Business Fitness for Retail & WholesaleEffective cost management strategies

for healthy profits in 2011

About ExpenseReduction Analysts

Expense Reduction Analysts About Expense Reduction Analysts2

Expense Reduction Analysts works inpartnership with its clients, offering theexpertise and resource to:

• Forensically examine and benchmark up toa hundred areas of business expenditure, in order to present opportunities forsignificant savings;

Expense Reduction Analysts is a leader in cost, purchase and supplier management and focuses on reducing operatingcosts, whilst maintaining or enhancing service levels, forprivate, not-for-profit and public sector organisations.

• Review and re-engineer procurement functions,in order to ensure optimum buying process;

• Facilitate high value supplier relationshipmanagement programmes, in order to createmutually beneficial working partnerships.

Expense Reduction Analysts has 170 consultantsacross the UK, and numbers Paul Smith, Scotmid, F Hinds, Pizza Hut and Aquascutum among itsretail and wholesale clients.

Introduction from Robert Allison Expense Reduction Analysts 3

Welcome to the first in our series ofBusiness Fitness Guides for 2011, focusingon effective cost management strategies in the Retail and Wholesale sector.

After the December snows hitting pre-Christmas sales, the VAT increase inJanuary, and the seemingly never-ending risein fuel prices, you will be glad to hear that wehave good news for you.

The good news is that you can increase profits– without selling any more product. With therelevant expertise, it is possible to reduce costssignificantly. And this guide is all about settingyou on your way to doing just that.

We know that, in retail and wholesale, youhave to keep one eye on service levels at alltimes. It is no good switching suppliers to getan extra percentage point or two, if the servicestandards of the new incumbent compromiseyour commercial activity.

Introduction from Robert Allison, Managing Director, Expense Reduction Analysts

This booklet is packed with information, adviceand tips from consultants who specialise in theretail and wholesale sector – as well as two casestudies that demonstrate best procurementpractice in action.

I hope that you find it valuable – and may I wishyou a successful year in 2011.

Retail and Wholesale – the marketplace in 2011

Expense Reduction Analysts Retail and Wholesale – the marketplace in 20114

Between 2000 and 2008, retail sales grewyear on year by around 4% with half of allspending being classed as 'indulgence’purchases. During a downturn, this is themost vulnerable area for retailers, asconsumers revisit their budgets and revisetheir luxury, non-essential spending.

In this changing market, consumers are alsodemanding real value, with quality andservice becoming important factorsalongside price, especially for majorpurchases. In the early 2000s, value wasoften confused with price, but the moresophisticated consumer is now looking

Tracy Follows introduces the issues facing your sector

Retail and Wholesale – the marketplace in 2011 Expense Reduction Analysts 5

harder at the quality of the merchandise andtaking more time to consider his or herpurchase. Technology is driving this trend with a proliferation of Internet comparison sites and Smartphone apps.

While most retailers have been swift toaddress the changes in consumer spendinghabits brought on by the increasinglydominant Internet, the impact of onlinespending continues to have an effect on highstreet sales.

Most retailers have revisited their businessstrategy to cope with the online marketplace,as well as the economic downturn. However,some well-known but poorly financed nameshave vanished from our high street, leadingto an overcapacity in premises, all too evidentfrom the empty shop-fronts. While this mayput retailers in a strong position with many oftheir landlords, on the other side of the coin,there has been the negative impact of theBusiness Rate Review in 2010.

In the light of all of these financial pressures,it is clear that good housekeeping and costreduction should now be an essential part ofany retailer’s operational strategy.

From Chip and Pin to Carrot and Stick

Expense Reduction Analysts From Chip and Pin to Carrot and Stick6

Steve Whitlam describes the changing landscapeof the credit card industry

Having seen chip and pin become widelyaccepted by cardholders and retailers forface-to-face transactions, the card industryhas turned its attention to cutting identityfraud where the retailer and cardholderdon’t meet.

After a few years of a softly-softly “carrot”approach, the “stick” has appeared in terms ofincreased – and avoidable – transaction costsand penalties where businesses do not complywith the common standards for cardholder notpresent (CNP) transactions through mail-order,by telephone or via the internet.

From Chip and Pin to Carrot and Stick Expense Reduction Analysts 7

It is very unusual for us to find that retailersare not now capturing the 3-digit signaturestrip code in all CNP transactions, but it iscommon to find a belief that it is adequate for web transactions. While it is a useful toolfor reducing the potential for fraud whentransactions are through the Internet, costsavings flow from 3D Secure being in place.(3D Secure is the catch-all name for systemssuch as Verified by Visa or MasterCard Secure Code.)

The non-compliant will have their ability to accept card payments revoked

Even where 3D Secure is available, it is oftennot functioning and penalties run on averageat 0.5% of credit card transaction values and10p per debit card transaction. Every singlepenny of that penalty is avoidable.

The other primary area of avoidable costs is to ensure that cardholder data is handled incompliance with Payment Card Industry DataSecurity Standards (PCI-DSS), and whensystems are compliant, to ensure that themerchant acquirer is aware. Penalties can be as high as 0.85% of all transaction values andthe solution can be as easy as filling in a formfor smaller retailers with only face-to-facetransactions.

It is more complex for larger retailers andthose who transact through mail order,telephone or the Internet, but I believe that itwill not be long before the non-compliant havetheir ability to accept card payments revoked.

Savings and service – the vital combination

Expense Reduction Analysts Savings and service – the vital combination8

Derek Hodd discusses what to look for in a retailsector supplier

Retailers are naturally looking for goodprices in the products and services theypurchase – but not at any cost. Retailershave to be service-orientated, and anychange in supplier must not be allowed to interfere with the service levels theyneed to receive in order for them to becompetitive. To take an obvious example,switching distribution suppliers must notstop the right products getting onto theright shelves at the right time.

It is therefore vital that service accompaniessavings.

Retailers also value new ideas – retail is detailand sometimes the smallest change inmerchandising, for instance, can reap hugebenefits in sales. It is therefore important topartner with suppliers who are ahead of thecurve, who can advise on what the market isdoing and where it is going. There was thecase recently of my advising a client to switchto a different printer: their existing one wasnot really proactive, but their new printer isproviding much added-value by doing suchthings as advising them on the new mediathat are available, like vinyl static mats onwhich to print sales messages.

In general, it is important to think of yoursuppliers as potentially strategic partners.Suppliers can do so much more than simplydeliver on time and to a price.

Savings and service – the vital combination Expense Reduction Analysts 9

“It’s the way we’ve always done it”

It always pays dividends to review your actualcurrent requirements. I analysed one retailer’scash handling needs. The profile had notchanged since the days when everybody paidin cash or cheque. I carried out an extensiveanalysis of their collection profile and theirneeds, and was able to recommend changesthat suited their current requirements far more closely.

It is obviously important to look at the ratesyou are paying, but it is also vital to look at thesurrounding processes and overall businessneed. It is often the case that differentdepartments deal with different aspects, and“joining up the dots” is overlooked.

“We always get three prices”

It is surprisingly rare for a company toundertake a proper survey of the marketplaceand thus to procure from an informed position.Often, different departments use differentsuppliers for the same product or service.Sometimes, it takes me quite a while just togather all of the relevant data together, beforecommencing a comprehensive review.

It is therefore not surprising that busy retailersthemselves struggle to undertake theirreviews, but the time and effort can paybackhandsomely.

Best practice in action

Expense Reduction Analysts Best practice in action10

Category % savingPrint 15%Print Logistics Distribution 40%

“It soon became clear that our whole printprocess was a complex area and that we couldbenefit from an independent viewpoint. Given the diverse nature of our printrequirements and the large number of staffordering print, we needed a strategic review of the processes, policies and proceduresadopted, and identification of potential areas of improvement.

“I could see the value of the immediatemanpower that Expense Reduction Analystscould bring to Pizza Hut (UK), and so we agreedthat this analysis would be undertaken with theaim of focusing on key areas and looking atspecific unit costs.”

The detailed terms of the brief were agreed andGerard appointed Max Wright, CommercialProcurement Manager of Pizza Hut (UK), as thekey contact point, whilst Nigel invited fellowAnalyst Paul Fordham to join him on the project.

Max explains, “We are delighted with ExpenseReduction Analyst’s work! Nigel and Paul werehighly focused and were able to pinpoint exactly how best to approach this project.

Gerard Carolan, Financial Controller for Pizza Hut (UK), recalls his initial discussions withExpense Reduction Analysts’ Nigel Rosehill, “During our first meeting, Nigel was immediatelyable to relate to our procurement issues due to Expense Reduction Analysts’ own variedexperience drawn from their existing diverse client base. This knowledge enabled him to identifythose areas where we might encounter challenges from an early stage in the investigations.

When they met with key personnel from PizzaHut (UK), there was a minimal amount ofdisruption to the ongoing business.

“All reports have been clear and concise andbacked up by detailed analysis, which hasenabled us to take well-informed decisions.Nigel and Paul were then able to followthrough the recommendations by handling the negotiations and implementation.

“This, in my mind, is one of the key reasonswhy Expense Reduction Analysts is sosuccessful. Its analysts are totally focused,which means they are able to meet deadlinesand actually make things happen!”

Pizza Hut ProfilePizza Hut, with 12,000 outlets in 90 countriesand more than 300,000 staff, is the largestpizza restaurant company in the world. PizzaHut serves more than 1.3million pizzas everyday to approximately 4million customersworldwide. Pizza Hut (UK) is a householdname and is known to be a dynamic, fast-growing company and a market leader in the UK pizza restaurant and home delivery industry.

Taking a slice off the costs for Pizza Hut

Best practice in action Expense Reduction Analysts 11

Category % saving £ savingPackaging 27% £15,000Merchant fees 15% £14,746Stationery 40% £12,848Facilities contracts 36% £14,690Cash handling 68% £14,425Cleaning 5% £4,117Print 49% £32,456Total £108,282

The strength of Expense Reduction Analysts isits people. Andrew Lees and David Mitchellwere able to draw upon the experience andknowledge of their fellow consultants to assistwith different areas of the analysis work. Fellow consultants Keith Robinson, Marc Pageand Derek Hodd joined the project team toreview Aquascutum’s spend levels on facilitiescontracts, cleaning and cash handlingrespectively.

Meanwhile, Expense Reduction Analysts’Hartley Jenkinson was invited to analyseexpenditure on merchant card fees andstationery. In both instances, following tender to a number of alternative suppliers, it wasagreed that Aquascutum should remain with the existing suppliers, both of whom were verykeen to keep the business. This meant there was no disruption to Aquascutum andnegotiations ensured that good profitimprovements were achieved in both areas.

Chris Carlisle, Finance Director for Aquascutum,engaged Expense Reduction Analysts

consultants Andrew Lees, David Mitchell andDerek Hodd to review the company’s

expenditure levels in a number of cost areas.

Richard Anson, renowned amongst his ExpenseReduction Analysts colleagues for his knowledgeof the packaging industry, reviewed this costarea for Aquascutum. He used his expertise tosuggest alternative packaging designs which are not only cheaper to produce, but will enablemore garments to be packed into each box, thus reducing the number of boxes purchased.

Winning the respect of client staff quickly

Chris Carlisle explains: “Obviously theappearance of our products is extremelyimportant. Richard understood this completelyand, despite achieving a significant profit,ensured that the packaging changes had noimpact upon the way the product looked once it was unpacked.”

Chris has been extremely pleased with the workcarried out and concludes: “My experiences ofcost management specialists were mixed prior toengaging Expense Reduction Analysts, as muchdepends on the manner in which the consultantsengage those involved in the buying process.

“In the case of Expense Reduction Analysts, the consultants have won the respect of the staff quickly, due to their in-depth knowledge of their specialist areas and their willingness to understand the specific requirements of a prestige brand such as Aquascutum.”

Best practice in action

Tailor-made profits for Aquascutum

Expense ReductionAnalysts

find extra profit

www.expense-reduction.co.uk

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