 17 percent per annum). The Turners Finance book has grown over 30 percent in the last year and they see that growth rate continuing.

There is additional cash flow from the EC Credit, from debt management and credit control services for New Zealand and Australia customers, and, as required, commercial and consumer debt collection.

What they like about this business is the way it generates a lot of cash and is “Pretty well recession proof.”

A multichannel strategy is evolving around retail. The group is developing new retail models online and with other retailers. The cross selling of products across the group channels is increasing. “So Dorchester Finance is writing some loans for Turners Group customers that do not fit the MTF lending criteria, DPL insurance have tailored a motor vehicle breakdown insurance policy for distribution through the Turners Group and so on,” Byrnes said.

Nor has Turners been coy about embracing evolution. The growth in trucks and machinery justified the strategy of development of separate retail sites from the car business in the main centres. The lesson for retailers is to regularly take a wider assessment of the market in stressful times.

Adversity generates loyalty

Kathmandu shareholders loyally rejected the takeover offer by Briscoe Group, which was undoubtedly disappointed by the low take up.

The offer faced the obstacle of Kathmandu’s independent adviser valuing its shares 30c to 60c above the implied value of the offer of $1.80 a share. The advisor deemed it inadequate and not reflective of its underlying value.

Kathmandu portrayed itself as a higher growth, geographically diverse and vertically integrated retailer and in contrast, Briscoe as a lower growth, New Zealand only business with a greater focus on lower margin products.

My hunch is that the market’s August turmoil blurred relative values and there was fresh belief Kathmandu’s new chief executive Xavier Simonet can put distance between recent results and take the business further.

Yet, alluding to Briscoe as lower growth was more of an illusion. Briscoe’s July half-year result saw sales up 4.4 percent and a $20.46 million profit, which was up 10.83 percent on the first half-year result in 2014. Normalised growth of 22 percent over last year’s first half record profit was, as managing director Rod Duke said, “very impressive”. Briscoe also completed a number of major store projects and relocations during this first half, including two new Rebel Sport stores in Coastlands and Hornby that took the group to 80 stores.

The gross margin percentage continues to benefit from the constant focus on inventory management. The stock receipting by scanning project throughout all Briscoes Homeware and Rebel Sport stores last year has further streamlined the supply chain process by minimising the time for inventory to travel from back door to shop floor. Refinement of the quality and breadth of local and international product ranges also continues to deliver margin gains for the Briscoe Group.

Foreign exchange cover taken out last year when the New Zealand dollar was stronger against the US dollar than today has also helped to sustain gross profit margin.

The point being that this is how Duke is more than offsetting the high levels of competitiveness across the retailing sectors in which Briscoe operates.

The low acceptance level to Briscoe’s bid (10 percent response rate equating to just 2.27 percent of capital at time of writing) suggested to him that Kathmandu shareholders are expecting a reversal of the negative trends in its operating and financial performance and “to deliver greater value increases than they would obtain from a merger of the two companies.”

Of course, as the largest shareholder in Kathmandu, Briscoe would like performance to improve and for the value of their Kathmandu shareholding to rise!

This copy originally appeared in NZ Retail magazine issue 740 October / November 2015.

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