In my last post, I mentioned the importance of having tools like in-memory analytics to help find and exploit growth segments at this time when most markets are flat. Well here in the UK, on line shopping was the channel that kept most retailers buoyant over the Christmas season with some reporting that 25% of their revenue came from home delivery or click and collect.
Even the grocery retailers benefited from the trend but I doubt if any will be reporting major hikes in profits because the economics of on-line business for them look horrendous. It is estimated that picking, packing and delivering the average on-line order costs between £15 and £20 despite the fact that most simply charge £5, (and one even delivers orders over £50 for free). Now that’s probably fine for low volume, value high orders, such as champagne and caviar, delivered in high density metropolitan districts where the time and distance between stops is low. But for the cost of picking and delivering orders for the average family that live in lower density rural areas must be crippling – and you can bet that there are considerably more of these using the home delivery service as for them it’s good value – better than getting the car out for a trip into town.
Analysts estimate the UK market on-line groceries is worth £5bn and growing at 20% a year, so this sector can’t be ignored, but the more grocery retailers expand into it, the more they cannibalize the footfall passing through their capital-intensive stores where volume is reported to be falling at 3-5% annually. Talk about being caught between the devil and the deep blue sea!
Some of the newer pricing plans, such as the once only sixth monthly fee of £60 for all deliveries worth over £40 that one retailer is offering for home deliveries, shows they are battling with the issue. But it’s not likely to have much effect when the reality is they need to charging the customer far more for such a labor intensive service that has limited economies of scale. Rolling out a stratified tariff that better reflects the number of items in the order and population density of the customer’s address might also help but I doubt if that will happen though as complexity is something most retailers abhor.
So my first piece of advice is to divest your investment portfolio of grocery stocks as they’re likely to be on the slippery slope. But secondly, once you’ve discovered the magical growth segment, make sure you understand the cost to serve involved using solutions such as SAP Profitability and Cost Management to provide the insight into the complexity of how fixed and variable costs behave. Without it strategies such as ‘clicks-and-mortar’ could destroy value for you too.
It’s good to see that the Gartner analysts who contributed to the most recent Hype Cycle for Performance Management 2011 have ‘Cost to Serve Analysis’ on the rise, Customer Profitability Management sliding through the trough and Profitability Modelling and Optimization climbing the slope of enlightenment. That’s right three different flavours of profitability reporting on a single hype cycle! I guess it’s time to raise a glass to the folk who have sworn by this stuff for the last couple of decades – you’re time has surely come and I hope your consulting practices are thriving on it.
My initial thought was why has Gartner seemingly scattered these terms like confetti, when to many people, they are all facets of the same thing – having a more accurate understanding of how customers and products consume direct and indirect resources. But having read through the paper more thoroughly I see that their focus in Cost to Serve Analysis is mainly focussed on the supply chain and Customer Profitability Management more on supporting decision making for marketers. As an aside, I’m sure many experts would say Gartner need to get off the fence and put customer profitability and the more nebulous customer value into context instead of discussing them seemingly interchangeably, but that’s a personal quibble. And then Profitability Modelling and Optimization which Gartner see as working its way up the their ‘plateau of productivity’ is really about bring it all together at a corporate level with a multi-dimensional view of costs and profitability by customer, product and whatever cost object you care to mention.
Don’t get me wrong, my reservations about what they have done are minor – I’m delighted to see cost and profitability reporting so well represented on a Hype Cycle. With companies struggling to find opportunities for revenue growth, many will get some big and fairly rapid returns from having better insights into where they create value and where they don’t – and understanding what changes to make to drive margins. The last few quarters have seen some big name companies from all types of industries invest in profitability reporting and many will find the experience transformational. Others though have perhaps come into it too late to dig themselves out of the sorry mess that has resulted from poor strategic decisions taken years before – but that’s another story.
With cost and profitablity reporting being an important top on anyone’s agenda, here is a timely video clip of a long time advocate and acquaintance - Philip Young, Finance Manager of the European speciality oils company Q8 Oils – talking about their deployment of SAP BusinessObjects Profitability and Cost Management, what they uncovered and how they benefited from accurate and actionable data.
Click to play
Water, electricity and gas companies right around the globe are required to report to external regulators who want to know the cost of providing different services to different types of customers, something that involves ‘separating’ the accounts. In this video Duncan Michie of PriceWaterhouseCoopers describes the reporting requirement for the UK water industry – followed by my long time colleague Simon Geddis showing the power of SAP BusinessObjects Profitablity and Cost Management in both satisfying this reporting requirement and delivering value for the utilities provider. Enjoy.
NB The video file is stored on www.sapfinancialexcellence.com and you may need to register to access it – but it’s well worth it as the site contains a wealth of other treasures.
The last few weeks of the year that run up to Christmas is the time retailers make most of their profits and the recent announcements put out by our UK retailers show that many have had a difficult time with a dip in like-for-like sales. Many put it down to the adverse weather in December with a weeks of persistent snow and frost. But the steady slide in house prices and rising unemployment are the most likely culprits undermining consumer confidence. Many UK consumers are doing exactly what UK business have done for the last couple of years – cut back on spending and paid off debt.
However there are a few notable exceptions and the High Street division of WH Smith PLC* is one of them. WH Smith High Street competes against major supermarket such as Tesco, Asda and Sainsbury and powerful on-line retailers such as Amazon – and you probably wouldn’t want to set up such a business today. Yet it continually delivers improving profits and has outperformed the FTSE 100 in recent years, paying increasing dividends and buying in shares, so that investors have enjoyed good returns. It’s a laudable achievement that earnings per share have tripled since 2006!
In its year-end results in August 2010, the company announced that’ ‘High Street continues to deliver consistent profit growth and strong cash generation with profits of £51m, up 4% on the prior year. We continue with our strategy to rebalance the mix of the business towards our core categories whilst reducing our presence in entertainment. Cost savings of £12m were delivered in line with our plan. A further £13m of cost savings have been identified making a total of £25m over the next three years.’Yesterday in its year-end trading announcement the company said that LFL sales in High Street were again down by 7% in the 8 weeks to 22nd January 2011, further strategic alignment by withdrawing from the ‘entertainment’ category, (DVD’s CD’s and computer games), – but that margins had continued to improve. Now while WHSmith High Street cannot keep shrinking for ever, it is a wonderful milch cow in generating cash to grow the Travel business where there are better opportunities for growth.
So what’s their secret sauce? Well undoubtedly a world-class CEO in Kate Swan, who has shown she is committed to keeping this 200-year old business aligned with a rapidly changing market and well capable of taking incisive decisions. But many of the cost savings are surely under-pinned by the implementation of SAP ERP and SAP ERP Financials in the middle of the last decade when 50 financial software systems in the company’s UK-based warehouses were integrated into a single system giving better visibility into the supply chain. At the same time the company implemented what is now SAP BusinessObjects Profitability and Cost Management to accurately measure net product profitability at the category level and to give better insight into the cost of core business processes. It is this insight that has informed their product strategy – and probably the strategy for High Street, which in recent years has seen a return to smaller formats such as motorway service stations. At heart it’s a simple case of ‘If you don’t measure it, you can’t manage it’ – but they stand out as shining example in the retail world of how world-class performance management really helps improve the value derived from world-class transactional systems.
What’s more with the withdrawal of Borders from the UK, they are the only UK retailer where you are sure of finding specialist magazines – cycling, the outdoors and jazz in my case – no doubt all higher margin SKU’s!
* WH Smith PLC consists of High Street and Travel divisions
Time to use better tools?
The quarterly newsletter from Doug Hicks, long time cost and profitability practitioner, dropped into my email box yesterday in which he reviews his last 25 years observing the auto industry in his home state of Michigan and suggests that ‘ The state of cost information in the U. S. auto industry is no better today than it was in the 1950s when the industry had little or no competition and when knowledge of product and process costs was not a significant factor the industry’s financial success’. His observations come from conversations with finance professionals, auto suppliers, other consultants working in the auto industry and from the response he received after an article of his appeared in last December’s issue of Manufacturing Engineering after which he had automotive engineers writing to him complaining about the totally irrelevant and inaccurate cost information they’ve been forced to use by their company’s accountants. He lists a litany of poor practices such as grouping lots of product line, customer, and market costs into a large “blob” called SG&A and then peanut buttering over everything and spending hundreds of thousands of dollars to implement costing and quoting systems that will result in inaccurate cost information even when they run perfectly.
He writes, ‘Because they don’t have accurate and relevant cost measures, price negotiators and decision-making executives can make up any fantastic theory they want to use to justify the price they want or the decision they’ve already made. Negotiators in the auto industry regularly “play with the numbers” so that they can justify the price they are quoting to a customer or demanding from a supplier. In fact he suggests that individuals in the automotive industry find that having fact-based cost information based on an economic model that matches a company’s operation puts them at a competitive disadvantage because they can no longer simply “make stuff up” to get the results they want. So that’s why Detroit went to hell in a hand cart – (not that I should really be commenting on the state of the US automotive industry as a British limey – ours went off the road years ago)
After such a damning piece, he does manage to end on a positive note hoping that the automotive industry adopts better costing methods that improve their decision making – exactly what SAP BusinessObjects Profitablity and Cost Management delivers. My guess is the same can be said of many manufacturing companies in other sectors, but read Doug’s article for yourself. DTHCo – Autumn 2010 – Costing and the Auto Industry (2)
Don’t you just love a nice diagram? Well if you’re one of those folk who prefer to take in information visually rather that aurally – and you’ve got an interest in cost management – you might like the one included here which is taken from a new paper by Ludger Weigel of Ernst and Young in Germany who I had the pleasure to spend some time with in Berlin a couple of months ago. Click on it to see the detail
In the introduction Ludger points out that, ‘CFO agendas have changed significantly in the first year of economic revival since the financial crisis. Last year, restructuring and short-term cost reduction measures were given top priority. Now, the focus has shifted towards issues such as improving efficiency and generating profitable growth.’ He adds that these issues are being addressed by the realignment of medium and long-term strategies, including the development of product portfolios, the optimization of value added (make-or-buy decisions) and an increase in marketing and sales effectiveness (pricing and channel controlling).
But if companies are going to achieve operational excellence, then decsion makers need sound information upon which to base decisions, such detailed and accurate profitability of individual objects such as specific clients, orders or products. The main thrust of Ludger’s paper is that to avoid misinterpretation, it is crucial that indirect costs are transparently and fairly allocated based on the actual level of input. The solution he suggests – one that we recommend and which is being increasingly adopted - is to combine the direct costing capabilities of SAP ERP Financials with SAP BusinessObject Profitability and Cost Management application. His excellent diagram elegantly shows which tool he recommends for each of the steps involved in the calculating net profitablity of customers and products. They say ‘a picture paints a thousand words’ so guess I’ll stop here and invite you to read the paper yourself.