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Retail & Consumer Outlook | Australia2008 | New Choices4th Annual Edition l June 2008

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PricewaterhouseCoopers is pleased to introduce the fourth annual edition of Retail & Consumer Outlook, the fi rm’s forward-looking publication that addresses major trends and issues for the industry in Australia.

In this edition, you will fi nd commentary from PricewaterhouseCoopers specialists on 10 key issues. Our work for clients in Australia and overseas, and our analysis of global trends, indicates these are the most important issues that the retail and consumer goods industry confronts, or will confront, in the short and longer term.

As has become customary, each chapter also includes commentary from an industry leader entitled ‘The way I see it’. Michael Luscombe, Chief Executive Offi cer of Woolworths, is among the contributors to this edition. We would like to thank each of those who took the time to offer their valuable perspective on the issues reshaping the industry.

Fundamental environmental, demographic and economic shifts are under way. These present new choices for consumers and retail and consumer goods companies alike. While all the issues we consider this year are important, PricewaterhouseCoopers believes three – sustainability, private equity and people – are paramount.

Sustainability has become an everyday concern and is a common thread in this year’s Outlook. This year, we look at the consumer trend towards sustainability and the imperative to develop a sustainable value proposition.

Growth remains fi rmly on the agenda, with trade buyers and the private equity market still hot for retail and consumer goods companies. These organisations will need to have strategies in place should the ‘barbarians’ come knocking at the door.

Chief executives worldwide have identifi ed the ability to attract and retain talented people as a prime source of competitive advantage. However, with an increasingly tight labour market in Australia, companies will need smarter strategies to engage a young, mobile workforce.

Also considered in this edition are the benefi ts of corporate performance management, ways to reduce shrinkage, understanding your total tax contribution, new rules for customer loyalty programs, what’s in store for the grocery supply chain, and how new technologies can help companies connect with customers.

Understanding these issues will be vital as company CEOs seek to stabilise revenue growth in coming months. Even though strong sales and profi ts indicate consumer sentiment remained buoyant up until March 2008, successive interest rate increases have fi nally taken effect, with sentiment plunging in more recent surveys. Several major retailers have announced that their comparative store sales are under pressure for the fi rst time in years.

More effi cient supply chains and appropriate technology will be particularly important in delivering improved customer service, which many CEOs see as the key to future growth. Companies must identify new channels to market and take advantage of them to meet customer needs and growth objectives. A fl exible, agile and effi cient infrastructure will be critical to survival in an increasingly competitive market.

We trust you will fi nd Retail & Consumer Outlook 2008 insightful and thought provoking.

Should you need assistance or like to offer feedback on our perspectives, please contact one of the fi rm’s retail and consumer goods professionals, identifi ed throughout the publication.

Stuart HarkerRetail & Consumer Goods LeaderPricewaterhouseCoopers Australia

2 | Retail & Consumer Outlook 2008

Sustainability | Speeding up on sustainability page 5

Sustainability is now an established part of our language and an everyday concern. Sustainability is about more than just environmental issues; it encompasses an organisation’s entire approach to business and a growing number of businesses believe sustainability is now driving consumer purchasing decisions. Leading retail and consumer goods companies are publicly committing to sustainability, however organisations across the globe are at different points in addressing sustainability issues. Working towards a sustainable customer value proposition is a journey that requires a well-thought-out roadmap and organisations must take it seriously as it is here to stay.

Mergers & Acquisitions | Deal or no deal. Is now the right time? page 23

The US subprime meltdown and the resulting global credit squeeze has signifi cantly altered the global mergers and acquisitions landscape. In today’s interconnected global economy, the potential for economic contagion is great. However, Australia’s economic outlook remains relatively positive over this period due to strong international demand for commodities. Decisions regarding mergers and acquisitions, to stay and compete or seek an exit, rest with shareholders and business managers. Decision makers need to understand that the strategic option that best suited their business 12 months ago may no longer maximise value.

Private Equity | Barbarians at the gate. Fact or fi ction? page 37

Despite a mixed reputation, private equity delivers signifi cant benefi ts to the organisations it invests in and the broader economy. Although the debt market in Australia has tightened, especially for larger transactions, private equity funds are in a long-term growth phase. Private equity provides a valuable model to non-private equity fi rms in terms of its focus on lifting profi tability through a focus on management quality and incentives, growth options, benchmarking and analysis. For non-private equity organisations looking to emulate private equity success, aligning the interests of management and shareholders remain the key to growth.

Supply Chain | Getting fresh…the new battleground page 47

The Australian grocery supply chain has been adopting supply chain practices of leading European and United States retailers over the past fi ve years but still has some way to go before it operates effi ciently. This chapter is based on secondary and primary research, interviewing senior business and supply chain executives from more than 35 Australian grocery market participants, including retailers, wholesalers, manufacturers and third-party logistics providers to determine the trends and imperatives that will drive the market over the long term.

IFRS | The cost of customer loyalty page 61

Once the almost exclusive domain of airlines and credit card organisations, loyalty programs have proliferated in Australian and international retail markets over recent years. Newly introduced international accounting rules view loyalty from the perspective of the consumer, asking what the consumer has paid for, and demand a prescriptive approach to accounting for certain types of loyalty transactions. These new rules impact the timing of profi t recognition and will require additional data capture for accurate reconciliation. Retail and consumer goods organisations will need to reassess the value of loyalty programs and the cost of compliance in order to optimise the benefi ts realised.


Tax | The hidden burden of tax collection page 71

Australian organisations are under increasing pressure to manage and report their tax obligations well, and to do so they need a better understanding of how the tax system works. Organisations in the retail and consumer goods industry pay and collect more business taxes than most other industries and spend an enormous amount of time and incur signifi cant costs in collecting tax in a low-margin environment. If they get it wrong they incur the wrath of the consumer and the Australian Taxation Offi ce and risk damage to their brand. A better understanding of all business taxes is becoming increasingly important for business leaders. Better information about taxes, including tax collection obligations will be essential for effective management and reporting to stakeholders.

Corporate Performance Management | Planning your success page 79

In order to respond to changing consumer needs organisations need accurate and timely information to make informed management decisions. Going forward, holistic, predictive information on fi nancial, operational and regulatory performance will be vital in meeting customer needs effectively and effi ciently. To achieve this, organisations may need to invest in systems and people that will allow them to better capture and analyse information and use it to develop a strategy for growth in the context of the bigger economic picture. Corporate performance management is a fundamental cultural shift that, at its best, overcomes silos, politics and individualistic tendencies to create a unifi ed team that is striving for the same goal.

Shrinkage | Is your profi t walking out the door? page 89

Australian retailers lost an estimated $3 billion dollars to shrinkage in 2007, or an average of about 1.4 per cent of sales. Evidence suggests that shrinkage has become less of a priority for retailers. However, shrinkage represents a clear opportunity to signifi cantly improve profi t margins, whether retailers are small and growing or large and with a mature footprint. A whole-of-business approach is needed, beginning with an audit that identifi es how much shrinkage is costing the company and where it is occurring. Companies should then develop a structured plan to tackle the problem.

People | Why should I work for you? page 101

At its core, retail is a people business. Attracting and retaining the right employees is an ever-increasing cost for retail organisations. Getting good people to connect with customers, products and services is a key element to success. Organisations must plan, prioritise and strategise about their people like never before. Those that develop creative and competitive solutions will win the talent war and achieve sustained high performance. Whilst each organisation may use a broad range of people practices, it is essential they support the delivery of an enhanced customer experience.

Technology | Helping you click with customers page 113

Advances in technology have helped retail and consumer goods companies compete in a global marketplace and respond to economic and demographic trends and regulatory requirements. But companies are only just starting to use technology to connect with consumers to better fulfi ll their wants and needs. New technologies allow retail and consumer goods companies to quickly adjust to changing consumer demands. Early adoption of relevant technologies can help companies build solid, long-lasting, interactive consumer relationships that go beyond price and location. Adjusting technology to meet consumer demands must be an integral part of corporate strategy.

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Sustainability is now an established part of the language and an everyday concern. Global warming, drought and environmental destruction regularly make front page news. Consumers have connected this issue with their concerns about work-life balance and their health and wellbeing. A growing number of businesses are seeing concerns about sustainability as driving consumer purchasing decisions, and corporations and their ethics are being scrutinised as never before.

In last year’s Retail & Consumer Outlook, we predicted that retail and consumer goods companies would heed the call for corporate sustainability, environmental performance and develop new offerings. We also anticipated that calls for corporate social responsibility (CSR) would grow louder. We now see clear evidence that companies are responding to consumer demands.

Leading retail and consumer goods companies are publicly committing to sustainability. “The market is ready,” the Chief Executive of British supermarket chain Tesco, Sir Terry Leahy, has declared. “We have to make sustainability a signifi cant, mainstream driver of consumption.”1 The CEO of Anglo-Dutch multinational Unilever, Patrick Cescau, has said sustainability and corporate responsibility should be central to business strategy and will be vital to the growth – and indeed survival – of today’s businesses. “How well and how quickly businesses respond to this agenda will determine which companies succeed and which will fail in the next few decades,” he warned.2

The outlookSustainability is an increasingly important element in consumer purchasing decisions.

The market for sustainable retail and consumer goods and services is growing.

‘Green’ or ‘LOHAS’ (lifestyle of health and sustainability) consumers will demand retailers and consumer products companies become ever more sustainable.

Sustainability is a long-term strategy that must be embedded in an organisation’s every function and process if it is to be effective.

Companies that act now to address sustainability issues will enhance their brands; those that do not could be marginalised.

Retail and consumer products companies will continue to refine their customer value propositions to gain a competitive advantage.

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1 “Tesco, carbon and the consumer”, speech by Sir Terry Leahy, 18 January 2007, www.tesco.com/climatechange/speech.asp2 “Unilever’s CEO: Social innovation and sustainability the only game in town”, www.ethicalcorp.com/content.asp?ContentID=5110

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Speeding up on sustainability


What’s the buzz about?Sustainability might be the new buzzword, but what does it really mean? Is it just about the environment?

Two working defi nitions are commonly used today. The World Commission on Environment & Development has defi ned sustainability as: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”3 The Dow Jones Sustainability Index (DJSI) defi nition is: “A business approach to create long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”4

Sustainability thus is not simply about environmental issues, as many might believe. Environmental issues have dominated the sustainability agenda lately because of developments in the science of climate change, but they form only part of the sustainability equation.

In a retail and consumer products context, the DJSI says sustainability is about: “Fostering loyalty by investing in customer relationship management and product and service innovation that focuses on technologies and systems which use fi nancial, natural and social resources in an effi cient, effective and economic manner over the long term.”5

Marks & Spencer, Kingfi sher, Wal-mart and Cadbury Schweppes are some of the leading global retail and consumer goods companies that have applied these working defi nitions. Through its sustainability strategy, called Plan A, Marks & Spencer says it aims to work with “our customers and our suppliers to combat climate change, reduce waste, safeguard natural resources, trade ethically and build a healthier nation.”6

At Kingfi sher, sustainability is part of their corporate social responsibility and the Executive Committee reviews the progress of their sustainability metrics every six months. They have also linked sustainability to senior managers’ objectives and related pay.7 Every initiative has a KPI and they are publicised on their internet site, along with how the KPIs are tracking against their targets.

Wal-mart’s Sustainability 360 strategy “takes in our entire company – our customer base, our supplier base, our associates, the products on our shelves, the communities we serve. It’s not just about reducing our environmental footprint. And it’s not just about having our house in perfect order before we can be bold.”8 Wal-mart has committed to long-term targets such as reducing packaging by fi ve per cent by 2013.9 The company estimates this will save it US$11 billion across its global supply chain.

Cadbury Schweppes has set long-term sustainability goals and made a commitment to focus on ethical sourcing, the environment, health and safety, human rights and employment standards, community and food marketing.10

In Australia, Woolworths has taken a leadership position in sustainability and announced their seven year sustainability strategy late last year. According to Michael Luscombe, CEO Woolworths, “sustainability is about doing the right thing…..’ by their ‘shareholders, suppliers, staff, customers and communities.”11

An evolving landscapeOrganisations around the world are at different points in addressing sustainability issues. PricewaterhouseCoopers has developed a framework (Figure 1.1) that identifi es three phases in the response to sustainability, from simple regulatory compliance to making sustainability a competitive advantage.

Many organisations respond initially to sustainability as a regulatory issue and comply as required to protect their reputation and fi nancial position (Phase 1, Figure 1.1). Reputable global and Australian companies have suffered a severe backlash from the media and consumers for poor environmental and social performance. The use of child labour, poor working conditions, “greenwashing” and misleading product labeling are examples of issues that have caused much debate and spurred companies to take corrective action. Business leaders are increasingly concerned about the potential for such incidents to produce legal liabilities, cause revenue losses and damage their brands.

3 World Commission on Environment & Development, 1987, www.unngocsd.org/CSD_Defi nitions%20SD.htm4 Dow Jones Sustainability Indexes, www.sustainabilityindex.com/07_htmle/sustainability/corpsustainability.html5 Ibid6 Marks & Spencer Plan A, http://plana.marksandspencer.com/?action=PublicAboutDisplay7 www.kingfi sher.co.uk/managed_content/fi les/reports/cr_report_2007/index.asp?pageid=48 “Sustainability 360: Doing good, better, together”, www.Wal-martfacts.com/articles/4785.aspx9 “Wal-Mart’s Green Plan: Renewable Resources”, Women’s Wear Daily, 2 February 200710 “Our goals and commitments on sustainability 2006-2010”, http://csr2006.cadburyschweppes.com/csrvision/goalssustain.html11 “Doing the Right Thing – Sustainability Strategy 2007-2015”, Woolworths Limited

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Much is now expected of leading brands from the large segment of ‘green’ or ‘LOHAS’ (lifestyle of health and sustainability) consumers who are vitally concerned about sustainability. This group makes purchasing decisions based on the brand/image of a product or company.12 Sustainability is thus playing a key role in building brand value, as confi rmed by a major international study completed in 2007 by the Economist Intelligence Unit. Half the organisations surveyed in the study indicated that sustainability programs improved brand value.13

Organisations in Phase 1 are often able to cut costs by using less energy, reducing waste, and by recycling. Wal-mart, for example, saved US$3.5 million in transportation costs in one year by reducing toy packaging.14 Boots is saving £1.2 million a year through recycling.15 Johnson & Johnson has saved about US$30 million annually through an energy effi ciency

program since 1973.16 Some leading Australian retail and consumer companies have begun projects that mirror these leading practices but more opportunities can still be captured.

As organisations start to see benefi ts in cost effi ciencies and brand differentiation (Phase 2), they develop a deeper understanding of the long-term value of sustainability and how it can become a strategic advantage (Phase 3). Most Australian retail and consumer goods companies are in Phase 1 with only a few leaders in Phases 2 and 3. In contrast, global retail and consumer goods companies such as Tesco, Waitrose, Kingfi sher, Wal-mart, ASDA, Procter & Gamble, Unilever and Cadbury Schweppes have stepped out of Phase 1 and are in Phases 2 and 3. Their sustainability initiatives have enhanced their revenues and brand equity. Tesco in the UK, for example, has increased sales of organic goods by 20 per cent from 2005 to 2006.17

12 “Living LOHAS – Lifestyle of Health and Sustainability in Australia”, Consumer Trends Report, Mobium Group, August 200713 “Sustainability a business opportunity”, PR Newswire(US), October 200714 http://Wal-martstores.com/GlobalWMStoresWeb/navigate.do?catg=67715 “Boots – carbon management, environmental logistics and product stewardship”, report by Business in the Community as part of the Beacon Programme16 Johnson & Johnson case study, www.theclimategroup.org/reducing_emissions/case_study/johnson_johnson/17 “Britain’s supermarkets’ organic push”, Reuters News, 11 September 2006

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Figure 1.1: The PricewaterhouseCoopers sustainability maturity framework

Source: PricewaterhouseCoopers

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Licence to operate

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Compliance and risk managementPhase 1 Phase 2 Phase 3

Managing for value Strategic advantage

Brand differentiation

Cost efficiencies

Build market share

Brand enhancement

RISK MANAGEMENT

This is where manyorganisations start

Phase 1 – Recognition and understanding

Organisations start to recognise and understand the implications of not addressing sustainability issues effectively. They realise that issues such as climate change represent a material risk and their brand is at stake if this risk is not managed. At the same time, regulations compel them to develop a sustainability strategy.

Timeframe – approximately one year.

Phase 2 – Management

Organisations start to manage sustainability programs and achieve results such as cost effi ciencies. Their strategy and management differentiate the brand for consumers and stakeholders. Organisations start to reconfi gure their operations to manage the risks and exploit the opportunities of sustainability.

Timeframe – approximately twoto three years.

Phase 3 – Performance

Organisations realise benefi ts and are able to benchmark their sustainability performance internally and externally. They now have a true competitive advantage and have increased their market share.

Timeframe – beyond two to three years.

Note: Timeframes are indicative only and are dependent on a companys’ level of commitment and investment.


There is no quick fi x that will make a company sustainable; it is a journey that takes time. It is crucial to make an early start in deciding a strategy to gain an advantage. Organisations that do not recognise the value of sustainability could be marginalised and suffer competitive disadvantage in the long term. To illustrate this point, companies with environmental and social policies outperformed stockmarkets by 25 per cent on average over the past two years, the Goldman Sachs Group found.18

The market opportunityAustralian retail and consumer goods companies have not been as quick to seize the opportunity of sustainability as their global peers. Many Australian companies either do not have a stance on sustainability or are only focusing on specifi c issues such as packaging, or water and energy consumption, rather than ethical sourcing, fair trade and transport. There are some exceptions. Woolworths, Macro Wholefoods Market, Bunnings and Coles Group are among the few prominent Australian companies in the sector who have started on the sustainability journey.

Consumer research supports our view that the sustainability market opportunity is growing. Mobium Group’s research on consumer trends last year found that LOHAS consumers have to date spent $12 billion, and the Australian LOHAS products and services market is predicted to grow at 20 per cent a year to reach $21 billion by 2010.19

This research indicates that Australian consumers are becoming more willing to buy ‘green’ products and services that have low environmental impact. For example, GreenPower customers have increased by an average of 15 per cent annually over the past four years and in mid-2007 1,000 new GreenPower customers switched on each day. It is important to appreciate that these consumers are willing to pay a premium of 25 per cent or more for a green experience. The price and availability of sustainable products and services remains an issue, however, and this will be discussed later in this chapter.

Building sustainability into your customer value propositionThe global experience indicates sustainability will soon be a mainstream concern and a core part of business rather than an ‘end game’. Companies should therefore make it part of their customer value proposition.

We believe a sustainable customer value proposition has six pillars: corporate strategy and structure; product development; pricing; supply chain; store layout and design; and marketing and communications (see Figure 1.2 below). These address consumers’ needs and expectations.

18 “Ethical index outperforms”, Bloomberg News, July 200719 “Living LOHAS – Lifestyle of health and sustainability in Australia”, Consumer Trends Report, Mobium Group, August 2007

Figure 1.2: PricewaterhouseCoopers sustainable customer value proposition

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Customer sustainabilityneeds and expectations

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Corporate strategy and organisation structureMany leading global companies develop and publish sustainability or CSR reports that allow them to measure and improve their performance, and register the reports in the global CorporateRegister.com database. Australian retail and consumer goods companies which register reports at CorporateRegister.com include Coles Group, Foster’s, Woolworths and Wesfarmers.

Additionally, leading companies have strategies to meet environmental, social and ethical requirements and report on them using the Global Reporting Initiative (GRI) guidelines and indicators, otherwise known as the sustainability reporting guidelines. The GRI, a network of experts from institutional and governance groups, introduced the guidelines to enable organisations to benchmark themselves on sustainability performance standards, laws, codes, voluntary initiatives and norms.

More than 1,000 organisations worldwide use the GRI guidelines to produce their sustainability reports, including Australian retail and consumer goods companies Woolworths, Wesfarmers and Foster’s. Many Australian companies cite reputation enhancement as a key benefi t of producing a sustainability report.20 A considered strategic response to the issue allows companies to communicate their stance on sustainability to consumers and stakeholders, as well as enhance their brand.

To ensure successful execution of the strategy, it needs to be driven by senior management and supported by a dedicated team. It is important to have board and executive management sponsorship to support the necessary changes. Many organisations appoint sustainability or CSR offi cers to drive sustainability initiatives.

Product development, assortment planning and allocationCompanies will need to review their product range and develop new sustainable products to meet consumer demand. Leading US retailer Home Depot has developed 3,000 eco-friendly products, while British chain Marks & Spencer has launched a private label called Greener Living. Many overseas retailers have been able to introduce new products because innovation has increased the supply of ‘green’ products.

In contrast, Australia is not producing enough sustainable products to meet demand, according to leading organic retailer Macro Wholefoods Market, which food industry portal Just Food included in a global list of retail innovators.21 Most innovation has come from niche or cottage industry suppliers which are unable to produce large volumes. Retailers and suppliers therefore must collaborate in product development to lift volumes.

20 The State of Sustainability Reporting 2005, www.environment.gov.au/settlements/industry/corporate/reporting/survey.html21 “UK: Sustainability and innovation key for retailer growth”, Just-Food, March 2007

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The following are suggestions for developing a sustainable product category:

secure sponsorship of the CEO and merchandise director

make sustainability part of the merchandise buying culture

ensure that the sustainable product category blends into the range and will meet margin and sales requirements

work with customer products companies to develop and promote new products

build the sustainable product category into the marketing and merchandising plan and consider different ways to increase product awareness and sales

ensure all claims made about the products within the sustainable product category are appropriately certifi ed, to avoid consumer and regulator concerns around ‘greenwashing’

build awareness of sustainability issues among buyers

ensure products, especially top sellers, are always available or consumers will seek alternative brands or formats

continue to invest in consumer research.

PricingWhile some consumers are willing to pay more for sustainable products, price is still a barrier. Specialty retailers have obtained higher prices but anecdotal evidence from major retailers suggests consumers will resist paying a premium. Mobium Group’s LOHAS research found that most respondents would pay at most 25 per cent more for environmentally friendly products and services,22 and the Australian Bureau of Statistics found that price and convenience were critical to the decision to behave in an environmentally friendly way.23 PricewaterhouseCoopers’ experience indicates that achieving sales will be challenging if sustainable products are priced 10 per cent or more than mainstream products.

However, supply and demand must be adequate if prices are to come down. Larger retailers in particular will have an advantage because they have economies of scale and can absorb higher costs. Companies should not use this as an excuse to avoid building a sustainable customer value proposition. Instead, they need to create a compelling equation that explains to consumers the intrinsic value of paying a higher price. For example, if a company can explain how a product helps to reduce greenhouse gas emissions or promotes fair trade, some consumers will pay a little more because they want to do the right thing or at least, be seen to be doing the right thing.

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22 “Living LOHAS – Lifestyle of Health and Sustainability in Australia”, Consumer Trends Report, Mobium Group, August 200723 4102.0 – Australian Social Trends 2006, www.abs.gov.au/AUSSTATS/[email protected]/mf/4102.0?OpenDocument24 “Sustainability and the supply chain”, Logistics Management, Volume 46, Issue 11, November 200725 “Fleet heroes: The green giants of industry: Leading corporations are tackling their carbon emissions head-on”, The Observer, March 200726 “Tracking to the Kyoto target 2006”, Department of the Environment and Heritage, Australian Greenhouse Offi ce

UK retailers have increased consumer awareness and demand through strong marketing strategies. Promotions have played a key role in stimulating purchasing decisions where price may be a barrier. For example, Tesco’s Green Club card offers points for recycling old mobile phones or donations to charities, and Macro Wholefoods Market in Australia has a Macro Wholefoods Market Minded Loyalty Program that offers products and services such as yoga, massage and naturopathy.

Supply chainThe supply chain has been described as the key to “interpreting, enacting, and optimising sustainability initiatives.”24 Headline initiatives have focused largely on transport and logistics, packaging and ethical sourcing. Retail and consumer goods companies that implement these long-term strategies will have a robust, sustainable customer value proposition.

Transport and logisticsBetter transportation and fl eet management can help companies cut their carbon emissions and address a key consumer concern. Wal-mart, Marks & Spencer and Tesco have all made savings in this area. Conversion to bio-diesel fuel is one option however questions remain about the magnitude of the greenhouse benefi t that the current generation of bio-fuels deliver. Companies can also redesign their delivery fl eet, maximise space in delivery trucks, or backfi ll trucks to make fewer trips. Woolworths is using these measures in Australia. Internationally, ASDA is the leading retailer in sustainable transport and logistics and has managed to make money from it. When its trucks deliver, they collect cardboard and plastic and take it to recycling centres. ASDA earned £5.4 million from recycling in 2006.25

In Australia, transportation is the third largest source of greenhouse gas emissions with road transport the largest contributor. In 2004 road transport was responsible for 89 per cent of emissions.26 Australian retail and consumer goods companies should consider making transport a key consideration in their sustainability strategy. They should work closely with logistics and third party providers to measure and reduce their direct and indirect emissions. Indirect emissions relate to a company’s interaction with suppliers, partners and customers.

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Packaging Consumers are seeking packaging that is recyclable, reusable or refi llable, and/or made of biodegradable materials, according to research conducted by Datamonitor 27 and the Mobium Group.28 Sixty-two per cent of those Mobium surveyed saw environmentally appropriate materials as an important part of the total product. Many consumers believe products are over-packaged.

Australia’s National Packaging Covenant and the Environmental Code of Practice for Packaging provide guidelines for reducing packaging and its impacts. Major retail and consumer goods companies – including Woolworths, David Jones, Goodman Fielder, Campbell’s, Arnott’s and National Foods – voluntarily comply with these guidelines and many have packaging action plans up to the year 2010. A key question, however, is whether these guidelines will be seen to go far enough, as the retail and consumer goods sector starts to compete on their sustainability performance.

However, companies must keep in mind pricing. The Datamonitor survey found most consumers were still reluctant to pay a large premium for sustainable packaging.

Ethical sourcingEthical sourcing is becoming increasingly important and demand for authenticated fair trade products is rising. Sustainable sourcing covers a multitude of topics including fair treatment of suppliers and the sustainable sourcing of food.29 It is a watchword in the media and has been brought further to the fore by television shows about the treatment of animals.

Research on LOHAS consumers tells us that their purchasing decisions are largely based on a brand’s ability to source products that are environmentally and socially friendly.30 Woolworths, Macro Wholefoods Market, Tesco and Marks & Spencer have all had success with local sourcing. Global supermarket chains such as Waitrose, Sainsbury and Tesco now offer sustainably sourced fi sh in response to increasing demands. Global companies have made signifi cant investments and are working directly with local and global farmers to deliver on their promises. Cadbury Schweppes formed an alliance with Earthshare,31 a US conservation network, to support sustainable cocoa farming and improve biodiversity on cocoa farms in Ghana.

Ethical sourcing is not only a high priority for food products but is now a consideration with general merchandise. Wal-mart is buying organic cotton for its apparel and home product ranges. It is also offering products made from bamboo and soy-based fi bres. Marks & Spencer is promoting garments made from fair trade cotton. Sportsgirl is the fi rst major Australian fashion retailer to develop a sustainability offering called Organic Cotton Collection, which has reportedly been well received. Other clothing companies appear set to follow a similar course, with Country Road creating a sustainability team to work on future ranges32 and Bonds and Rio both releasing a range of underwear made from bamboo.33

Good product labeling is essential and retail and consumer goods companies must ensure that sustainability claims on products they sell are appropriately certifi ed. This is an emerging area, and the appropriate standard for particular types of claims is not always clear. The growth in the LOHAS segment is likely to drive rationalisation, however until this occurs, the challenge for business is to determine which standard to work with. The risk is that a company builds systems and processes around a standard that is ultimately not supported by consumers, putting them behind the market and facing signifi cant costs to switch.

Organic food labeling is a good example of this issue as there is no single standard or certifi cation system.34 There are currently seven organic food certifi ers, which confuses consumers. Conscious of these issues, the Organic Federation of Australia proposed a single standard in November 2007 and is awaiting industry comment.35 Retail and consumer goods companies should press for one legislated national standard for domestic organic products.

There has been much debate about the concept of ‘food miles’. Food miles refer to the distance food travels between production and consumption. It can be a complex issue as analysis sometimes reveals counter intuitive outcomes. For example, a UK study found importing tomatoes from Spain during winter was more effi cient than sourcing them from Britain because of the many millions of short trips between producers and the shops. Another example is the debate about whether UK retailers should continue buying fl owers from Kenya. While local sourcing reduces transport emissions, it also may have the consequence of reducing income for already impoverished Kenyan workers. In Australia, food miles can be a complex issue due to our extreme weather conditions and geographical spread. Our view is that ‘food miles’ is a matter that is still developing as its implications are not fully understood.

27 “Consumer attitudes towards packaging: New insights and future perspectives”, Datamonitor, September 200728 “Living LOHAS – Lifestyle of Health and Sustainability in Australia”, Consumer Trends Report, Mobium Group, August 200729 UK Grocery Retailers 2008: Scramble for market share intensifi es, Datamonitor30 “Living LOHAS – Lifestyle of Health and Sustainability in Australia”, Consumer Trends Report, Mobium Group, August 200731 www.cadburyschweppes.com/EN/EnvironmentSociety/EthicalTrading/CocoaProcurement/earthshare.htm)32 “ECO LIFE”, Sunday Age, September 200733 “Go Green with Rio bamboo underwear”, http://cosmo.ninemsn.com.au/article.aspx?id=32287834 “Living LOHAS – Lifestyle of Health and Sustainability in Australia”, Consumer Trends Report, Mobium Group, August 200735 OFA Australian Standard Regulatory Proposal, www.ofa.org.au/papers_menu.html, November 2007

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Store design and layoutStore design can help retailers clearly signal their ‘green’ credentials. Global retailers such as Wal-mart, Tesco, Marks & Spencer, Kohls, L.L. Bean, Home Depot and CB2 (Crate and Barrel’s sister company) started this trend. A handful of Australian retailers and property developers are now building stores with recycled materials, minimising water usage and investing in energy effi cient air-conditioning. Woolworths, for example, is building new stores according to a set of its own sustainable design guidelines.36 Ikea has set the benchmark for retail businesses by using smart environmental management technologies. An award-winning Ikea store in Logan, Queensland was designed specifi cally for Australia’s unique conditions, incorporating climate control, water reclaiming, solar, mechanical and electrical power systems. Ikea says such systems have cut its running costs by more than 60 per cent.

A second consideration is the location and layout of green products in-store. Convenience is the second barrier in consumer purchasing decisions. Retailers need to make it easy for consumers to buy sustainability driven products. Clear signs and labels should be used to help customers fi nd products quickly, particularly when personal service is not available. A ‘store within a store’ concept could be helpful in larger retail formats.

36 “Doing the right thing – sustainability strategy 2007–2015”, Woolworths Limited

Sustainability


Figure 1.3: PricewaterhouseCoopers sustainable customer value proposition and enterprise integration framework

People and change

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Customer sustainabilityneeds and expectations

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Marketing and communicationsMarketing and communications are vital to capture consumer mind share and establish brand credibility. According to the LOHAS consumer survey, 60 per cent of respondents could not recall an Australian brand that provided sustainable products and services.

Marketing messages need to be simple and easy to understand. They should focus on how the product could improve health, lifestyle and sense of wellbeing, or how it could improve wider social and environmental conditions. At a corporate level, marketing needs to clearly show the company is actively promoting sustainability and involved in community programs.

Importantly, marketing messages must be completely honest to maintain brand credibility and trust. The LOHAS survey reported that 64 per cent of consumers interviewed were sceptical about companies’ health and environmental claims. The Australian Competition and Consumer Commission is actively pursuing companies who breach ‘greenwashing’/green claims that breach consumer protection laws.37 It has warned food and beverage manufacturers not to use potentially misleading labels when marketing goods and that it will continue to scrutinise ‘green’ claims.38 Companies that breach the Trade Practices Act requirements in relation to green claims can be fi ned. For those found guilty of misleading or deceptive conduct these fi nes can be as high as $1.1 million, not to mention the brand damage.

Critical success factorsA successful sustainable customer value proposition must be integrated into the core business and embedded in every business function and process. Figure 1.3 shows a sustainability strategy and integration framework with the sustainable customer proposition overlaying the organisation’s functional groups and processes.

Every function and employee must understand and embrace their organisation’s sustainability strategy and customer value proposition. For example, employee induction training should incorporate sustainability and store teams must know what the sustainable product range is and where their customers can fi nd them in the store.

Companies such as Wal-mart, ASDA and Waitrose have become leaders in sustainability because they have made sustainability part of their daily business.

37 “Court canes egg supplier over ‘organic’ labelling”, Foodweek, August 200738 ACCC guidelines for ‘green’ marketers www.accc.gov.au/content/index.phtml/itemId/810157/fromItemId/142, www.accc.gov.au/greenmarketing

Sustainability


A sustainability roadmapWorking towards a sustainable customer value proposition is a journey that requires a well-thought-out roadmap. This journey will be a steep learning curve for Australian retail and consumer goods companies. Much research, planning and preparation is required to develop the proposition but companies that adopt a fl exible approach and act early will have the competitive advantage. The following are key principles to consider:

1. Appoint a sustainability executive at board level to provide sponsorship and establish a supporting team charged with embedding the sustainability culture enterprise-wide.

2. Develop a sustainability strategy and customer value proposition that is integrated into the overall business strategy and customer value proposition.

3. Assess your carbon abatement options and set footprint reduction targets for your organisation and with your suppliers.

4. Assess store design and layout and product packaging against how it communicates your sustainable customer value proposition.

5. Understand your sustainable customer segment well, factor changing expectations into your product portfolio planning and innovate to meet customer needs.

6. Communicate widely both your brand position on sustainability and your actions in addressing sustainability issues using recognised guidelines and channels.

7. Collaborate with suppliers, manufacturers, business partners and industry bodies to achieve your goals, especially on product innovation and labeling.

8. Involve your employees and provide them with sustainability training.

9. Involve the local community and invite feedback from consumers.

10. Be fl exible and respond quickly to changing customerand stakeholder expectations.

Sustainability


Appoint a sustainability executive and develop a sustainability strategy.

Take an ‘inside out’ approach – address sustainability issues within the organisation before responding to the customer.

Build sustainability into your culture and involve employees across the organisation.

Be flexible to adapt to rapidly changing consumer demands for sustainable products.

Collaborate internally and with your external suppliers to produce new sustainable products and reduce carbon emissions.

Learn from global leaders in the retail and consumer products industry.

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Sean Lucy | Director PricewaterhouseCoopers Assurance+61 3 8603 3386 | [email protected]

Sean is a climate change and sustainability specialist at PricewaterhouseCoopers. Coming from a legal background, he has particular expertise in the design and operation of carbon markets, and the governance issues created by climate change. Sean works regularly with clients in the public and private sector on these issues. In addition to his client work, Sean contributes to the ongoing public debate on sustainability through his work on boards and public committees. He has previously served as the Chair of the Law Institute of Victoria’s Environmental Issues Committee and on the Board of the Australian Business Council of Sustainable Energy, and was recently appointed to the Victorian Government’s Ministerial Reference Council for Climate Change Adaptation.

Sustainability

ConclusionAustralian consumers are demanding more sustainable products and services, however to generate a better supply and lower prices, demand needs to increase.

Retail and consumer goods companies must push new products to consumers to raise their awareness, as UK retailers Marks & Spencer and Tesco have done. If and when demand increases, companies must be in a position to respond. This means that they need to gear up now.

Sustainability is here to stay. Companies must therefore take it seriously and build sustainability into their customer value propositions. Handled correctly, sustainability will build brand value and create competitive advantage.


Michael LuscombeManaging Director and Chief Executive Offi cer,Woolworths Limited

The way I see it

Sustainability

At Woolworths, sustainability means doing the right thing by our employees, customers, shareholders and the community. We employ 180,000 people and about 21 million shoppers walk though our stores every week. We also do business with a large number of partners who in turn do business with our customers, so our community connections span a signifi cant proportion of Australia and New Zealand.

In 2006, the Woolworths management team started to think about our role in relation to climate change and how we could make a difference moving forward. We wanted to make a positive impact on the wide net of people with whom we interact directly and indirectly. This led to the development of the Woolworths Sustainability Strategy 2007–2015, which was released last November.

A key part of our strategy is to address emissions. As of 2006, our greenhouse gas emissions from all operations (excepting joint ventures) stood at roughly 3.7 million tonnes CO2 equivalent. This is about 0.66 per cent of Australia’s total annual emissions. When we looked at these numbers, and how they were likely to grow under a business-as-usual scenario, we decided signifi cant action was required. We resolved to limit emissions such that in 2015 the total emissions from our current businesses would not be any greater than they were in 2006, despite the organic growth in our business. This would represent a 40 per cent reduction based on our anticipated growth. As below, we’ve set further targets for transport.

Achieving these targets will not be easy but we are confi dent we can get there if we apply the same determined, forensic approach that allowed us to take $1 billion out of the supply chain through Project Refresh. We are serious about strategies that are credible and achievable, which is why our emission reduction targets have been developed from the bottom up. Yes, people might say our targets are ambitious but they are in line with our performance-driven culture, and our team will work together to achieve them. We recognise we are challenging ourselves and may not be able to resolve all the obstacles, but we’ll try our best. We will also review our position and be better placed to give guidance after we have the Garnaut report.

Woolworths has identifi ed four key opportunities that will enable us to drive down our emissions:

changing our transport fl eet

incorporating sustainability principles into store design

implementing innovative and more effi cient technology solutions

changing our behaviour internally.

With our fl eet, we are shifting to more fuel-effi cient vehicles. We aim to reduce passenger fl eet emissions by 30 per cent by 2012. For goods, the goal is a 25 per cent reduction in emissions per carton delivered over the same period.

The design of stores presents a tremendous opportunity given they are responsible for the bulk of our emissions. In-store electricity use comprises approximately 70 per cent of our emissions profi le. Our response has been to develop sustainable design principles, which have been piloted at our fi rst Green Store at Rouse Hill in Sydney. This store showcases the features we aim to incorporate in every new outlet from September 2008. We are also working to upgrade our older stores and opening Green Stores at Victoria Harbour in Melbourne, Geelong West in Victoria and Glenorie in New South Wales.

More effi cient technology is another key area of activity. We have identifi ed that our second largest emission source is hydrofl ourocarbon (HFC) leakage from our refrigeration systems. In 2006, leakage of refrigerant gas from our supermarkets amounted to approximately 610 kilotonnes of CO2 equivalent. While the gas we use does not deplete ozone, HFCs are a signifi cant greenhouse issue. By switching to an alternative technology that, ironically, uses CO2 as a refrigerant we can signifi cantly reduce our emissions resulting from leaking of refrigerants.

We are really excited about the potential of this CO2 refrigeration technology, but we do face a lack of support skills because it is relatively new in Australia. We are working with TAFE to help develop the required skills for the service and maintenance of these new systems.

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Another technology area where we can make a difference is alternative power. Our recently constructed distribution centres have been built to carry solar arrays and, with appropriate regulatory support such as feed-in tariffs or accelerated depreciation, we can signifi cantly increase our renewable power generation. Also high on our carbon emission reduction agenda are co-generation of heat and power, the purchase of carbon credits, renewable energy and sending zero waste to landfi ll.

We recognise that implementing these business initiatives is only the beginning. We are working to embed sustainability into everything we do, and part of this is changing the way we behave. We have begun challenging our teams in our 3,000 locations to adopt sustainability behaviours in their workplaces.

We have Eco Ambassadors representing sections of the business and stores. The ambassadors attend an annual national program where we train them to infl uence their colleagues’ behaviour and take environmentally sound actions in stores such as switching off lights, computers and air-conditioning when not in use.

To support this behavioural change, we are introducing next-generation energy management systems to track our energy usage. We are also working on making energy data more user-friendly for our stores and developing a ‘dashboard’ – similar to the one you see in a car – that allows us to view our energy consumption and drive behaviour changes across our teams.

We are encouraging our Eco Ambassadors to go further and take what they have learned into their homes and communities. We see that our people have a role to play not just in minimising environmental impact through their own actions, but also in encouraging others to change. We have been able to reduce energy consumption from lighting at our head offi ce by 30 per cent through behavioural change (such as powering down our computers at night and switching off mobile phone chargers when they are not in use). If we can drive similar changes through our central operational systems and in the wider community, then the impact could be dramatic.

We are also looking at other ways to educate the broader community about climate change and the impact of each of our individual choices. A key initiative in this area is the consideration of carbon labelling. We are working with the Australian Food and Grocery Council (AFGC) on a project to examine the benefi ts of carbon labelling and how such a plan might be implemented. Woolworths has jointly funded the study with the AFGC to better understand the challenges and opportunities involved. We don’t yet know if carbon will be a major determinant in customers’ grocery choices but we want to become informed and engage in meaningful discussion. I believe there is an opportunity for us to drive a collaborative approach across the industry.

Our teams are proud we are addressing sustainabilityand we all know this initiative is not a walk in the park. But ‘doing the right thing’ is now the way we do business and must be intrinsic to all our activities, without withering away shareholder value.

Sustainability


Macro Wholefoods Market is Australia’s largest organic food retailer, supplying a wide range of organic and natural products through supermarkets and cafes in Sydney and Melbourne. I entered the business with a partner when we purchased the long-running Macro store in Bondi Junction in Sydney’s eastern suburbs in April 2004.

The story of Macro Wholefoods Market’s growth has been balancing the commercial requirements of running a supermarket-style business with the obligations of a brand based heavily on sustainability.

Macro sells up to 12,000 product lines in 10 stores that range from less than 200 square metres to more than 1,000 square metres. We opened our second store at Crows Nest on Sydney’s north shore in December 2004 and a third in Richmond in Melbourne in September 2005. The Crows Nest store is now the largest organic store in the Southern Hemisphere.

When we bought in, the Macro store in Bondi had the largest turnover in the country by perhaps fi ve times compared to its nearest like-for-like competitor. Our plan was to expand the business from the vegan and vegetarian niche into the mainstream.

We have six stores in Sydney, four in Melbourne and plan to open three to four more in 2008. By 2010, we plan to have opened 40 stores and be present in several offshore locations.

I think there is a green and rosy future for organic produce in this country. Our increasing interaction with conscious consumers, farmers and manufacturers shows that Australians are ready to embrace clean organic food, grown the way nature intended. Macro is a proudly Australian business that is committed to bringing certifi ed organic, locally produced and Fair Trade foods to as many people as possible.

We believed we could make organic produce accessible to more people through large supermarkets as an alternative to the niche ‘cottage industry’ model that dominates the organic foods market. This might alienate those consumers who cling to the traditional model or who may be against the fact we sell meat and chicken along with vegan products.

Some consumers may also be uncomfortable with the fact we also sell some clearly marked produce that may be ‘conventional’ or possibly ‘in conversion’. However, we aim to provide our customers with the widest range possible without compromising our brand. In an industry where customers are extremely aware of and sensitive to sustainability, Macro’s brand integrity is crucial to our value proposition.

Branding is vital to our business. Our house brands are hugely successful with our Macro Wholefoods Market-branded milk and water comprising a sizeable chunk of our sales. We have opted against a franchising model as we need to manage and protect our brand very closely. This is particularly important in Australia as the market here is relatively young. While the growth rate in retail sales of organic produce is much higher in the United States, Europe and the United Kingdom (UK), we are working from a much smaller base. In the UK they had mad cow disease and people started really thinking about what they ate. Organic foods are part of the social fabric over there and people are prepared to pay for them.

Store appearance is another critical success factor in our customer value proposition. We aim to have our stores looking rustic as a counterpoint to the highly organised and stark appearance of conventional supermarkets. To create this ambience, we use earthy tones, recycled timber fl ooring and exposed beams. Lighting is also a very important feature. It has to be warm and a bit eclectic rather than banks of fl uorescent bulbs such as in supermarkets. Our stores are designed to refl ect the style, values and expectations of customers looking to purchase sustainable produce.

Operating a sustainable business can require us to juggle sometimes contradictory customer demands. Some may want us to source our supplies locally, while others insist on Fair Trade practices and others want the cheapest price. We do try to buy locally, not just because of the food miles but because the produce is better, it’s quicker to get it to us and we’re supporting the local grower community. We need more suppliers of quality organic produce to meet rising demand. It is impossible to stock 100 per cent organic at this stage due to lack of supply.

The way I see itPierce CodyExecutive Chairman and Co-owner,Macro Wholefoods Market

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Sustainability


To retain our brand integrity, our produce must be certifi ed organic. It is one of the vagaries of the industry that there are seven certifi cation bodies. If there was just one it would eliminate a lot of confusion. I am not so much concerned about the validity of the certifi cates handed out – I am concerned that a customer may be asking whether a product certifi ed by one standards body is more organic than one certifi ed by another.

There is a lot of expense and rigour involved for a supplier to shift from conventional to organic farming. For example, fully converting a strawberry farm can take three years. Growers who do this do get squeezed as their costs go up and they cannot charge more until they get their certifi cation. This means we must work collaboratively to support our suppliers every step of the way. We want to help this industry grow. Encouraging certifi ed growers to dedicate more land to organic produce and conventional farmers to make the switch to organic produce is vital to this. This is our number one priority.

However, we are running a supermarket business and we have to implement systems and processes to ensure we can operate effi ciently and compete effectively. Until recently, a signifi cant proportion of our 520 suppliers did not have fax machines. Some of our suppliers are still reluctant to put barcodes on their products, but we are working with them to change this. We are also introducing an automated stock system to prevent over-ordering and consequent waste.

The next projects on our books are becoming fully carbon neutral and conducting environmental audits on our suppliers. Consumers are acutely aware not just of their environmental footprint but those of the businesses they deal with. We have to be sustainable in every way possible to meet their requirements and that includes ensuring our suppliers are as environmentally friendly as possible. We are trying to achieve carbon neutrality and we are close, but not there yet as our focus for now is getting the basics of retail in order.

There is a premium attached to being a sustainable business. We are cheaper than our competitors but expensive relative to conventional supermarkets. However, at any one time Macro Wholefoods Market will sell some organic items cheaper than conventional produce in other supermarkets. If there is a shared line of product, we are no more than fi ve per cent more expensive. Customers do understand this. Sometimes, however, we have to explain why items such as bananas may be $2.99 when conventional bananas may be sold elsewhere for $1.99. We do invest heavily in educating consumers about the benefi ts of organic produce and the advantages of sustainability. This includes posting extensive material on our website.

We always say that people who come in here leave feeling good about themselves. We are unashamedly appealing to the conscious consumer and it is a feel good practice. We have to ensure sustainability across our operation or we lose our credibility.

Sustainability


Sarah ReynoldsMerchandise Planning and Distribution Manager,Sussan Australia and New Zealand

The way I see it

We like to approach the topic of sustainability by immediately throwing down the gauntlet: “Hands up who wants to save the world.” No small challenge in those few words, but one that can only begin to be met by taking small fi rst steps.

So far the steps taken have been a little circuitous – a journey of fi ts and starts, highs and lows, where one minute we pick up the pace only to lose momentum the next.

In Australia, nevertheless, a consciousness about sustainability is growing. Likewise, we at the Sussan Group are starting to think about green issues, include them in our business planning and, importantly, take action.

Unlike our counterparts in the Northern Hemisphere, however, we don’t publicise enough of what we’re up to. British fashion retailer Marks & Spencer, for instance, doesn’t leave its customers in any doubt. They promote their environmental credentials across the store.

Retailers here must follow the lead of Britain and Europe and exploit the customer touch points – in the case of Sussan, from garments and carry bags through to the way we communicate with shoppers in stores. Otherwise, we risk appearing out of touch. Not just with our customers, but staff too. We only have to look at the young and eager casual staff we employ over the Christmas period. Before they sign on, they now want to know what our strategy on sustainability is.

At Sussan Group, which incorporates the Sussan, Sportsgirl and Suzanne Grae brands, there’s a real buzz about sustainability. Underpinning that is a company-wide strategy to minimise our use of resources. Already we have programs up and running that are reducing energy, developing sustainable materials and recycling.

A recent audit of store lighting outside of trading hours, called Operation Lights Out, found we could save up to 20 per cent in electricity used for lighting.

We’ve developed a range of clothing using organic cotton which will feature in 110 stores by July 2008, compared to 50 stores stocking it in February. We’re also looking at ranges of organic denim and T-shirts, and down the track we’d love to work with more organic materials.

We’re cutting back on the waste we produce. In a Queensland trial, we’ve been able to reduce the shipping packaging of garments by 80 per cent. It’s a small initiative with a big impact. This will be rolled out more extensively for the Summer season’s deliveries.

For our catalogues we use FSC accredited stock, vegetable-based inks and print by a carbon neutral process. We recycle our printer cartridges through Planet Ark. And our plastic carry bags are degradable. We will have an enviro-bag alternative in May, the proceeds of which will go to our partner charity Breast Cancer Network Australia (BCNA).

Over a period of six months we have managed to measure our carbon footprint, predominantly in relation to our greenhouse gas emissions from company fl eet cars and electricity usage across head offi ce and all stores nationally. Our new premises also tick several green building boxes: water tanks for landscaped areas, recyclable waste, solar glass and thermal insulation, as well as a system that automatically optimises energy use for air-conditioning, heating and lighting.

Consumer sentiment is greening. Expressions like ‘climate change’ and ‘environmental responsibility’ are part of everyday conversations. For industry, there’s no going backwards. But to go forwards, you need people who are not only passionate about sustainability and committed, but also can inspire others.

Communication is crucial. We only have to compare our levels of promotion with Britain to highlight how much needs to be done. We have a monthly newsletter that keeps staff up-to-date on green initiatives, but this is only a small start. You need to generate momentum. In a fast-paced business like fashion, it’s easy to become sidetracked unless there’s someone to keep green issues top of mind.

Motivating others to form new habits isn’t easy though. There are plenty of people who still prefer the wait-and-see approach and will only act when they’re forced to. By then, it may be too late.

Price and cost of garments are issues but interestingly it has less to do with using more expensive eco-friendly materials and more with developing distinctive clothing that appeals to customers.

Our suppliers’ commitment to sustainability is not our priority just yet: It’s no good pointing the fi nger at China. They’re acting on our behalf. We must behave and communicate to them in a way that demonstrates that the environment is important to us, then we can infl uence them to embark on initiatives of their own.

Sustainability starts with us. We need to take ownership, responsibility and control. We need to show integrity and leadership. We need to get into the habit of asking what more we can do. If we achieve those things, then our circuitous journey may just take a straighter path.

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In Retail & Consumer Outlook 2007, we cautioned that private equity’s interest in the retail sector was rapidly changing the competitive environment and that complacent companies which chose not to act risked erosion of shareholder value. Twelve months on, more dramatic changes are in play.

Last year, we said businesses, shareholders and managers faced tough decisions – should they stay and compete or exit? If staying, should they pursue organic growth or an acquisition? If exiting, should they choose an initial public offering (IPO), or private equity or trade sale? These decisions had to be made to create a strategic roadmap to guide management over the next three to fi ve years.

Events have now put a question mark over those plans. The retail and consumer goods sector is feeling the heat from the United States (US) sub-prime meltdown and the resulting global credit squeeze. The crunch came after more than 10 years of uninterrupted economic prosperity fuelled by cheap credit, record corporate earnings, close to full employment and rising property prices.

It has signifi cantly altered the global mergers and acquisitions (M&A) landscape for all key players, including debt providers, private equity groups and corporations.

Many shareholders and senior managers are now asking: is the Australian economy insulated or decoupled from the US and Europe? Furthermore, with increasing domestic infl ation, interest rates at a 12-year high and softening retail conditions, is now the right time to execute their business strategy and do a deal?

The global economic slowdown will continue throughout 2008 and into 2009.

Australia’s economic outlook remains relatively positive over this period due to strong international demand for commodities.

The credit crisis will level the playing field between private equity and corporations, making the latter more competitive in the contest for assets.

While there will be fewer mega-sized deals in the next 12 to 18 months, the unrelenting supply of equity capital should prevent a noticeable decline in the number of small-to-mid size deals.

Transaction multiples will soften over this period, particularly for discretionary retail assets.

Buyers will go back to basics in valuation analysis, placing greater importance on maintainable earnings than aggressive and/or unproven growth potential.

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Mergers & Acquisitions

Deal or no deal. Is now the right time?



Fallout from the sub-prime meltdownDespite its relatively short existence, the word ‘sub-prime’ and its connotations are now fi rmly entrenched in the global fi nancial lexicon. As shown in Figure 2.1, sub-prime and other low-quality credit mortgages accounted for over 40 per cent (US$2.9 trillion) of the US mortgage bond market at the end of August 2007. The traditionally dominant government backed mortgages, such as Freddie Mac, made up the balance (US$4.2 trillion).

The sub-prime crisis is not over yet, however. As many sub-prime borrowers are still enjoying honeymoon rates, the full effects of the credit crunch are yet to be revealed.

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Figure 2.1: Estimated breakdown of US mortgage bond market, Q3 2007

Source: Federal Reserve Bank, SIFMA and Bank of England

When initial rates are reset and the number of defaults increases in the second half of 2008, global fi nancial markets will be tested once more.

In today’s interconnected global economy, the potential for economic contagion is great. As the slowdown in the US worsens and the impact of the fi nancial crisis spills over into the broader economy, the US could enter a prolonged recession, with potentially signifi cant repercussions for the world economy.

What does this mean for Australia? The ANZ bank, in its January 2008 Economic Outlook, forecast robust domestic GDP growth of about 3.5 per cent in 2008 and 2009. Underpinning that forecast is a strong domestic economy fuelled by the resources boom, plus increased rainfall and a temporary reprieve from drought. The bank also factored in robust consumer confi dence, a strong credit supply, sound prudential regulation and an independent Reserve Bank that supports tight monetary policy.

In the fi rst quarter of 2008, however, choppy global equity markets seemed to cast doubt on whether the insatiable demand of a developing Asia would be suffi cient to insulate Australia from sub-prime contamination. As refl ected in Figure 2.2, the intra-day volatility of the ASX 200 increased signifi cantly in January 2008, relative to August 2007, when the effects of the sub-prime crisis on the fi nancial markets became more evident.

In the period 1 September 2007 – 31 March 2008, the ASX 200 declined sharply by 14.5 per cent.

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While the US equity markets infl uence investor sentiment to a large degree, there is evidence to support some economic decoupling of the US and Australia. Demand, both domestic and from our developing trade partners, China and India, is the principal factor sustaining robust economic performance. In addition, prudential regulation has minimised the impacts of the sub-prime crisis in Australia. Consequently, credit supply to households and corporations has remained strong, although costs have risen as credit risk has been repriced.

Despite tempering in recent months, consumer confi dence remains quite robust, and is underpinned by record low unemployment of less that 5 per cent and strong wages growth, and the promise of a further $8 billion in tax cuts during the fi nancial year. A corollary of the recent high

consumer demand is infl ationary pressure. Underlying annual infl ation is appreciating, well above the Reserve Bank’s target band of 2-3 per cent, and interest rates had risen for the twelfth successive time when this article was written in early April 2008.

Since the March interest rate rise, signs suggest that consumer demand has slowed. Retailers such as David Jones and Myer have reported a slow down in comparable store growth for the fi rst time in several years. However, a toughening of retail conditions, combined with a round of interest rate increases by the banks, adds support for the argument that the offi cial interest rate has peaked for the current economic cycle. Consequently, it is expected that the current dent in consumer confi dence may be relatively short-lived.

Mergers & Acquisitions26 | Retail & Consumer Outlook 2008


What does this mean for the M&A market?The M&A market was hot in 2007, as Wesfarmers’ circa $18 billion takeover of Coles Group showed. Many deal makers, both corporate and private equity, are wondering how the landscape might alter over the next 12 to 18 months.

While Australia’s economic outlook appears positive, the global credit squeeze has affected deal fundamentals and the balance of power among deal makers. Debt providers have become signifi cantly more risk adverse and funding more costly. This has forced private equity parties to review deal valuations and structuring, required rates of return, and investment holding periods. Consequently, the playing fi eld has levelled and corporations can now compete more effectively on price. In fact, a corporation’s ability to exploit synergies could enable it to out-bid a fi nancial investor which does not have a related investee company in its portfolio.

During periods of tighter monetary policy and widening credit spreads, it is common to see a decline in M&A activity. This is particularly true at the ‘big end of town’ where deals are valued at more than $1 billion. An analysis of the disclosed retail and consumer goods deals completed as at 31 March 2008 (Figure 2.3) also indicates a slowdown in small-to-mid-market M&A activity.

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Figure 2.3: Year-to-date (31 March 2008) retail and consumer transactions completed

After a bumper year in fi scal 2007, driven largely by private equity, the market has slowed. Both the number and value of deals has fallen. In the fi scal year to date, the number of deals completed and disclosed, valued at $200 million or less, fell by approximately 37 per cent compared with the same period last year. A comparison to 2006, which may provide a better benchmark, suggests a more modest decline of about 12 per cent.

This slowdown is expected to continue into 2009. But while the M&A market may continue to show softness in the second half of 2008, the strong supply of funds from private equity and superannuation funds should prevent a signifi cant decline in activity, particularly in the small-to-midsize market.

Access to debt fi nanceDuring the days of readily available credit, debt providers lent aggressively. Private equity-backed deals regularly obtained senior debt multiples of fi ve to six times ‘last twelve months’ (LTM) earnings before interest, tax, depreciation and amortisation (EBITDA). Banks were willing to lend against cash fl ow and with very light covenants. Borrowers topped up with subordinated mezzanine funding, if needed, before a thinner equity slice was overlaid to complete the funding package.

Since August 2007, leveraged fi nance has become more diffi cult to source. Transactions of $1 billion or more, which require $600-$700 million in debt, are diffi cult to syndicate, partly because many banks have reached their sector exposure limits over the past couple of years. This means the number of mega deals will decline in 2008 and into 2009.

At the ‘big end of town’, banks remain open for business, albeit at a lower leverage and higher funding cost. On average, senior debt to LTM EBITDA multiples for attractive, defensible, retail assets have fallen from fi ve to six times (average), to three to four times (maximum).

Similarly, senior debt margins have increased. Senior margins that were typically 2.00-2.50 per cent over the bank bill swap bid rate have risen by 25-50 basis points. Amortising loans now attract a 25 basis point increase, and non-amortising loans an incremental margin of up to 50 basis points. The cost of senior debt for many leveraged transactions may have increased by more than 30 per cent (8.10 per cent to 10.65 per cent).

Debt service coverage ratios (DSCR), which measure the amount of cash fl ow available to meet interest and principal repayments, have also tightened, with many lenders now seeking a minimum of 1.2 times.



Private equity’s historical dominance in M&APrivate equity-backed transactions have generated most of the headlines in recent years. Private equity moved aggressively, using large quantities of low-cost debt to leverage lazy balance sheets and ultimately drive returns. Now, the global squeeze has restricted the supply of cheap funds from the US and Europe. Fewer leveraged buyouts offer the required high returns. Tighter, higher cost credit caused three private equity partners, Primera, Pacifi c Equity Partners and Macquarie Bank, to abandon their support for Wesfarmers’ bid for Coles Group in June 2007.

While an increase in the cost of debt has made corporations more able to compete for assets, private equity is still active in the retail and consumer goods sector. An analysis of the disclosed retail and consumer goods transactions completed in the fi scal year to date 2008 (see Figure 2.4) confi rms this. While the number of private equity deals declined compared to the same period in 2007 – the peak of the current private equity cycle – it is broadly comparable to that of 2006.

Private equity’s involvement in the retail and consumer goods sector is likely to continue because almost 70 per cent ($6.1 billion) of the $8.9 billion raised in 2007 remained uninvested as at 30 June 2007 (see Figure 2.5). In addition, new funds continue to be raised. This emphasises both the on-going need and capacity of private equity to execute deals in 2008.

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Figure 2.5: Private equity funds raised and invested in Australia


Figure 2.4: Private equity retail and consumer transactions

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In the current environment, private equity will rely less on high leverage to drive returns and more on operational improvements. As a value buyer, private equity will also seek out retail & consumer goods sub-sectors that are ripe for consolidation. By combining a sub-sector’s number three and number four players, for example, it could grab suffi cient market share to capture the number one market position. In the process, it could achieve the cost synergies typical in such ‘roll-up’ transactions. Archer Capital’s consolidation of Amart All Sports, Rowe & Jarman and Rebel Sport is a good example of such a strategy.

As retail investments such as Myer, Super A Mart, Godfreys and Repco approach maturity, private equity will seek to realise their return. A sale to the public via IPO has been one traditional exit strategy (the others being a trade sale or secondary buyout). However, recent stockmarket volatility has created a diffi cult environment for IPOs and some fund managers are sceptical about private equity-sponsored fl oats based on recent results. While these factors will not necessarily prevent a successful fl oat, they may affect the listing timetable, particularly for smaller IPOs.

Private equity might now opt for a trade sale, or secondary buyout – selling the investee company to another private equity fi rm upon maturity. In an effort to minimise market risks and transaction costs, we may also see an increase in the number of dual track sale processes, where an IPO is run in parallel with a trade sale/secondary buy-out.

Alternatively, private equity may choose to extend its typical investment holding period beyond three to fi ve years, and wait for conditions to improve. In the meantime, its focus will remain on improving performance to lift earnings growth.

New opportunities for corporatesMore than half of Australian CEOs believe that the domestic economy would be insulated from a US recession, according to PricewaterhouseCoopers’ 11th Annual Global CEO Survey. They therefore remain very confi dent about their growth prospects. In the United Kingdom (UK), by contrast, only 43 per cent of CEOs had the same confi dence.

Over 70 per cent of CEOs surveyed in China/Hong Kong stated that they were very confi dent about their growth prospects, while in India, 90 per cent were very confi dent. This bodes well for M&A activity in 2008 and indicates corporations will use strong balance sheets to grow by acquisition.

Confi dence in the Australian economy is further refl ected in the levels of corporate investment. Figure 2.6 shows private business investment has grown about 10 per cent year-on-year over the past four years.

ANZ’s latest capital expenditure survey shows that corporations plan to increase the nominal value of their investments by about 19 per cent in 2008. This indicates that the business investment boom is likely to continue for some time, despite the credit crunch.

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Figure 2.6: Australian private business investment



The tightening of global debt markets and the associated impact on private equity will bring new opportunities for corporate deal makers. Private equity’s ability to outbid corporations will be tempered. Banks will be much more comfortable lending to companies which are relatively conservatively geared and able to extract synergies.

Figure 2.7 is based on a sample of ASX-listed retailers and it indicates the strength of corporate balance sheets. It shows that the median net debt-to-historical EBITDA multiple, which is a proxy for the leverage employed, has been below 1.0 times. This is conservative compared to typical private equity-sponsored businesses which have multiples of 4.0-5.0 times. It suggests many retailers could double their current debt levels, albeit at a higher cost, at an acceptable risk level.

Despite strong balance sheets, many corporations do not need signifi cant debt to fund their growth plans. After a sustained period of record profi ts, many are cashed up and strongly positioned to fund ‘bolt-on’ acquisitions or organic expansion strategies through retained earnings.

Figure 2.7: Selected ASX listed retailers – net debt/historical EBITDA multiple

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Retail valuationsIn Retail & Consumer Outlook 2007, we predicted that valuations, which had broadly doubled in recent years, would plateau and could cool because private equity’s required returns were at minimum levels given the high degree of fi nancial leverage employed.

A year later, tightening economic conditions have put retail valuations under pressure. Risk premiums have risen because of the discretionary nature of many retail assets and their heavy reliance on consumer confi dence.

Figure 2.8 which is based on a sample of ASX-listed retailers, shows that valuations forecast for fi scal 2008 are not as strong as those for fi scal 2007. More specifi cally, the median one-year-forward price-earnings ratio (PER) fell from about 17.0 times in fi scal year 2007 to 13.0 times (down 24 per cent) in 2008.

But not all retailers in the sample are forecast to decline in value. Almost 20 per cent, largely those in non-discretionary retail sub-sectors, were forecast to increase in value. Not surprisingly, the forecast PERs of fashion retailers deteriorated the most.

Figure 2.8: Selected ASX listed retailers – One year-forward price earnings ratios (PER)

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How does the current climate affect your strategy?Fundamental changes in the M&A landscape require shareholders and senior management to revisit their strategic plans. Retail and consumer goods companies seeking growth through acquisition have new opportunities. For example, more favourable valuations, and the ability to better compete with private equity for funding. On the fl ipside, those seeking an exit can no longer expect to ride on the coat tails of private equity. Savvy buyers will examine each business on its merits, valuing underlying maintainable earnings over risky growth potential (eg a signifi cant store roll-out strategy compared to historical track record and market constraints).

While dynamics in the M&A landscape have changed, this does not necessarily mean that shareholders and senior managers should delay or reformulate their strategic plans. The M&A outlook remains reasonably positive, particularly for deals that make strategic sense. That said, shareholders and senior managers must rethink how they will execute plans to maximise value.

So what is it to be – are you staying to compete, or seeking an exit?



Staying to competeCompanies in mature retail and consumer goods sub-sectors must pay at least as much attention to achieving top-line growth as they do to increasing the bottom line. Cost reductions, while important, are not sustainable indefi nitely. Revenue growth is essential to drive earnings and minimise the risk of being left behind or taken over.

There are three main ways retail businesses can grow revenue: they can expand their range of products or service offerings, enter new markets at home or abroad, or take out a competitor to increase market share.

The path to growth can be through a merger or acquisition, or a partnership with private equity. In terms of the latter, a 2007 survey by PricewaterhouseCoopers and the Australian Private Equity and Venture Capital Association (AVCAL)1 found that a private equity environment fosters innovation, increases growth through further acquisition and improves effi ciencies and cash fl ow.

Whichever path you choose, investment is required. Funding may come from retained earnings or an external source, depending upon the urgency of growth plans, the capital required and management’s skill set. External funds could come through a leveraged recapitalisation, sale of an equity stake or a joint venture.

Heading for the exitTime an exit badly and shareholder value could suffer. Hence retailers, both public and private, must carefully consider their decisions.

Holding onto a non-core business for too long can be a problem for public companies. Senior managers who ‘shepherd’ an exit can constrain the entire organisation, impair the growth of the business unit, and signifi cantly reduce the extractable value when it is fi nally sold. Exits are often made at the worst time – at a low point in the business cycle or when earnings are declining or fl at.

To make better exit decisions, organisations should review their entire portfolio to identify core and non-core business units and assess their performance. This minimises the risk of staying too long with a business that starts to decline in value. Investing the sale proceeds into the core business can increase its value and lead to a share price re-rating.

Private companies face different circumstances, but with similar risks to shareholder value. Owners may seek an exit to resolve a succession issue, to unlock value built up over many years, or de-risk part of their investment. Regardless of the rationale, timing is again critical to maximise value.

Assuming even market conditions, businesses confi dently forecasting signifi cant earnings growth may do better by waiting. A bolt-on acquisition or an alliance could improve the underlying business before a sale. Delaying exit plans might signifi cantly increase the proceeds, particularly for those companies which are confi dent in achieving strong growth prospects.


1 AVCAL commissioned PricewaterhouseCoopers to produce a report titled The Economic Impact of Private Equity and Venture Capital in Australia, January 2008. In preparing this report, PricewaterhouseCoopers surveyed 46 companies who had received private equity backing.

Increasing your odds of successHaving identifi ed the preferred acquisition target, execution strategy and source of funding, or having carefully reached a decision regarding the timing of an exit, it is important to ensure that each strategic decision recognises and aligns with the prevailing M&A environment.

With this in mind, shareholders and senior management should carefully consider the following fi ve points, whether they decide to stay in the market or not.

1. Ensure any bolt-on acquisition makes strategic sense

Acquisitions don’t always add value. They should not be seen as a growth strategy in themselves, but as a way to do things which are not possible organically – to get new skill sets from which to innovate, to expand into new markets, or to consolidate.

Coles’ acquisition of Myer in the mid-1980s ultimately destroyed value. The rationale was to defend against a potential takeover by Woolworths. However, Coles was unsure how to position Myer against Kmart and Target and struggled to integrate it, let alone unlock any real synergies.

One of the golden rules of M&A is to focus on the business’ overarching strategy, rather than trawling the market for ‘good’ potential targets. Viewing M&A as an enabler offers the greatest potential for long-term sustainable growth. Discipline is necessary to ensure an acquisition is ‘on-strategy’.

2. Commit to a disciplined processPrivate equity has raised the bar in the retail and consumer goods sector, and its reshaping of the M&A landscape offers useful insights for corporations. Private equity’s modus operandi is that there must be compelling logic to support an acquisition. It is disciplined in valuing targets, and in formulating a post-deal integration strategy.

Signifi cant value is lost if buyers overpay for assets. To minimise this risk, buyers should review each opportunity carefully. Benchmark key performance indicators based on industry leading practice, rather than historical trends, to quantify the benefi ts of enhanced operational capabilities, size and scale, and access to new markets. This helps to ensure valuations are robust, while providing a foundation for post-deal integration planning.

The implicit and explicit costs required to achieve benefi ts must also be considered. Factor in costs beyond the typical one-off and ongoing costs necessary to unlock synergies, include the time senior management and staff spend in fi nalising a deal, and the opportunity costs of delaying other initiatives.

Similarly, the longer-term costs of inaction must be carefully weighed up. A decision not to take-out an industry incumbent may leave the opportunity to a competitor, enabling them to strengthen their market position at your expense.

Mergers & Acquisitions32 | Retail & Consumer Outlook 2008


Unlike private equity, corporations tend not to conduct detailed post-deal integration planning during M&A. Despite the strategic (as opposed to fi nancial) basis of most corporate deals, and the signifi cantly longer expected holding period, development of a 100-day plan must become an integral part of the deal process.

Investing time upfront can help businesses benefi t more quickly from a deal. In addition, integration planning ensures that all costs are fairly refl ected in the valuation analysis.

3. Select the right exit optionTypical exit options include trade sale, sale (or sell-down) to private equity, or IPO. Factors such as company size, growth prospects and shareholder objectives usually determine the most suitable option. The overriding factor is, however, the prevailing economic climate.

If confi dentiality concerns can be appropriately managed, a trade sale could be the most suitable exit path. Trade players, which have potential to gain synergies, are arguably now in a stronger position to compete on price than private equity.

Publicly listed companies have the added benefi t of being able to offer scrip or shares as part of a deal. The potential for share price accretion may tempt exiting shareholders. In addition, offering scrip may allow shareholders to defer capital gains tax until shares are cashed in.

Private equity’s keen interest in the Australian retail and consumer goods sector is evident in the acquisitions of Bras N Things, Colorado, Godfreys, Moraitis, Myer, PAS Group, Rebel Sport, Red Rooster, Repco, skins and Tegel. Despite lower available leverage and higher cost of debt, the love affair is expected to continue.

Sale to private equity remains an attractive exit option, particularly for shareholders seeking to de-risk their investment while retaining a smaller equity stake. Depending on shareholder objectives, many private equity funds will consider joint venture or even minority stakes.

A retained stake permits shareholders to benefi t from any value created over the investment holding period, which is typically three to fi ve years. In addition, it gives shareholders the fl exibility to make a full exit within a known time period.

The recent volatility in fi nancial markets will restrict the IPO exit option over the next three to six months. Private businesses whose primary objective is exit will be less attractive to investors than those pursuing growth. Large companies with strong prospects should weather the storm, however, small companies may be more susceptible to market sentiment. Regardless, those considering an IPO in 2008 should consider the second half of the year. This would allow the market to settle and increase the likelihood of success.

A dual track sale process, where shareholders prepare for two exit options and hold off on selecting the preferred one until the last minute, should also be considered. This increases costs, but could help shareholders achieve their objectives.

4. Manage value expectations with a renewed focus on fundamentals

Businesses are unlikely to achieve the giddy double-digit multiples paid by deal makers over the past 18-to-24 months. Those seeking an exit can no longer expect to ride on the momentum created by private equity. Savvy buyers will go back to basics in valuing assets. Investors will show less appetite for businesses that forecast high growth without a strong historical track record of increased earnings.

Shareholders and senior managers who are not prepared to sell at a price commensurate with their perceived value of such growth opportunities will be forced to delay their exit plans until they have tangible evidence of the forecast growth, or revisit their value expectations in light of the recent repricing of risk premiums.

5. Minimise perceived risks when preparing for a sale

The higher the risk, the lower the value. Hence, shareholders and senior managers should attempt to minimise any perceived risks associated with the business before trying to sell.

Poor documentation is a common problem among private businesses and growth plans are often not formally captured. This can make it diffi cult for a buyer to see the true potential of a business beyond its one-year forecast. A documented three-to-fi ve-year business plan, including supporting fi nancial model(s), is critical.

A business that is heavily reliant on an owner-operator can increase its perceived risk profi le. In such circumstances, a new management team or existing senior employee should be groomed to succeed the owner and take over many of the day-to-day operational responsibilities.

Bolt-on acquisitions can make a business a more attractive prospect, particularly a mature retail business that may be struggling for top-line growth and needs to increase market share. If integration is relatively easy, an acquisition could greatly increase product market penetration and the business’ value.

Rising fuel, product, wages and borrowing costs are putting increasing pressure on retail margins. Businesses that cannot quickly pass these on to consumers must seek offsetting cost savings, such as supply chain improvements.

Heavily geared businesses are particularly unattractive in the current economic climate. Sellers must look for opportunities to pay down debt quickly, such as by selling surplus and/or non-core assets. For example, retailers which own a warehouse or store unit could consider sale and leaseback options.


Take actionReview your strategic objectives in light of the prevailing economic climate.

Use M&A as a tool to enable growth, not as a growth strategy.

Learn from private equity and professionalise your M&A process.

Consider all costs (implicit and explicit) when valuing prospective targets.

Consider sale enhancement strategies to grow earnings and, hence, value, while buying time to better prepare for sale.

Seek greater efficiencies to reduce margin pressure and to drive profitability.

Reassess your value expectations in light of higher prevailing risk premiums.

Consider delaying an exit if significant earnings growth is expected.

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Lorcan Barden | Associate Director PricewaterhouseCoopers Corporate Finance+61 3 8603 3062 | [email protected]

Lorcan provides lead fi nancial advisory services to both public and private companies. Lorcan’s primary focus is in the retail sector, where he has undertaken a range of assignments including acquisitions, divestments, private equity transactions and strategic options reviews.

Greg Keys | Partner PricewaterhouseCoopers Corporate Finance +61 3 8603 6376 | [email protected]

Greg leads PricewaterhouseCoopers Corporate Finance team in Melbourne. Greg’s extensive lead advisory experience acting for both public and private companies covers business divestments, IPOs and capital raising as well as mergers and acquisitions.


ConclusionThe global economy has slowed dramatically over the past six months after 10 years of sustained growth, and the US is arguably already in recession. However, despite fi nancial market instability, Australia’s outlook remains positive, albeit tougher.

Nevertheless, the M&A landscape in Australia has altered signifi cantly. Cheap debt is a thing of the past, and the balance of power has shifted from private equity in favour of corporations. Deal makers now face new risks and opportunities, which will determine when and how deals are done.

The decision to stay to compete or seek an exit – or to wait and see what happens – ultimately rests with shareholders and business managers. However, decision makers must bear in mind that the strategic option that best suited their business 12 months ago may no longer maximise its value.


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The way we see it

As an investment holding company building a portfolio of retail businesses, RCG Corporation is keeping a close eye on global credit limitations. While this tightening could make capital harder to access, it does make our proposition of combining a fair purchase price with adding value and creating synergies across a portfolio of businesses more competitive. The high valuation multiples paid by private equity fi rms, in particular, 18 months to two years ago, are not available today.

RCG originated from Retail Cube Ltd, an organisation that gave all involved some tough lessons in acquiring the right businesses that have maintainable earnings and the ability to grow. Retail Cube had combined three businesses – The Athlete’s Foot, King of Knives and Amazing Paints – into a single listed entity in 2004. It is no secret the move was not a success. About 18 months ago a new board was put in place with strong retail experience and we examined ways we could take the group forward.

We immediately recapitalised the business, put Amazing Paints into administration and after a thorough six-month evaluation decided to sell King of Knives. The Athlete’s Foot is currently RCG’s sole specialty retail business and is growing strongly with about 130 franchise and corporate stores across Australia and New Zealand.

RCG’s plan is to pursue a disciplined growth strategy that is robust enough to withstand downturns in consumer confi dence and competition for acquisition targets from private equity fi rms. We plan to complement a careful acquisition strategy with continuing to drive growth from The Athlete’s Foot.

On the growth side, we are opening eight to ten new The Athlete’s Foot stores a year, achieving double digit like-for-like store growth and identifying and exploiting category extensions such as back-to-school and team sports. We are also on track to roll out a new customer loyalty program.

On the acquisition side, we are looking to bring in synergistic businesses. To fund these acquisitions, the group successfully raised A$15 million in October 2007, predominantly from a select group of highly regarded small cap funds. RCG has also obtained support from its bankers for a substantial acquisition funding facility. We also have access to considerable additional capital from our institutional investors if required.

The Athlete’s Foot is unique among athletic footwear retailers in that our stores are dedicated to footwear only and we employ a high-service model that provides customers with optimum fi t, function and performance. Our goal is to deliver a lot more than just a ‘product and price’ offering. As a result,

we are evaluating businesses that are in the sports, fi tness, active lifestyle and wellness sector and can achieve synergies with The Athlete’s Foot and future acquisitions.

The board of RCG is determined to make the right acquisitions, not just any acquisition. We look at a number of key issues when evaluating an acquisition. We regard the people, long-term economics, maintainability of earnings and growth potential as critical to any potential transaction.

We are looking at businesses we can double over three to fi ve years rather than mature organisations with, say, fi ve per cent earnings growth rates. For certain prospective deals, we evaluate whether we can adopt a private equity-style approach – albeit with a longer investment holding period – of partnering vendors or management who have a share of the business with a view to providing capital to fuel growth.

Our strategy accounts for the expectation that the economy is going to slow in the medium term. The Athlete’s Foot is quite resilient because we target higher socio-economic groups and because the pursuit of health and an active lifestyle remains important regardless of economic conditions.

Rather than pose a problem, we expect the tightening in credit availability will allow us to compete more effectively when prospective acquisitions come onto the market. Private equity fi rms’ access to debt funding is lower and the playing fi eld is tipping towards corporates such as ourselves who can access synergies and add value to businesses in play. Our strategy is to provide a platform for investee groups to grow/expand while diversifying risk and strengthening their operating position.

In Australia, senior debt multiples have come back to three to four times, whereas in the past those numbers were a lot more aggressive. Private equity fi rms consequently cannot load as much debt into transactions, reducing their ability to compete on price. So transaction multiples are plateauing and in some cases easing in line with the trend towards reduced trading multiples of listed companies.

However, there is still a lot of money to sustain private equity activity in the retail sector and we aren’t immune from the credit issue. We are also seeing sellers taking some time to reduce their expectations of valuation multiples.

After a challenging period, we have positioned ourselves soundly for growth for the next three to fi ve years. We are well placed to cope with any softening of consumer sentiment while there is also an upside in the tightening of credit availability. Our existing business has a strong growth profi le and provides a sound platform to deliver synergies to any future investees.

Michael CooperManaging Director, The Athlete’s Foot

Hilton BrettDirector, RCG Corporation


Michael Cooper Hilton Brett

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The US$31.4 billion leveraged buyout of RJR Nabisco in 1988 was the largest in history until Hospital Corporation of America was taken over 18 years later in 2006. A 1990 book about the takeover, Barbarians at the Gate: The Fall of RJR Nabisco, was published in numerous editions and was also made into a television movie. It popularised the view that the private equity industry consists of ruthless barbarians looking to hunt down unsuspecting victims. That view lingers in the United States (US) and here in Australia, where high-profi le businesses such as Rebel Sport, Myer and Coles Group have either been taken over by private equity or had well publicised approaches from private equity in the past two years.

Market knowledge of private equity has increased since 1988 but the internal workings of private equity and how it drives value through investment are largely, as the name suggests, private. While this can be of great benefi t to the private equity-owned business, it adds to the mystique that often surrounds private equity funds. This mystique, combined with bad press, has helped tarnish private equity’s image.

Private equity fi rms might have deep pockets, but their funding costs are high – up to 25 per cent – which means they cannot simply rely on fi nancial leverage to generate returns. They will typically not consider investing unless they see ways to improve a business’ strategy or gain a competitive advantage within two to fi ve years. While they are constantly looking at ways to increase the business’ underlying value, which may involve removing costs, more often than not it involves fi nding ways to grow.

PricewaterhouseCoopers’ research confi rms that retail and consumer goods companies have more to learn about the private equity industry. It also suggests that, rather than being barbarians at the gate seeking to destroy value, private equity fi rms often add value.

The outlookPrivate equity has a mixed reputation but delivers significant benefits to the companies it invests in and the broader economy.

Private equity investors provide benefits other than financial resources, including industry knowledge and contacts and advice in areas from strategy to marketing.

Private equity investors do not simply rely on financial leverage to generate returns: they must increase the business’ value via growth and efficiency improvements.

Areas of focus for private equity include management quality and incentives, growth options, improving operations, and industry and competitor analysis.

Non-private equity companies can benefit by focusing on the same areas.

Although the debt market in Australia has tightened, especially for larger transactions, private equity funds are in a long-term growth phase.

Billions in private equity has been raised but not yet invested and new funds are being raised, indicating private equity is here to stay.

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Private Equity

Barbarians at the gate. Fact or fi ction?


Perceptions of private equityPricewaterhouseCoopers conducts the Business Insights Survey twice each year to gauge the outlook for mid-sized businesses and examine issues affecting growth over the next 12 months. A survey looking at business prospects in 2007 covered perceptions of private equity.1 (See Figure 3.1 and 3.2).

It found that, despite a rise in the number of deals and increased media attention, about half (49 per cent) of respondents had little or no knowledge of private equity

funds. Although private equity had been active in the retail and consumer sector, 38 per cent of retail and consumer respondents had little or no knowledge of private equity funds.

The largest perceived benefi t of private equity, which 34 per cent of all respondents cited, was the role it can play in creating value by developing or expanding the business. One in fi ve businesses saw it as a way to fund signifi cant capital projects and 23 per cent would use it to enter new markets.

1 PricewaterhouseCoopers Business Insights Survey: Performing 2007. (Survey respondents are chief executives and fi nancial offi cers of more than 600 businesses with an annual turnover of $20-$500 million. The 2007 survey was undertaken in November-December 2006.)

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Source: PricewaterhouseCoopers Business Insights Survey: Performing 2007

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23%

34%

17%

13%

4%

13%

25%

25%

46%

29%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Don’t know

None

Would not use

Fund significant capital expenditure

Buy out shareholding in whole

Enter new markets

Buy out shareholding in part

Development or expansion capital

All respondents

Retail and consumerrespondents

Figure 3.2: What effects would private equity funding have on your business?


Private Equity


16%

1%

2%

4%

9%

14%

18%

16%

27%

29%

39%

48%

13%

4%

4%

8%

17%

4%

13%

17%

29%

54%

50%

54%

0% 10% 20% 30% 40% 50% 60%

Don’t know

None

Other

Not applicable

Business disruption

Disclosure and confidentiality

Future outlook for the business

Use of debt finance

Lack of intimate business/sector knowledge

Change of ownership

Short-term investment horizon

Loss of control

All respondents

Retail and consumer respondents

Figure 3.3: What concerns you about private equity investing in your business?


The biggest concerns among retail and consumer goods companies considering private equity funding was loss of control and change of ownership – 54 per cent of respondents cited this fear (see Figure 3.3). The second biggest concern, cited by 50 per cent, was the change of ownership of private equity. In PricewaterhouseCoopers’ experience, most private company owners have a time horizon of more than 10 years while private equity funds tend to invest for two to fi ve years. However, shareholders in ASX-listed companies can have a shorter-term investment horizon, particularly as the performance of institutional investors is typically measured quarterly.

Interestingly, only 16 per cent of respondents saw the use of debt fi nance as a concern, although in a recent survey by The Economist Intelligence Unit, 85 per cent of the respondents in that survey were of the view that high debt burdens are a risk of private equity ownership.2 Given the tightening of debt markets, these concerns may extend not only to the amount of debt, but also the terms on which that debt is provided.

Private equity’s impact on businessIn fi scal 2007, $8.372 billion of private equity capital was raised in the Australian region, plus an extra $572 million of venture capital funds, according to Thomson Financial and the Australian Venture Capital Association Limited (AVCAL).3 In addition, $6.1 billion of private equity raised in previous

years remained to be invested. This indicates private equity funds will continue to be active in Australia (see Figure 3.4).

Since 1 July 1998, private equity has been a signifi cant source of funding for Australian business: 1,749 companies have received private equity or venture capital investment, including 217 consumer-related companies.4

Private equity is also a big employer. PricewaterhouseCoopers estimates that the private equity industry and private equity-backed companies employ up to 650,000 people, or about 8 per cent of those working in the private sector in Australia. In the United Kingdom, private equity-backed companies also employ about 8 per cent of private sector workers, or about 1.1 million people.5

In 2007, PricewaterhouseCoopers and AVCAL6 surveyed a range of organisations to analyse how private equity-backed businesses have benefi ted, fi nancially and otherwise, compared to companies which have not had private equity investment. Although the survey sample was relatively small, it nevertheless suggested that private equity backing brings a range of benefi ts.

Of the companies surveyed that had received start-up or venture capital backing, 23 per cent indicated that they sought private equity funding because it offered greater fl exibility than other sources of funding. Another 26 per cent indicated they sought private equity backing to benefi t from private equity’s industry experience.

2 Economist Intelligence Unit survey, December 20073 Thomson Financial & AVCAL Survey, fi scal year ended 30 June 20074 Ibid5 The British Private Equity and Venture Capital Association: The Economic Impact of Private Equity in the UK 2007 (published February 2008)6 AVCAL commissioned PricewaterhouseCoopers to produce a report titled The Economic Impact of Private Equity and Venture Capital in Australia,

January 2008. In preparing this report, PricewaterhouseCoopers surveyed 46 companies who had received private equity backing

Private Equity


7 BVCA, The Economic Impact of Private Equity in the UK, 2007 (published February 2008), in conjunction with research by IE Consulting8 ABS Labour Force Survey, total employees, June 2007 (seasonally adjusted)

-2,000

0

2,000

4,000

6,000

8,000

10,000

1999 2000 2001 2002 2003 2004 2005 2006 2007

$m

Private equity raised(including venture capital)

Private equity invested (including venture capital)

Private equity funds remaining to be invested

Figure 3.4: Private equity funds raised and invested in Australia

Source: Thomson Financial & AVCAL Survey, year ended 30 June 2007

Of the larger and more established companies surveyed that had sought private equity backing, 60 per cent reported increased operational effi ciency. Among companies surveyed, revenue generated from sales grew on average by 26.5 per cent during 2006-2007. A similar survey by the British Private Equity and Venture Capital Association (BVCA)7 indicated that on average, sales of private equity-backed companies rose by 8 per cent annually, compared with 6 per cent for FTSE 100 companies and 5 per cent for FTSE Mid-250 companies.

In addition to providing fi nancial capital, as Figure 3.5 highlights, private equity can offer benefi ts ranging from industry contacts and advice on strategy and marketing through to help with recruitment. ‘Strategic direction’ was cited as the most signifi cant contribution aside from funding. A 2007 BVCA study (see Figure 3.6) delivered similar results, with nearly half of respondents listing strategic direction, fi nancial advice and contacts as the three key ways in which private equity had helped develop their businesses.

The survey undertaken by PricewaterhouseCoopers for AVCAL found that private equity involvement has had a positive impact on employment growth and staff satisfaction. During 2006-2007, among the companies surveyed involved in management buy-outs, FTE staff increased by 56 per cent, while among fl edging companies receiving venture capital, staff increased by 34 per cent. This compares with nationwide employment growth of 2.5 per cent8 during the same period.

Of the companies surveyed by PricewaterhouseCoopers, 56 per cent indicated that staff satisfaction had increased since the involvement of private equity, while 40 per cent thought it had stayed the same. In the BVCA study, 75 per cent of respondents thought that their management buy-out had had either a positive or very positive impact on management, and 68 per cent said that it had given them more freedom to innovate.

Private Equity


A Dunn & Bradstreet National Business Expectations Survey9 carried out in late 2007 found that private equity-backed companies were more optimistic about sales, with 48 per cent of surveyed companies expecting their sales to increase compared to an Australian industry-wide expectation of 42 per cent.

This confi dence was not restricted to the outlook for sales: the survey highlighted that private equity-backed companies had more confi dence in their ability to hire staff, at 48 per cent versus the Australian industry average of 13 per cent.

Private equity-backed companies also reported that total capital investment grew at an average of 25 per cent during 2006-2007, outperforming the forecast average annual Australian growth in new private capital expenditure of 11.4 per cent.10

How does private equity generate value?Private equity investors do not simply rely on multiple arbitrage – buying a business on a low earnings multiple and selling on a higher one – or fi nancial leverage to generate returns. Rather, before investing, private equity will explore ways in which it can improve the underlying growth profi le or operational effi ciency of a business.

A leading Australian private equity fund, Pacifi c Equity Partners, recently stated that revenue growth accounted for 61 per cent of investment gains, multiple expansion for 17 per cent and balance sheet management and cost reduction only 11 per cent each.

While private equity investors do not adopt a one size fi ts all strategy to investment, there are common themes that they will always address.

Management quality and incentives Private equity investors are no different to listed or private businesses in seeking the best management talent available. As a sale can be a transforming event, it allows a private equity investor to reinvigorate the existing management team – typically the preferred approach – or strengthen it with external hires.

In addition to ensuring the team has the required capabilities, private equity will encourage key members to take an equity stake in the business, through which they can generate signifi cant returns if they hit certain targets, or key performance indicators. This aligns managers’ interests with those of the private equity investor, and gives them a fi nancial incentive to drive profi table growth and improve operations.

9 Dunn & Bradstreet National Business Expectations Survey, September 200710 Australian Bureau of Statistics, Private New Capital Expenditure and Expected Expenditure, Australia, June 2007 (seasonally adjusted)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Contacts Strategicdirection

Financialadvice

Managementrecruitment

Marketing

Figure 3.5: Companies which experienced added benefi ts through private equity (Australia)

Source: AVCAL, The Economic Impact of Private Equity and Venture Capital in Australia, January 2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Financialadvice

ContactsStrategicdirection

Managementrecruitment

Marketing

Figure 3.6: Non-fi nancial contributions to private equity-backed companies (UK)

Source: BVCA, The Economic Impact of Private Equity and Venture Capital in the UK, 2007

Private Equity


Growth options – organic or via acquisition Whether it involves entering new geographic regions or product categories, continuing a store roll-out or taking over rivals, private equity will invest further capital if that is required to continue to grow the business. Two examples illustrate this.

When Macquarie Direct Investments bought JB Hi-Fi in July 2000, it had 10 stores and revenue of around $140 million. When Macquarie Direct sold its shareholding in October 2003, JB Hi-Fi had grown to a network of 26 stores with revenue of $356 million. Today, JB Hi-Fi has 89 stores across Australia and New Zealand (with a longer term target of circa 150 stores)and has revenues in excess of $1,600 million. Further, Patrick Elliott, the individual responsible for the initial private equity investment, remains on the JB Hi-Fi board today as its chairman.

When Archer Capital bought sports retailer Amart Allsports in September 2004, Amart was a Queensland-centric 26-store chain. Archer funded an organic store roll-out to other states, and in September 2005 backed Amart in acquiring Australia’s No. 3 sports retailer, Rowe & Jarman. In March 2007, Archer provided further fi nancial backing to enable Amart to acquire Australia’s largest sports retailer, Rebel Sport.

Operational improvements Opportunities for operational effi ciencies can be a key attraction for private equity. These effi ciencies can take many forms, ranging from improving working capital and inventory management to improving supply chains and distribution effi ciencies. All have the simple objective of improving the business’s profi tability.

During due diligence, private equity investors undertake extensive benchmarking analysis, comparing the target to competitors and like companies, both domestically and internationally. While a private equity investor might identify where improvements can be made, it usually relies on the management team to deliver the effi ciencies.

Because operational improvement targets are among the KPIs set for management, it has a signifi cant incentive to do better. For example, since a TPG led syndicate acquired the Myer department stores in March 2006, the performance of the business at both the revenue and the profi t levels has improved signifi cantly. This improved performance has been driven not only by effi ciency improvements, but also by investing further capital expenditure in the business.

Industry and competitor analysis Before investing, private equity will typically form a top-down view of the industry to assess its growth profi le and the threats it faces. Private equity will assess the competitors in the industry and the ability of the target to compete against or even acquire those targets.

Can businesses achieve similar benefi ts without private equity?Ignoring the signifi cant benefi ts of access to capital, it is possible for non-private equity companies to enjoy some of the additional benefi ts private equity brings.

Retail & Consumer Outlook 2007 discussed the issues and options for public and private companies in seeking to offer private-equity-like incentives. Those issues and options remain pertinent today. Aligning the interests of management and shareholders is key in identifying and delivering those added benefi ts.

A board with external appointees is mandatory for public companies but not for private companies. While a board with external appointees may appear to be an unnecessary layer of bureaucracy, it can have many benefi ts, including:

bringing external perspectives to a business

challenging accepted industry wisdom

offering external assistance in deciding strategy

broadening the range of contacts available to shareholders and management.

Even the discipline of reporting regularly to a board can improve a business’s fi nancial focus. Should shareholders look to exit the business, a regular reporting system will give comfort to potential bidders which may be refl ected in their pricing.

Even if shareholders are not considering selling, it can be a worthwhile investment to prepare for, or run, a mock sale exercise (eg a listed company might prepare a takeover defence strategy). When looking to sell a business, vendors aim to highlight not only its strengths, but also avenues of potential growth and operational improvement. Undertaking such an exercise in case of a sale or an unsolicited approach can drive shareholder value.

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Private Equity


Take actionInvestigate and improve your organisation’s interaction and communication with the board/owners. Regular reports bring discipline and focus to financial management.

Understand the value of your business through a mock sale exercise for all or part of your company. Identify areas where growth and efficiencies can be achieved.

Identify key managers and give them incentives to improve and remain with the business.

Consider growth and exit options to add value to the business.

Complete a benchmarking exercise to identify new efficiencies in your business.

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Private Equity

ConclusionIn addition to any residual image issues stemming from the buy-out era in the US during the 1980’s, private equity’s reputation has suffered because its operations are necessarily hidden from public view. The popular view of private equity fi rms as ‘barbarians at the gate’ is largely undeserved.

PricewaterhouseCoopers’ research has found that Australian companies, including retail and consumer goods companies, still have much to learn about private equity. Our research suggests companies are already benefi ting from the resources, other than funds, that private equity fi rms bring.

Private equity offers a valuable example to non-private equity fi rms in lifting profi tability through a focus on management quality and incentives, growth options, and benchmarking and analysis.

For non-private equity fi rms looking to emulate private equity, aligning the interests of management and shareholders remains the key to growth.

James Gulbin | Director PricewaterhouseCoopers Corporate Finance +61 2 8266 0868 | [email protected]

James leads the PricewaterhouseCoopers Corporate Finance retail & consumer goods team in Sydney and has extensive experience providing fi nancial and strategic advice to both public and private companies and private equity investors. James has advised companies and private equity investors on a broad range of assignments, including IPO’s, acquisitions, divestments and strategic options reviews.

Dan Cotton | Partner PricewaterhouseCoopers Corporate Finance+61 2 8266 3053 | [email protected]

Dan has extensive experience in corporate fi nance and investment banking with a focus on mergers and acquisitions, private equity and capital raising. Dan spent fi ve years with Goldman Sachs JBWere and prior to that was with Grant Samuel. Dan has advised on numerous transactions covering a wide range of industries: capacity to identify and manage the highest value and most appropriate exit strategies in divestments.


Terry SmartChief Operating Offi cer,JB Hi-Fi

The way I see it

John Barbuto fi rst set up JB Hi-Fi in 1974 in East Keilor, Melbourne to sell hi-fi equipment and recorded music at low prices. In July 2000 former Kodak Australasia director Richard Uechtritz and myself collaborated with a consortium of private equity investors led by Macquarie Direct Investment Ltd to undertake a management buy-in. Our Non-Executive Chairman is Patrick Elliott, Executive/Director of private equity manager Next Capital and a former Executive Director of Macquarie Direct Investment while Richard is our Chief Executive Offi cer.

At the time of the management buy-in we had 10 stores and sales of around $140 million. At the time of our initial public offering in October 2003, we had expanded that to 26 stores.

The experience we had with private equity not only helped us in our listing, but also provided a platform for the very strong growth we have been able to deliver since listing. The Macquarie Direct managers – Patrick in particular – had experience in retail and provided a robust sounding board for new ideas. They often played devil’s advocate and challenged the proposed strategies we had going forward.

Having that in-house advisory source was also crucial to our listing in 2003. A lot of businesses can underestimate what is involved in taking a private company public. There is a lot that needs to be done and a lot that needs to be thought about not only for the listing itself but the subsequent structure and direction of the business. Patrick and his team had the contacts within the investment community, the understanding of the steps that needed to be taken before a fl oat and the experience to help us set up our procedures and systems to ensure we were heading in the right direction. The network of contacts in particular would have been harder to develop as a management team on our own.

The easier access to capital also ensured we could make the investments in areas such as human resources and information systems to prepare the business appropriately.

The three to four year horizon that private equity players have in achieving a return on their investment was not a concern in our case. We have always been a management team that makes decisions quickly. But we complemented this with a very strong business model and a sound store network expansion strategy that meant everything we were doing was for the longer term. Our private equity partner gave us a short-term focus that enhanced, rather than detracted

from, our longer-term plans. We invested capital and resources quickly to build up our systems and people to support the listing and position ourselves for future growth.

It has to be said that we could not have taken the pre-private equity JB Hi-Fi to an initial public offering. The period under private equity gave us time to sort out our systems and procedures. This process of refi nement can often result in earnings volatility that public markets are less likely to understand and support. The fact our deal was structured as a management buy-in, not a management buy-out, really smoothed the relationship we had with our private equity partner. A management buy-in essentially involves a partnership whereby you are collaborating on setting strategies and processes together. In a management buy-out the private equity partner may challenge processes and this may be confronting for the other parties.

While private equity players obviously do strong diligence on the management of target companies, it is important that the management teams do the same on prospective partners. We were very committed to achieving a win-win result so we ensured that our private equity partner could complement our strengths and “fi ll the holes” in the expertise of our team.

There is no question that life in 2008 is more complicated than it was during our period under private equity ownership. That may be attributable in part to the fact we were a smaller company then, but with private equity you are obviously dealing with a limited number of shareholders, communication can be a lot easier to manage and access to capital can be simpler. We do not operate differently than we did under private equity, but obviously as a public company you have to invest far more management time in dealing with shareholders and complying with regulatory requirements.

The systems, processes and investments we put in place under private equity ownership still stand us in good stead today. In March we announced plans to ramp up our expansion of JB Hi-Fi branded stores. Instead of growing from our current 85 stores to about 120 over the next four to fi ve years, we now expect to grow over that same period to about 150 stores. Our sales forecast for the 2008 fi nancial year is around $1.8 billion, 40 per cent up from 2007. Without the early private equity investment, I do not think we would be looking at these sorts of targets today.

Private Equity

Sup

ply

Cha

in

04


The Australian grocery supply chain has been transformed over the past fi ve years as Woolworths and Coles, in seeking to reduce their costs and improve on-shelf availability, have adopted and tailored to the Australian market the supply chain practices of leading European and United States retailers. However, the Australian grocery retail supply chain still has some way to go before it operates as effi ciently.

Previous editions of Retail & Consumer Outlook have mapped the changes in the supply chain and their impacts, from the controversy over factory gate pricing to initiatives such as shelf-friendly packaging and collaborative planning, forecasting and replenishment.

This year we look beyond these initiatives to the trends and imperatives that will drive the market over the long term: more demanding consumers, climate change, globalisation and rapid technological advances, and economic uncertainty.

The changes the two big grocery retailers set in play will continue as the industry is forced to collaborate more effectively to serve a market in which freshness, convenience and sustainability will become paramount.

Supply Chain

Getting fresh... the new battleground

The outlookTransformation will continue and become part of business as usual, yet fully realising its benefits may remain a challenge. Some initiatives will be mothballed and/or changed considerably to suit the Australian market eg collaborative planning, forecasting and replenishment.

Greater supply chain collaboration will be put back on the agenda, to address problems with on-shelf availability and meet workplace safety regulations at lower cost.

For retailers, the battle for market share will be fought over the fresh food offering.

The quest for quality fresh produce will force increased in-store investment and could stretch the capability of upstream supply chains.

Industry participants will embrace the challenge of environmental sustainability and start measuring, reporting and reducing carbon emissions.

Anecdotal evidence suggests the margins of manufacturers may be eroded, forcing them to consider investing in non-grocery channels to market.

Leading manufacturers may explore new ways of serving the convenience, route and food service trades.

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Our research approachPricewaterhouseCoopers’ outlook for the grocery supply chain is based on research from various sources. First, we conducted secondary research, scanning the market to identify global and local trends, and sought insights from our own subject matter experts. We then conducted primary research, interviewing senior business and supply chain executives from more than 35 Australian grocery market participants, including retailers, wholesalers, manufacturers and third-party logistics (3PL) providers (see Figure 4.1).

Our research found that over the coming fi ve years, a number of trends and issues will force companies in the supply chain to reassess their priorities. We asked our respondents to rank the relative importance of issues across three categories:

Macro trends and issues affecting grocery and other major markets.

Consumer trends driving changes in tastes and preferences in the grocery market.

Grocery industry trends and issues specifi c to the local market – including competitive behaviour and key operational and strategic issues.

The critical trends and issues that our respondents cited are illustrated in Figures 4.2 to 4.4.

1.

2.

3.

Supply Chain

Figure 4.1: PricewaterhouseCoopers’ 2008 Australian grocery supply chain study approach

Key issues

Take actionSurvey responses

Secondary research

Assessment ofissues and trends

Key findingsKey issuesand trends

- Global

- Consumer

- Industry

- Lean supplychain

- Sustainability

- Global sourcing

- New channelsto market

- Technologyenablement

- Collaboration

- Fresh

- Environmentalsustainability

- Channels to market


Figure 4.2: Macro trends and issues

Changingconsumer demands

Climate change

Globalisation

Rapid technologyadvancement

Economic uncertainty (eg stagflation)

Supplier

Retailer/wholesaler

Third-party logistics(3PL) provider

Notimportant

Somewhatimportant

Moderatelyimportant

Veryimportant

Extremelyimportant

Source: PricewaterhouseCoopers’ 2008 Australian grocery supply chain study


When considering the big picture issues that may affect their businesses in 2008, respondents consistently cited changes in consumer preferences as their primary concern (see Figure 4.2). Manufacturers and retailers are equally adamant that the changing needs of consumers will drive the need for ongoing supply chain investment. We believe this must come in the form of greater collaboration between retailers and their suppliers – starting with merchandising and promotional decisions, and ultimately the development of supply chains responsive enough to adequately serve increasingly fi ckle consumers.

Interestingly, the issue of climate change rated a very close second to the needs of consumers – perhaps indicating the start of a shift from rhetoric to reality as organisations seek practical ways to reduce their environmental footprint. Again, the supply chain impacts will be substantial, forcing grocery

industry participants to focus on understanding, measuring and identifying ways to reduce their environmental footprint. This point was not lost on third-party service providers, which rated it their most pressing ‘macro’ concern for 2008 onward.

Our analysis of consumer trends confi rmed that a growing concern for health and wellbeing is likely to continue to drive purchasing behaviour (see Figure 4.3). While not a new trend, this is one that some companies have not adequately addressed, particularly with regards to the fresh food value proposition. Our respondents also cited consumers’ increasing demands for convenience and alternative channels, for example quick service restaurants, as key concerns. Together with the declining margins available to suppliers in the grocery channel, we forecast that these issues will bring some manufacturers to consider more profi table routes to market.

Figure 4.3: Consumer trends and issues*

Supplier

Retailer/wholesaler


Awareness of anddemand for new

channels (eg online)

Move away fromthe ‘middle market’

(eg online)

Greater demand forconvenient solution

Growing focus onhealth and wellbeing

A key driver of supermarket retailers’ push to develop an enhanced fresh food offer.

PricewaterhouseCoopersforecast these trends to be a growing issue for the grocery supply chain.

Notimportant

Somewhatimportant

Moderatelyimportant

Veryimportant

Extremelyimportant

* Defi nitions of the terms used:

Growing focus on health and wellbeing More fresh product and a reduction in pre-packaged goods.

Greater demands for convenient solutions Increased presence of convenience outlets as well as convenient shopping in traditional-style supermarkets with smaller pack sizes.

Move away from the middle market The division of the grocery retail market into major retail formats and smaller convenience operators.

Awareness of and demand for new channels (eg route and food service)

Consumers want to source products quickly and easily en route to or from home or work (eg at convenience outlets, fast food restaurants).

Supply Chain



Figure 4.4: Grocery retail industry trends and issues

PricewaterhouseCoopersattribute many of the issues of OSA to lack of collaboration between retailers and manufacturers in replenishment planning.

Many of our respondents were packaged grocery suppliers that had relatively less concern for retailers’ focus on the fresh offer.

PricewaterhouseCoopers forecasts this channel will grow in importance over the next 5 to 10 years.

ACCC groceryprice inquiry

Growth of conveniencegrocery retailing

Aldi growth

Retailers’ focuson fresh offer

Retailer supplychain transformation

Woolworths growth

Private label growth

Wesfarmers/Colesstrategy

On-shelf availabilitychallenges

Notimportant

Somewhatimportant

Moderatelyimportant

Veryimportant

Extremelyimportant

Based upon our interviews, PricewaterhouseCoopers believes freshness and convenience will both become more important. On-shelf availability (OSA) was cited as the most important issue over the next fi ve years (see Figure 4.4). Our retail respondents consistently cited this as a key concern for their business and said the major supermarket operators differed in their OSA performance. It is perhaps not surprising that their second greatest concern was Wesfarmers’ plans for the Coles business and what impact this may have on suppliers.

Our analysis of key issues and trends suggests four key themes will have signifi cant ramifi cations for the grocery supply chain over the long term:

Supply chain collaboration will be imperative as the challenge of on-shelf availability combines with the demand for improved workplace safety, at a lower cost of compliance.

Grocery retailers will renew their focus on the fresh offer in response to the trend towards health and wellbeing, and provide a more comprehensive offer relative to specialist fresh food retailers.

The industry must meet the challenge of environmental sustainability while avoiding signifi cant cost increases in a time of food price infl ation.

Australian manufacturers will pursue growth and improved margins in non-supermarket channels.

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Supply Chain



Collaborate, for safety’s sakeEarly in the transformation journey, collaboration was heralded as the great enabler of end-to-end effi ciency that would stop weeks of inventory from being tied up along the supply chain. Retailers and suppliers invested large amounts in data standards, synchronisation, processes and systems such as Global Net eXchange and World Wide Retail Exchange in the name of collaborative planning, forecasting and replenishment (CPFR).

PricewaterhouseCoopers studies showed growing levels of awareness and application of the technology in 2005, when 16 per cent of respondents indicated they had used the technology and program, and in 2006, when 36 per cent indicated some application of the technology and program. Suppliers in 2007 failed to see the benefi ts and correspondingly, transaction volumes through these systems declined.

Woolworths had by then changed its approach, and its new approach has become the de facto standard in Australia. Its vendor replenishment planning/vendor managed inventory program appears to be operating successfully with its automated replenishment capabilities. Coles appears to have relaunched its vendor replenishment planning program with manufacturers.

However, PricewaterhouseCoopers has identifi ed a growing need for collaboration across the supply chain. On-shelf availability remains a priority (see Figure 4.5), yet anecdotal evidence suggests it may have declined overall in the past 12 to 18 months. We believe this is because retailers have been bedding down changes to their physical distribution centre networks and freight operations. In addition, retailers engaged in signifi cant promotional activity in the second half of calendar 2007, which had a detrimental impact upon on shelf availability performance.

Over the long term, increases in global sourcing coupled with a push towards leaner supply chains will be a more fundamental challenge to OSA – a fi nding consistent with a recent Australasian study by the Australian Food & Grocery Council.1

Our research has also identifi ed that a new focus on safety and work practices should also make collaboration a priority in the minds of supply chain professionals. Chain-of-responsibility legislation and work practice regulation are forcing organisations to review expectations of order and load quantities against timing for pick-up and delivery. Failure to share and sychronise data can result in long waiting times, overloaded vehicles and extended working hours which directly affect the industry’s ability to provide a safe work environment.

Barriers to all forms of collaboration still remain, with the most pronounced being incompatible systems and lack of standards (see Figure 4.6). Why has the industry so far failed to break the standards barrier? GS12 has been endeavouring to bind Australian supply chains around a common set of standards, however there appears to be continued inconsistency in the document standards. Moreover, the major retailers have had a history of mixed investment and commitment in data standards.

Lack of trust will continue to stifl e more effective collaboration in the absence of a concerted and co-operative effort. Trust between trading partners remains a major issue with most of our respondents. Few feel that a lack of knowledge and capability is preventing further collaboration. The chart below shows how respondents across the grocery retail supply chain view resistance and barriers to further collaboration in the industry.

1 ECR Extra, March 20082 GS1 Australia is a not-for-profi t organisation that locally administers the global multi-industry system of identifi cation and communication for products,

services, assets and locations eg bar codes

Supply Chain


Figure 4.5: Supply chain collaboration initiatives – relative advancement

Supplier

Retailer/wholesaler


Optimisationof end-to-end

product flow

Collaborativetransport planning

Collaborativereplenishment andinventory planning

(including VMI, CPFR)

Data sharing

Categoryplanning/ranging

Typically historical, not current transactional data and sometimes limited to review meetings (eg monthly between supplier and buyer).

Limited to the program currently run by the likes of Woolworths eg VMI program. Coles reintroducing VPRs however some way behindWoolworths program.

Limited largely to primary freight/Coles collect programs.

Not planning/no intention to plan

Will plan for inthe future?

(5-10 years away)

Actively planningfor now?

(3-5 years away)

In pilot/early stages?

(1-2 years away)

We do this today

Supply Chain


Figure 4.6: Barriers to collaboration in the grocery supply chain

Supplier

Retailer/wholesaler


Not a factor Moderateresistance/barrier

Strongresistance/barrier

Too costly/riskyto implement

No clearbusiness case

Lack ofknowledge

or capability

Lack oftrust between

trading parties

Incompatiblesystems/lackof standards

Trust, systems and standards appear to be the major inhibitors to collaboration.



A fresh reason for changeAustralia’s grocery retailers see their fresh food value proposition as a key battleground for customers in the coming years. Woolworths recently announced plans to expand its fresh food fl oor space by up to 50 per cent. Meanwhile, Archie Norman was quick to target the improvement of Coles’ fresh offer as a key priority upon his appointment as adviser to Wesfarmers. The independent sector is not about to be left behind either. Food wholesaler Metcash has announced plans to add a fourth pillar to its business by acquiring fresh produce wholesalers. Metcash believes that offering fresh produce to its IGA supermarket network will boost fresh food sales from $600 million to $1 billion.3

However, in a recent comparison of British and Australian supermarkets, GAPbusters Worldwide found that Australian supermarkets lag behind their United Kingdom (UK) counterparts in the quality of their fresh offer. While 63-72 per cent of UK shoppers were completely or very satisfi ed with the quality of fresh produce on offer, only 40-55 per cent of Australian shoppers were as satisfi ed.4 Recent research by ACNielsen found that specialty stores had been successful because they offered better quality, range, price, location and service.5 The implication is that the supermarkets are losing market share. While the Australian and UK supply chains have major differences, there are some implications for the Australian market.

There is little doubt that Australian consumers’ relative dissatisfaction with the supermarkets’ fresh offer is in part due to price. However, addressing quality appears to be the main issue, and will have the most far-reaching consequences for the upstream fresh supply chain. The key question over the next fi ve years will be whether fresh supply chains in Australia can respond to the demands of the major retailers and wholesalers, which all plan to increase the volume, quality and price of fresh produce. This is a key point given Australia’s geographic position and the impacts of climate change and drought on price, quality and quantity.

It is imperative to reduce the time fresh produce spends in the supply chain to increase its shelf life. Now that retailers’ fresh supply chains are largely stockless, they are focusing on the time produce spends in the supply chain and on-shelf. In a recent study of a leading fresh produce supply group, PricewaterhouseCoopers found signifi cant opportunities to streamline operations and reduce inventory carrying time and improve freshness. Growers and packers were better able to match supply with demand by adapting their work practices and communicating effectively with buyers at major retailers and wholesalers. The benefi ts of such initiatives can be substantial. In this particular example, inventory days were halved in some cases in the upstream supply chain, while 10-20 per cent of packing costs were eliminated through matching machine use and shifts to demand.

These tactical opportunities will close some of the capability gaps between the more sophisticated management of manufactured food versus fresh produce. However, more fundamental structural change is likely as Woolworths, Coles and Metcash seek to secure a greater share of quality supply at lower prices. We forecast that the major fresh produce markets will enter a period of limited or declining volume growth as Metcash in particular seeks to build alternative channels to market by buying and developing wholesale distributors. In the meat category, we expect signifi cant consolidation in the distribution market as retailers seek to simplify sourcing contracts. Each of these major changes presents challenges for industries already under extreme pressure from the impact of drought.

For retailers themselves, achieving a world-class fresh offer will not be easy. Signifi cant capital expenditure in store will be required to excite consumers, and process changes will be required to ensure that quality can be maintained. Retailers will need to invest in understanding the constraints and challenges of the upstream supply chain and the capabilities required to better co-ordinate the supply of fresh produce from grower to consumer.

3 Australian Financial Review, December 20074 Retail World, July 9-20, 20075 Retail World, June 25-July 6, 2007

Supply Chain


Sustainability: the new imperativeThere is a growing awareness of environmental sustainability and how it relates to the Australian grocery supply chain. Rising energy and commodity prices will be the driving force in prompting the industry to become more sustainable over the next three to fi ve years, but customer and consumer expectations will have a growing infl uence. Based upon our research the retailer community appears to have made the least progress in reducing its carbon footprint (see Figure 4.8), which implies it will rely heavily upon suppliers and service providers to deliver sustainable retailing.

As shown in Figure 4.7, we foresee the primary drivers for an increased investment in sustainability to be those cited as least important at present: consumer, shareholder and employee expectations. As the likes of Woolworths raise the bar on sustainability with suppliers and services providers, this could change behaviour dramatically and potentially quickly.

Figure 4.7: Key drivers of supply chain sustainability

We predict that shareholders, consumers and employees will emerge as the key drivers over the coming 5 to 10 years. Leaders have demonstrated this, such as Marks & Spencer with its Plan A and Wal-mart with its employee, consumer and shareholder engagement.

Customer expectations(for manufacturers

and 3PLs)

Employeeexpectations

Shareholderexpectations

Consumerexpectations

Meeting regulatoryrequirements

Risingcommodity prices

Risingenergy prices

Notimportant

Somewhatimportant

Moderatelyimportant

Veryimportant

Extremelyimportant

Supply Chain



Not surprisingly, action on more complex initiatives such as monitoring and reducing emissions is three to fi ve years away (see Figure 4.8). Interestingly, many organisations are looking to cut emissions before setting up monitoring systems, which implies that they are further behind the play than perhaps they know: monitoring is necessary before they can report on and reduce emissions. Only 26 per cent of the organisations PricewaterhouseCoopers surveyed had formally announced a target for reporting carbon emissions.

There are a number of leaders in this space and we have watched with interest the likes of Linfox, which has appointed a chief carbon offi cer to build a monitoring and reduction program across its organisation in preparation for growing customer demand. Our observation of the relative preparedness of the Australian grocery supply chain community for a carbon-constrained economy is consistent with observations in Chapter 1, Speeding up on sustainability, which looks at developing a sustainable customer value proposition.

When and if the likes of Coles and Woolworths make sustainability a condition in their terms of trade, the grocery supply chain will be forced to comply. Leading organisations acting now will be able to amortise the costs associated with monitoring and implementation of programs over an extended period.

Recent cases brought against organisations for misleading claims of sustainability indicate regulators are monitoring this area closely.

Channels to market – changes ahead?An interesting fi nding of PricewaterhouseCoopers’ study was that a number of suppliers said they were considering putting more resources into alternative non-grocery channels such as route trade or quick serve restaurants.

In ACNielsen’s 2007 Retail Barometer, more than two-thirds of manufacturers (69 per cent) cited consumers’ growing interest in shopping in neighbourhood centres rather than large shopping centres. In addition, 61 per cent of those surveyed said non-supermarket channels were showing above-average growth for their businesses. Asked whether they were actively pursuing growth and distribution opportunities outside the major supermarkets, 63 per cent said they were or would be within the next six months, while a further 22 per cent were actively planning for it.

Australian food and grocery suppliers have access to a number of channels to market beyond the major supermarket chains. These include:

The fuel and convenience market – including major fuel retailers and 7-Eleven. This is perhaps the most organised of the non-supermarket channels with Coles Express and Caltex serviced through Coles and Woolworths respectively.

The independent and convenience grocery market – encompassing all independently operated grocery and specialist outlets. A large proportion of this market consists of IGA-bannered stores served primarily via Metcash.

1.

2.

Supply Chain

Figure 4.8: Supply chain sustainability initiatives – relative advancement

Use of carbonoffsets

Carbon emissionsreporting

Direct emissionsreduction (from

eg transport and manufacturing)

Indirect emissions reduction (from eg

packaging used)

Efficient water use

Waste reduction

Supplier

Retailer/wholesaler

3rd Party Logistics(3PL) Provider

Retailers appear least prepared to deliver an environmentally sustainable supply chain.

Inconsistency here which demonstrates lack of understanding and capability regarding emissions reduction. Typically emissions reporting is put in place prior to emissions reduction programs as you need to measure before you can reduce.

Not planning/no intention to plan

Will plan for in the future?

(5-10 years away)

Actively planning for now?

(3-5 years away)

In pilot/early stages?

(1-2 years away)

We do this today



The route market – the truly ‘disorganised’ trade of smaller outlets served either directly through smaller distributors or through Cash and Carry outlets.

The food service market – including restaurants, cafes and takeaways and licensed establishments served through largely similar channels to the route market.

Each of these markets is potentially more costly to serve than the organised supermarket trade but they also have stronger margin potential due to the relatively high fragmentation of a smaller customer base (in dollar terms) see Figure 4.9 below.

For manufacturers, the relative attractiveness of these channels to market will depend on market penetration or volume of sales and the margins available. Grocery retailers’ transformation programs have effectively driven a wedge between the supply chains supporting the organised supermarket trade and the remaining channels to market. Major retailers have been seeking to eliminate cross-subsidisation and claw back the cost of distributing supplier products via an array of rebates to these other distribution channels.

In addition, where the volume required to support an effi cient local manufacturing operation was once a source of bargaining power for grocery retailers, this is beginning to change.Most of the organisations we talked to have increased the

3.

4.

proportion of their product lines sourced globally in recent years, and many expect this trend to continue. Where a local manufacturing base does not exist, the volume ‘subsidy’ of the big retailers is not required to achieve economies of scale. In this circumstance, the favourable distribution margins of non-supermarket channels become even more attractive. The various forces and their impact on the supermarket and non-supermarket channels are illustrated in the fi gure below.

This may be starting to affect local suppliers, especially when overlaid with global sourcing and private label merchandising. Some manufacturers PricewaterhouseCoopers surveyed identifi ed instances where they might consider giving convenience, route or food service channels priority over supermarkets on the basis of margin. In extreme circumstances, this could affect supermarket supplies and possibly see manufacturers’ shift towards grocery channels.

These anecdotal accounts suggest there may be opportunities for smaller retailers to capitalise on the growth of the convenience, route and food service markets. Greater collaboration may open the door to creative solutions that will give leading manufacturers closer control of sales channels at a competitive cost in markets where distribution reach is no longer a source of competitive advantage.

Supply Chain

• Volume

• Access to markets

Retail

• Removal of cross subsidisation

• Trading terms eg rebates and trade spend

• Primary freight

• Vendor managed inventory

• Distributor dominated

• High cost to serve

• High demand variability

• Low levels of loyalty

• Growing volumes

• Stronger margins

• More direct access to the consumer

Route and food service

6 Source: Counts of Australian Business June 2003-2007, Australian Bureau of Statistics Catalogue No.8,165.0


Figure 4.9: Retail versus route and food service profi t drivers


Take actionManufacturers, wholesalers and third-party logistic providers should:

Optimise physical distribution networks to align them with retailers’ networks.

Engage with the major retailers’ collaboration programs.

Evaluate strategies for route and food service channels to capture volume and margin growth.

Investigate the costs of serving route and food service markets.

All companies should move beyond order and invoice message sharing to advanced shipping notice (ASN) and status updates, and adopt GS1 standards and standard message formats.

Retailers and manufacturers should increase the horizon for data sharing and focus on accuracy and post-event monitoring to learn from variations in forecast data.

Retailers and fresh food suppliers should investigate opportunities to accelerate inventory movement in the upstream supply chain through demand and constraint-based planning and forecasting principles.

Third-party logistics providers should consider development of consolidation centres close to retail distribution centres or packing operations.

All companies should start measuring carbon emissions and build a strategy for reducing greenhouse gas emissions.

Fresh food suppliers and distributors should anticipate consolidation and changes in route to market for key fresh categories, and position themselves to benefit.

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Oliver Sargent | Partner PricewaterhouseCoopers Advisory Performance Improvement+61 3 8603 2146 | [email protected]

Oliver is responsible for supply chain capability with PricewaterhouseCoopers’ Advisory Performance Improvement group and for the development of the Australia Grocery Retail Supply Chain. Oliver has considerable global experience with retailers in both the grocery and merchandise arenas specifi cally focused on supply chain and logistics issues.

Supply Chain

Conclusion The major retailers’ transformation programs have perhaps reached their peak, giving suppliers and transport providers greater certainty. However, problems with on-self availability and demurrage, and tighter workplace safety regulation, will force the need for supply chains to collaborate more effectively and spur further change.

Grocery retailers will invest substantially in improving the quality of their fresh food offer in coming years, driving change in the upstream supply chain and putting specialist fresh food retailers under increasing pressure.

Sustainability will become a major issue and participants should focus in the near term on measuring their carbon profi le and developing carbon reduction strategies.

Convenience, route and food service channels to market will continue to grow and become more profi table to meet consumer demands. This may present opportunities for suppliers, and challenges regarding cost-effective fulfi lment. It also presents opportunities for innovative third-party logistics and food service providers.


Australia’s grocery supply chain is beginning to emerge from a period of transformation with new distribution centres and upgraded networks more in line with standards and effi ciencies set by Europe and the United States.

For third-party logistics (3PL) operators like ourselves, change has created challenges that we have, for the most part, dealt with, such as having to relocate fl eet to places like Albury and Gosford to accommodate the increase in regional distribution centres. However, big issues such as collaboration and climate change ensure even greater challenges lie ahead.

More immediately, we’re still coming to terms with the concept of handling groceries at simultaneous, multiple temperatures, whether they’re transported in the back of a single vehicle or stored under the one roof. It remains to be seen what impact multi-temp trucks and warehousing has on our logistical service profi le within the supply chain.

At the same time, the supermarket chains are increasingly looking at improving the quality and volume of their fresh produce to health-conscious consumers. Fresher products, delivered more often: that’s the catchcry we’re hearing.

We’ve seen some trials of pick-to-zero, where a precise order of perishable items is delivered to supermarket doors and no stock is held over. If such schemes eventuate, it may trigger a further round of changes in the distribution footprints across Australia and perhaps a shift back to a more centralised distribution model. But therein lies a contradiction.

You’re going to need fresh product in every major market if you want same day, no inventory turnaround. Such a set-up doesn’t exist in a lot of cases now. Nor have supply chains been transformed to cater for the growing imperative of fresh food delivery.

We may be forced to consider a more direct supply from the source to retailer. However, in the past this has been more suited to the smaller, more specialised operators rather than the large 3PLs because there hasn’t been the return on investment. If the business model is unviable, we won’t go there.

For 3PLs like Toll, investment in a market comes down to critical mass. Non-supermarket channels – which distribute to the likes of convenience stores, cafes and quick-service restaurants – have grown more appealing to fast-moving consumer goods manufacturers as grocery channels become less profi table. But do we want to get involved? Perhaps, but

the opportunities are limited to manufacturers that are large enough to have semi-dedicated route fl eets handle their own distribution.

Collaboration by manufacturers, retailers and 3PLs to improve end-to-end supply chain effi ciency and deliver products to retailers where and when they need them – known as on-shelf availability (OSA) – was an early priority in the transformation process.

In a more recent development, chain of responsibility (COR) legislation, which spreads the responsibility for safe work practices across all parties, has revived the push to bring the industry closer together. If a truck driver, for example, has an accident and causes the death of someone through speeding or fatigue, then retailers may fi nd they have a case to answer.

But there’s something else facilitating dialogue. Retailers are in the transport game now through initiatives such as primary freight. As providers, they have a strong vested interest in seeing improved safety, lower costs and higher returns.

Dealing with environmental sustainability and greenhouse gas emissions also is going to require a degree of collaboration from the main industry players. More green shoppers means more pressure on retailers to show what they’re doing for the sake of the planet. That same pressure is, in turn, passed along the supply chain to 3PLs.

Our fi rst challenge is to provide information about the amount of fuel we consume or carbon we produce. It isn’t hard to provide fi gures for diesel consumption, but translating them into a carbon footprint can be. Initially, we need to support retailers by providing such information. Whether that leads to a carbon reading on a tin of baked beans alongside the fat or sugar content, such as UK grocer Tesco proposes, isn’t clear at this point.

How we reduce the size of our carbon footprint is the bigger challenge. Firstly, don’t expect a viable alternative to diesel any time soon. Secondly, we’ve been using technology for almost two decades designed to save fuel by loading trucks effi ciently and optimising the way we drive them.

If we want to get serious about this issue, the single biggest thing we can do is provide effi cient, cost-effective rail services up and down the east coast of Australia. Federal Government take note: it’s as boring as creating a rail corridor. If we want our kids to breathe easy, forget about a better truck; just whack freight onto a train.

Martin SvikisGeneral Manager Business Development,Toll Group

The way I see it

Supply Chain

IFR

S

05


Once the almost exclusive domain of airlines and credit card organisations, loyalty programs have proliferated in Australian and international retail markets. Businesses in the airline, hotel, retail and utility industries operate a range of programs designed to win customer loyalty and reduce reliance on discounting.

Until now, however, there has been little guidance on how to account for these programs. Varied practices have evolved which generally refl ect the retailer’s view of the transaction as a cost of sale or a cost of marketing. New international accounting rules demand a very different approach: International Financial Reporting Interpretations Committee (IFRIC) 13 looks at loyalty from the perspective of the consumer, asking what the consumer has paid for, and demands a prescriptive approach to accounting for certain types of loyalty transactions.

These new rules change the timing of profi t recognition. Many companies will need to make a signifi cant investment in IT to gather the data necessary to comply with these new rules. This information is needed for accounting periods that have already begun, so if companies do not know how the rules will affect them, the time to start investigating is now.

While a change in accounting rules should not change the shareholder value equation, IFRIC 13 is a timely reminder for operators to assess the value of loyalty programs and to fi nd ways of optimising their benefi ts. Businesses without some form of loyalty programs may want to consider whether such a program could enhance shareholder value if handled correctly.

International Financial Reporting Interpretations Committee (IFRIC) 13 applies to accounting periods which have already begun and requires a fundamental change in approach. These new rules apply from 1 July 2008.

Companies should move quickly to assess the impact of IFRIC 13 on their loyalty programs.

Those that do not quickly address IFRIC 13 will struggle to deal with the accounting implications in preparing their 2008-2009 financial reports.

A more disciplined approach in accounting will help companies maximise the value they derive from loyalty programs.

Companies may need to invest more in IT and analysis tools to take full advantage of the customer data they receive through the programs.

GST should be carefully considered when developing accounting and IT systems to support customer loyalty programs.

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The outlook

IFRS

The cost of customer loyalty


What’s in store for loyalty programs?IFRIC 13 is to be applied to all fi nancial statements beginning on or after 1 July 2008. Companies should remember that interim fi nancial reports and comparatives should refl ect IFRIC 13. The initial impact should be shown through opening retained earnings at the start of the comparative period.

The new accounting rules will affect a huge variety of programs – large retailers often run a number of different types of programs. The impact of the rules will depend on how the program is structured, but regardless of which type you operate, it is important that you assess how it will be affected in detail. Table 5.1 offers a high level guide.

Do loyalty programs pay their way?It is impossible to generalise if loyalty programs pay their way as the nature and cost of programs vary widely. Clearly the growth in the number of programs suggests that the market believes loyalty programs have value. In some cases, programs have been established to eliminate a rival’s potential competitive advantage.

However, here is little evidence of widespread, detailed assessment of how the programs affect shareholder value. In many cases it is unclear whether the benefi ts more than cover the total cost of the program when marketing, opportunity and administration costs are included.

Equally, while core benefi ts such as customer attraction and retention, cross promotion, branding and marketing are understood, it is questionable as to whether too many programs maximise these benefi ts.

Arguably the greatest unrealised opportunity lies with data analysis. Loyalty programs offer access to a rich source of information about customers which can be used to make localised merchandising and marketing decisions. Data can be collected on everything from the correlation between purchases to the time of day customers of a certain demographic shop.

While a number of Australian retailers seek to use the data derived from loyalty programs to better understand customers, few have made the necessary investment in IT and analysis to take full advantage of the data in their merchandising and marketing plans.

Questions every loyalty program operator should ask include:

Do we understand and measure the shareholder value derived?

Have we optimised the benefi ts?

How well do we use the data derived and what difference could better management of program data make to our business?

Have we made adjustments to the program in response to changes in the market?

Have the program’s benefi ts achieved increased or decreased?

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IFRS

Program type Impact of IFRIC 13

Point accumulation program Points are accrued on purchases and are redeemable for merchandise or vouchers. Some programs allow points to be redeemed for goods or services provided by other retailers. Administration of the programs may be outsourced.

Extensive. IFRIC 13 will mean sales revenue is affected and the timing of profi t recognition may change.

Refer to example 1 on page 66.

Outsourced loyalty programs may result in a permanent reduction of revenue where the retailer is acting as an agent. If you have such a program, we recommend you consult further on the accounting implications.

One-off voucher programA consumer is offered a voucher for a discount on a future purchase during a promotion period in connection with a sale.

Extensive. IFRIC 13 will mean sales revenue is altered and the timing of profi t recognition may change.

Refer to example 2 on page 66.

Cross-format program These include fuel discount vouchers whereby the consumer is offered a discount on fuel in return for a minimum spend at an associated retailer.

Moderate. IFRIC 13 will mean sales revenue is impacted and the timing of profi t recognition will change. However, where rewards can only be redeemed over a relatively short period, the effect will be reduced.

Membership programMembers of the program are offered access to special events and products or a discount on merchandise.

Variable. The potential impact on these programs depends on whether rewards are provided in connection with a sale transaction or not. If rewards are granted without requiring a separate sale, there will be no impact.

Table 5.1: High level impact analysis of IFRIC 13


What are the GST implications?Customer loyalty programs, gift cards and voucher arrangements have complex goods and services tax (GST) implications. GST may or may not be payable depending on how arrangements are structured, and when the rules are applied, more than 10 per cent (the current GST rate) of the amount received from the customer may appear to be payable as GST.

GST treatment is not affected by the changes in the accounting rules, and companies should carefully consider the GST implications when developing or updating accounting and IT systems that support customer loyalty programs, and gift card and voucher arrangements.

In PricewaterhouseCoopers’ experience, accounting systems are often not well equipped to handle these non-core transactions. Any non-alignment of accounting, management and GST reporting systems can result in signifi cant additional direct and indirect costs being incurred to administer an arrangement, thereby offsetting the expected fi nancial benefi ts.

Accounting for loyalty programs, then and nowIn Australia, the most common accounting policy has been to accrue a liability for the cost to the company when a loyalty incentive is granted to the customer. This accounting refl ects that retailers generally regard loyalty programs as a cost of sale or promotion.

IFRIC 13 looks at the transaction from the perspective of the customer and splits sales transactions into multiple elements, recognising that the customer has purchased both a product or service and a right to some future benefi t. The fair value to the customer of the loyalty benefi t acquired is deferred and only recognised as revenue upon redemption or lapse.

Loyalty benefi ts that are not provided in connection with a sale transaction are not affected by the rules of IFRIC 13.

IFRIC 13 also clarifi es the distinction between items that are adjusted against revenue and marketing expenses. It rules that marketing costs are incurred independently of a sale transaction, so any vouchers, allowances and discounts or other incentives offered to a customer as part of a sale are deducted from revenue. This clarifi cation may impact discussions beyond accounting for incentives.

Determining fair valueThe different elements of the arrangement are considered using fair values. Deferred revenue might be estimated using only the fair value of the award credits or the relative fair values of the award credits and the goods or services sold. IFRIC 13 does not mandate a specifi c approach for estimating fair value of an award credit, but requires that it is based on the fair value to the holder, not the cost of redemption to the issuer.

The fair value of an individual award credit may be estimated using the discount that the customer would obtain when redeeming the incentive for goods or services. Some customers will not redeem some or all of their award credits. The interpretation requires that the fair value of a population of award credits also takes into consideration the proportion of incentives expected to be redeemed.

Some factors that might determine the individual fair value include:

Similar discount available to other customers – Value is dependent on both what the product is and to whom it is offered. If it is a less popular item near sell-by date, it is likely to have limited value to the customer.

Similar discount to be offered in the future – If offers on popular products are few and far between they will have a greater fair value than those offered every year and have little or no impact on the customer.

Similar discounts offered routinely – If a free voucher (not requiring a purchase) is offered at the same time as a similar voucher is given out with sales, the fair value will reduce.

Some award credits have a use-by date and therefore a fi nite life. Any deferred revenue not released previously would be released when the credits expired, although this amount should not be material if expected redemptions have been updated regularly.

Award credits that have an indefi nite life are more diffi cult and the issuing entity should estimate the period over which they will be used. The estimate should be revised regularly to ensure that award credits are released in the correct period. Retailers therefore may want to revisit whether indefi nite life arrangements are suitable.

Principal or agent?IFRIC 13 requires an entity issuing award credits to determine whether it is collecting revenue on its own account – as principal in the transaction – or on behalf of the third party – as an agent – when the award credits are redeemed by the third party.

When the entity is collecting revenue it earns commission income, which is the net amount or difference between the value of the incentive and the amount payable to the third party supplying the incentive. Commission income should be deferred until the third party is obliged to supply the award and is entitled to receive payment.

When the issuing entity is acting as principal and collecting consideration on its own behalf, revenue should be measured as the gross consideration, although an element of the revenue will clearly need to be deferred. This agent-principal aspect is considered further in Example 4 on page 67.

IFRS


What data does the company need to collect?Companies that issue award credits will be required to collect the information necessary to estimate the individual fair value of the award credits and expected redemptions.

So how should the individual fair value be determined? Table 5.2 is for illustrative purposes rather than a comprehensive clarifi cation of how individual fair value should be determined.

Table 5.2: Examples of fair value

Type of incentive Indicative individual fair values

Discount voucher attached to product

Cash value of voucher

Points earned as goods are purchased

Based on value of goods points can buy

Points earned at one store to be used at other stores

Based on value of goods points can buy

Historical information will often provide the best estimate of redemption rate. When records are computerised there should be suffi cient data to make an assessment. However, the assumptions used in complex arrangements may need to be discussed with an actuary.

Estimates might be more diffi cult with informal arrangements. For example, where a customer holds a card which is stamped every time a coffee is bought, entitling the holder to the 10th cup of coffee free, it is not clear how entities will gather data to support a reliable fair value. The interpretation, however, does not provide any exception for this type of program. A method for collecting this data (including the number of award credits that have been issued and not yet redeemed) may need to be established as soon as possible to ensure fair values can be supported, and the accounting entries determined.

Revenue or other income?The award credits might be redeemed against goods or services not supplied in the normal course of business. There are two aspects to consider:

1. Most companies would not buy or trade goods that are not used in their ordinary course of business, so there is likely to be a third party involved. Hence it will be necessary to determine whether the entity is acting as agent or principal.

2. When there is no third party involved, the guidance in Australia Accounting Standards Board (AASB) 118 should be applied to determine whether the credit is revenue or other income.

LossesWhat happens when an incentive would result in a loss on future sales? Retailers often offer discount vouchers to encourage customers to make return visits to the store. No liability is recorded on these price reductions except where redemption will result in products (or services) being sold at a loss.

Where a loss will be made, the seller has created an onerous contract, and provision will be made in accordance with AASB 137. When the incentives are redeemed, the seller should recognise revenue at the amount received for the product; that is, after deducting the discount granted on the normal selling price.

Free vouchers are not within the scope of IFRIC 13. However, in the unlikely situation that an award credit within the scope of IFRIC 13 is issued which leads to a loss on sale of the later item, the award credit arrangement would also be accounted for as an onerous contract.

IFRS

66 | Retail & Consumer Outlook 2008 IFRS

A customer receives one loyalty point for every dollar spent in store.

Under the terms of the loyalty program, customers must accrue at least 1000 points to redeem any rewards.

Points are valid for two years.

Points are redeemable for gift vouchers to be used in store.

1000 points earn the customer a $20 gift voucher.

For the purposes of this example, assume that the fair value of points to the customer is 2c per point and the cost to the company of each point is 1c.

For this example it is assumed that all vouchers issued are ultimately redeemed.

Transaction

A customer purchases a toaster for $55 and earns 55 loyalty points. The toaster has a cost of $38.

IFRIC 13 accounting

The customer has purchased two things, a toaster and loyalty points. The proceeds of the sale must be split between the purchase of the toaster and the loyalty points.

The amount attributable to the toaster is recorded as a sale immediately, while the fair value to the customer of the loyalty points is deferred on the balance sheet and the sale only recognised upon redemption or lapse of the vouchers issued.

Therefore the following entries are required upon sale:

Sale

DR Cash/receivable $55.00

CR Sale (toaster) $53.90

CR Deferred sale (points) $1.10 (55 points at a fair value of 2c each)

Cost of sales

DR Cost of sales (COS) $38

CR Inventory $38

Net profi t recorded at the time of sale under IFRIC 13: $15.90

Revenue recorded at the time of sale under IFRIC 13: $53.90

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Accounting under existing practice

Currently the full sale is recorded and a provision raised for the loyalty points granted. The provision is generally measured at the cost to the company. Therefore the following entries would currently be recorded:

Sale

DR Cash/receivable $55.00

CR Sale (toaster) $55.00

Cost of sales

DR COS $38

CR Inventory $38

Provision for loyalty costs

DR COS/marketing expense 0.55

CR Provision for loyalty costs 0.55 (55 points at the cost to the company of 1c)

Net profi t recorded at the time of sale under current practice: $16.45

Revenue recorded at the time of sale under current practice: $55.00

The result is that sales income and profi t that would have been recognised immediately are deferred under IFRIC 13.

This should result in a net difference in the profi t and loss during the period in which the sale occurs.

Issues relating to how to measure the fair value of points to the consumer are covered in Example 3.

Example 1 – Splitting loyalty program proceeds

A retailer sells a toy for $20. A voucher entitling the bearer to a discount of $6 on a subsequent purchase of the same type of toy is issued with each sale. Another retailer normally sells the toy for $18 without the provision of such a voucher. The retailer has historical experience that for every two vouchers issued, one is redeemed.

The customer is purchasing both the toy and a voucher. Therefore, part of the consideration received should be allocated to the discount coupon. The revenue should be allocated based on the fair values of the toy and the coupon. In the absence of other factors, the individual fair value of the voucher would appear to be $4. This is calculated by comparing the normal sales price for the toy ($18), to the price at which a toy can be purchased using the voucher ($14). This value is then adjusted for the proportion of vouchers expected to be redeemed (50 per cent).

The consideration received is equal to the aggregate fair value of the toy and the voucher.

The accounting entry when, say, 10 toys are sold and the vouchers are issued is:

Sale

DR Cash/receivable $200

CR Revenue $180

CR Deferred revenue $20 ($4 value x 50% to take into account expected redemption)

When a single voucher is redeemed, the accounting would be as follows:

DR Deferred revenue $4

DR Cash $14

CR Revenue $18

The amount of revenue recognised upon redemption of the voucher is based upon the number of vouchers redeemed relative to the total number expected to be redeemed. Given that only half of all vouchers are expected to be redeemed, revenue of $4 is released on the redemption of each voucher.

Example 2 – One-off vouchers

Retail & Consumer Outlook 2008 | 67IFRS

Company A runs an independent loyalty card program. Company A has contracts with a number of retailers, which can issue or redeem points or both as part of the program.

A customer holds a loyalty point card which is issued by Company A and allows the customer to earn points at a given list of retailers and use points at other retailers.

The face value of the point issued is $1 and for each point issued, the issuing retailers will pay $0.98 to Company A, in doing so earn $0.02 of commission income. Once the issuing retailer has paid Company A it has no further obligation to the customer.

When a retailer redeems points with a face value of $1, it will receive compensating cash from Company A of $0.91. Company A’s margin is the difference between the redemption price and the issue price.

Where a retailer both issues and redeems points, there is no netting of cash fl ows: cash is paid to Company A for points issued, and cash is received from Company A for points redeemed.

The benefi ts for the participating retailers are:

there is no need to administer the program

there is no obligation in respect of outstanding points, and the retailer can exit the program

fair value for the customer will be higher if the points are redeemable at a variety of stores.

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The accounting for such a program is as follows:

When the retailer makes a sale of $10, it issues points with face value of $1:

DR Cash $10.00

CR Revenue $9.00

Cr Commission income $0.02

Cr Liability to A $0.98

When the risks and rewards associated with the points are immediately passed to Company A, the liability is offset:

DR Liability $0.98

CR Cash $0.98

When the points are redeemed, the redeeming retailers will recognise the revenue made by the points with a face value of $1 at $0.91:

DR Receivable $0.91 from Company A

CR Revenue $0.91

Fair value to the customer should be signifi cantly greater than the cost to the company, although the difference is likely to be less where margins are low. If it is not, it may be time to reassess your loyalty program.

A customer receives one loyalty point for every dollar spent in store.

Under the terms of the loyalty program, customers must accrue at least 1000 points to redeem any rewards.

Points are valid for two years.

Points are redeemable for gift vouchers to be used in store.

1000 points earn the customer either a $20 gift voucher or retail merchandise with a sale value of $20.

A number of changes to the program have affected the range of products available to the customer as rewards.

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Transaction

A customer buys a toaster for $55 and earns 55 loyalty points. The toaster has a cost of $38.

On the face of it you would say that the value of the incentive is $1.10 or 2c per point. (ie the $20 retail incentive divided by the 1000 points required = 2c per point). However, the customer would consider a number of other factors when assessing the value of the incentive which would therefore infl uence the sale transaction.

Clearly in this case the need to earn a minimum level of points would diminish the incentive’s value given that the customer may never reach the minimum level or may take a long time to reach it. The use-by date of loyalty points and changes to the program may also affect customers’ valuation.

In any case, the fi nal fair value to the customer of the points is likely to be less than the $1.10 determined based solely on the gross value of the amount that can be redeemed.

This example highlights that the calculation of fair value to the customer is not necessarily a simple exercise and will require signifi cant data and potentially actuarial methods to calculate.

Example 3 – Assessing fair value in loyalty programs

Example 4 – Awards supplied by a third party


Take actionUnderstand the accounting implications of your loyalty program; expert advice may be required.

Assess your current IT systems to determine whether they have the ability to capture the data needed to comply with IFRIC 13.

Determine the GST implications of your loyalty program; expert advice may be required.

Understand and determine the shareholder value derived from the company’s loyalty program.

Consider options to increase the program’s value.

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Daniel Rosenberg | Partner PricewaterhouseCoopers Assurance +61 3 8603 3886 | [email protected]

Daniel has a broad range of experience in providing advice and assurance to retail and consumer companies in both Australia and the United Kingdom. Daniel has deep knowledge of IFRS and is the Australian Firm’s representative on the Global Retail & Consumer Industry Accounting Group which is charged with bringing practical solutions to technical issues.

IFRS

ConclusionThere are many and varied loyalty programs in the marketplace. Each has a unique set of conditions and circumstances. New accounting rules require a fundamental change in accounting for the costs of these programs. Data collected to comply with the new rules offers companies an opportunity to fi ne tune loyalty programs and gain more value from them.


The way I see itChris LauderGroup Financial Controller,Myer

The MYER one loyalty program was established in August, 2004 while Myer was still a part of the Coles Myer Group. When Myer was sold to the TPG private equity group in June, 2006, the program was retained.

The prevailing view of the new owners was that MYER one was a very powerful customer loyalty tool, fulfi lling its principal aim of building a loyal customer base that added value to the business. Today, it has more than 2 million members, contributing to more than 55 percent of total sales.

It’s fair to say that MYER one is among the most rewarding loyalty programs in the marketplace. The loyalty program works like this: as a MYER one member, every dollar spent in-store earns two reward points. Each quarter, members’ reward points are automatically converted into dollars and transferred onto a MYER one gift card where members have met the required spend. Members are rewarded with a $20 gift card once they reach 2,000 points. The program also includes targeted mail-outs of special offers and exclusive previews to headline events.

MYER one is designed to retain customers as well as attract new shoppers to our stores. But it also keeps us in touch with our customers, identifi es who they are, and lets us analyse patterns of behaviour. Apart from being a rich source of data about our clientele, the program enables us to make sure our key customers know when promotions of interest to them will be occurring.

As a broad observation, not too many Australian retailers are using this kind of data effectively. Nor analysing it in such a way that derives maximum value from it. Myer is aware of that.

With the data collected, our promotions can be carefully tailored. Special offers induce shoppers to buy more often or differently, which tends to lift their spend. For instance, if a member buys a lot of business shirts, he may be tempted by a discount on a suit. By rewarding our loyal customers with gift cards, they are encouraged back to redeem them, frequently spending above the card’s face value.

However, from 1 July 2008, a new ruling by the International Financial Reporting Interpretation Committee on customer loyalty programs – IFRIC 13 – changes the accounting of these programs with the objective of ensuring greater consistency across global retail markets. In the process, the focus switches from programs as a cost of sale or marketing to a value paid by the consumer.

At Myer, we have systems already in place that track the costs of our loyalty program, without intruding on our basic set of retail results. In managing the business, we aim to report internally and externally to one version of the numbers – one version of the truth.

The IFRIC ruling adds another layer that challenges the company by creating an accounting difference between the way we manage the business internally and how we report the fi gures to the market. Instead of simply a cost, loyalty is seen more as a retail item, just like fl oor stock. So the question is, do we need to report two versions of the truth?

It’s early days. We are still assessing the implications the ruling has on our IT systems and reporting processes. As a business, we don’t yet know whether data we use will be suffi cient to comply with the IFRIC standard. It may be a different range of assumptions and methods to calculate fair value to the customer is required; but any impact is likely to affect how we report that value rather than how we calculate it.

The same applies to the Myer Visa card, which earns holders three MYER one points for every dollar spent in-store and one point on any non-Myer transaction. It also needs to be carefully assessed, particularly as it’s unclear whether it is included within the scope of the standard.

Having said that, though, IFRIC 13 isn’t going to alter the way we run a loyalty program. We believe we have solid IT infrastructure to handle the changes; but it may prove more challenging for other retailers, particularly where the benefi ts are more marginal and there is little IT in place. In these instances, the value of the loyalty program may be questionable.

IFRS

Tax

06


How Australian businesses perform depends largely on their effi ciency and effectiveness, but also on the regulatory systems which support business. The taxation system has come under much scrutiny in the past decade and tax matters are high on the agenda of management and other stakeholders. Companies are under increasing pressure to manage and report their tax obligations well, and to do so they need a better understanding of how the tax system works.

Australia’s federal corporate income tax system imposes an unusually heavy tax burden on business by global standards. However, corporate income tax is only one of 21 Federal and 34 State and Territory taxes. Businesses operating Australia-wide face a total of 169 potential taxation obligations, or taxing points, excluding Local Government obligations. The effects of this complex, multi-layer system are still not well understood.

PricewaterhouseCoopers research1 shows the cost of tax collection is particularly heavy for companies in the retail and consumer goods industry, where the goods and services tax (GST) often applies to a high volume of transactions. Employment taxes, such as payroll tax and the Pay As You Go (PAYG) collection on wages, are also burdensome because of the sector’s relatively high labour intensity and high staff turnover.

There is an emerging debate about the effectiveness of Australia’s taxation system. There are some positive signs that governments understand the need to make the system more internationally competitive. At the Australia 2020 Summit hosted by the Rudd Government in April 2008 tax was considered as part of the “Future of the Australian Economy” topic. A major theme coming from the debate was “...the need for a holistic tax system that is fair, simple and effi cient. Australia needs a tax system that supports the global competitiveness of our economy, provides incentives, minimises distortions and supports fi scal responsibility.”2 Delegates recommended a comprehensive review of Australia’s tax system and considered simplifying the system. Meaningful reform will unquestionably be a challenge, but there are currently genuine grounds for optimism.

The outlookRetail and consumer industries pay and collect more business taxes than most other industries.

PricewaterhouseCoopers’ 2007 tax survey found that retail and consumer industry companies paid between $21 million and $1,665 million in tax last year.

For every dollar of corporate income tax paid, companies paid a further $1.62 in other business taxes.

Retailers are unfunded tax collectors: they spend an enormous amount of time and incur significant costs in collecting tax in a low-margin environment; if they get it wrong they incur the wrath of the consumer and the Australian Taxation Office (ATO) and damage their brand.

For every $1 of tax retail and consumer companies paid in 2007, they collected $2.26 in tax, well above the all-industry average of $1.19.

The total tax rate (TTR) for the sector was 40 per cent, which was significantly above the average of 33 per cent for all industries.

The TTR measure shows that, on average, for every $2.50 of profit made, the industry paid $1 in tax.

Retail and consumer companies spend on average $1.5 million a year complying with their tax obligations.

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Tax

The hidden burden of tax collection

1 What is your company’s Total Tax Contribution? 2007 survey results. PricewaterhouseCoopers published in 20082 Australia 2020 Summit, Initial Summit Report, April 2008 www.australia2020.gov.au/docs/2020_Summit_initial_report.doc


The Total Tax Contribution FrameworkPricewaterhouseCoopers believes it is important that the full impact of business taxes is clearly understood, including the impact taxes have on individual organisations.

PricewaterhouseCoopers designed the Total Tax Contribution Framework to enable companies to collect and report tax information in a consistent manner, to improve transparency and to meet stakeholders’ needs.

The Total Tax Contribution Framework assesses a company’s overall tax contribution by examining three specifi c areas:

business taxes borne – taxes that affect the income statement

business taxes collected – from customers and employees that are then remitted to government

tax compliance costs – costs incurred in assessing and remitting taxes borne and taxes collected.

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Survey confi rms the industry’s contributionIn 2007, 63 Australian corporations took part in PricewaterhouseCoopers’ Total Tax Contribution Survey, answering questions on the number of taxes they paid, the amount of tax they paid and collected on behalf of government, and the cost of tax compliance.

Respondents to the survey operate in a wide range of industries. They included large Australian-listed companies and large foreign-owned and privately owned Australian entities – a cross-section of big business in Australia. Eight operate within the retail and consumer goods industry.

The results confi rmed those from the fi rm’s 2006 survey, showing that retail and consumer goods companies contribute greatly to the Australian tax system – they pay and collect more business taxes than most other industries.

The impact of Australia’s tax system varies signifi cantly between industries. The amount of certain taxes paid differs between industries, and collection obligations often apply selectively to certain sectors. Tax obligations vary signifi cantly within the retail and consumer industry itself. For example, retailers’ main obligation is to collect PAYG tax from employees and GST from customers. In contrast, excise collection obligations are greater for consumer goods companies.

The industry should consider its position on tax reform to ensure that its interests are considered in any coming review.

Tax


Taxes borne directly In 2007, retail and consumer respondents to the Total Tax Contribution Survey paid an average of $322 million in taxes, which ranked fourth-highest out of the industries surveyed. Total taxes borne ranged between $21 million and $1,665 million per company surveyed.

The results for the retail and consumer industry show that taxes other than corporate income tax represented 62 per cent of total taxes borne. In other words, for every dollar of corporate income tax paid, companies paid a further $1.62 in other business taxes. This is signifi cant and highlights the complexity of the tax landscape in the sector.

The survey shows that the Federal Government relies heavily on corporate income tax as a source of revenue, but its take from retail and consumer companies is relatively low. Corporate income tax accounted for only 38.2 per cent of the total taxes borne by the industry. This is primarily because of its unusually broad exposure to other business taxes such as payroll tax, customs, excise and gaming taxes (generally where gaming occurs at retail liquor outlets), as shown in Figure 6.1.

Taxes collected for government In addition to taxes borne directly, business makes a further signifi cant contribution to government revenue through its obligation to collect a range of taxes from customers and employees. Retailers are unfunded tax collectors, spending an enormous amount of time collecting tax and incurring signifi cant costs with no compensation in a low-margin environment. Retail and consumer goods organisations must also take on the onerous responsibility for collecting and remitting these taxes on an accurate and timely basis.

Retail and consumer goods company respondents to PricewaterhouseCoopers’ survey collected an average of $830 million in taxes on behalf of all Australian governments. Signifi cantly, for every $1 of tax they paid, they collected $2.26, almost twice the $1.19 average across all industries.

Retail companies collected two main taxes, PAYG tax on employees’ remuneration and GST, whereas consumer companies collected mostly excise duty (see Figure 6.2). Excise duties made up 64 per cent of tax collected by the sector. Not surprisingly, the industry participants that bore the most tax were generally the largest collectors of tax. Particularly striking was that excise duties borne and collected by retail and consumer companies alone represented almost one-fi fth of total excise receipts for 2006-07. This highlights the sector’s contribution to government revenue.

Figure 6.1: Taxes borne directly by the retail and consumer goods industry


Gamingtaxes25.9%

Incometax 38.2%

Excise4.0%

Other9.3%

Customs10.7%

Payroll tax

11.9%Irrecoverable GST 2.6%

Fringe benefit tax 1.7%

Land tax 0.5%Insurance 0.2%

Stamp duty 0.6%

Local property tax 0.5%

Other state taxes 3.1%

Motor vehicle 0.1% Expatriate taxes 0.1%

3 What is your company’s Total Tax Contribution? 2007 survey results. PricewaterhouseCoopers published in 2008


The survey illustrates starkly the role that the industry plays as a collector of taxes. This role imposes an enormous cost on companies as they must build and maintain systems needed to collect and administrate taxes. An equally important point is that while customers ordinarily pay these taxes, business bears the fi nancial and reputational risks of error.

The total tax ratePricewaterhouseCoopers has benchmarked industry groups and individual companies using a number of metrics, including the total tax rate (TTR). This measures the percentage of profi t a company pays in tax or its total tax burden. The TTR expresses all business taxes borne as a percentage of profi ts before all business taxes borne. Two key factors infl uence the TTR: a business’s profi tability and the extent to which the business is subject to taxes, irrespective of profi tability.

The average TTR for the retail and consumer goods sector was 40.5 per cent, signifi cantly above the average of 32.8 per cent for all industries. This measure shows that, on average, for every $2.50 of profi t the industry made, it paid $1 in tax. This refl ects the fact that the sector pays a greater proportion of taxes other than corporate income tax than most other industries. Companies in the sector had TTRs between 23.3 per cent and 75.6 per cent.

Up to 169 taxing pointsPricewaterhouseCoopers’ survey identifi ed a wide range of taxes across Federal, State and Territory governments which create a signifi cant number of separate taxing points for Australian businesses. Many, if not all, states and territories impose their own taxes and each of these is a taxing point. Stamp duties, payroll tax and land tax are the main examples.

An Australian business that operates across several states and territories could be taxed at as many as 169 points,3 the survey found.

The retail and consumer business model exposes companies to a high number of taxing points. For example, taxing points arise when stock is procured and imported and when it is sold. They are created when employees are taken on and when assets are used in the business – and so on. Respondents to the PricewaterhouseCoopers survey identifi ed between four and 19 taxing points for their businesses, with an average number of nine. Respondents had diffi culty in identifying a range of state taxes, which leads PricewaterhouseCoopers to believe that the number of taxing points is signifi cantly understated.

Figure 6.2: Taxes collected on behalf of government by retail and consumer industry

Excise 63.8%

Other 2.5%

GST 16.4%

PAYG – employees 17.3%

PAYG – non-residents 0.1%

Wine excise tax 2.3%


76 | Retail & Consumer Outlook 2008 Tax

Taxes borne and collected as a percentage of turnoverTaxes borne and taxes collected as a percentage of turnover is a measure of a company’s contribution to government tax receipts relative to its size. PricewaterhouseCoopers’ survey found that the median of total taxes to turnover in the retail and consumer industry was 18.6 per cent. Like the TTR, the sector had a relatively high score on this measure due to the amount of excise collected. The average across all industries was 11 per cent.

A costly compliance mixTotal tax compliance cost measures the time and cost of activities relating to lodging returns, making payments to the Australian Tax Offi ce or state revenue offi ces, and seeking advice on tax law. Survey participants were asked to estimate the mix of time spent and external costs incurred in complying with all tax obligations.

The survey found that retail and consumer goods companies spent on average $1.5 million a year complying with their tax obligations. Compliance costs ranged between $30,000 and $3.5 million. Figure 6.3 illustrates the percentage of compliance costs spent across different categories of taxes.

Overall most time and money was spent on income taxes, which accounted for 58 per cent of compliance resources. However, income taxes represented only 12 per cent of the total taxes borne and collected by retail and consumer companies. While this probably refl ects the complexity of the corporate income tax system, it is nevertheless quite disproportionate. Individual companies might consider whether suffi cient resources are focused on taxes other than income tax.

Generally, respondents felt that the various compliance regimes were too time consuming and costly, particularly for fringe benefi ts tax and the different state regimes for payroll tax and stamp duties.

Figure 6.3: Total compliance costs

58%

4%

16%

22%

Income taxes

Goods and services taxes*

Employment taxes

Property taxes

* Goods and services taxes (26 taxes are imposed at different stages within the value chain eg GST, customs duties and excise duties).



Take actionA better understanding of all business taxes is becoming increasingly important for business leaders. Better information about taxes, including tax collection obligations, is essential for effective management and reporting to stakeholders.

Additional points to consider include:

Benchmark your company’s performance against that of industry competitors and other groups.

Encourage dialogue between senior management and executives to ensure a clear corporate strategy.

Manage tax costs and the allocation of tax resources.

Report openly to key stakeholders on taxes borne and collected and your company’s total tax contribution.

Broaden corporate social responsibility reporting to include the company’s tax contribution.

Initiate discussions on tax with government and other external stakeholders.

Review and validate regularly your processes, controls and systems to ensure all taxes are being correctly remitted.

Assess whether an organisational wide approach should be taken when collecting and remitting taxes.

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Tim Cox | Partner PricewaterhouseCoopers Tax & Legal+61 3 8603 6181 | [email protected]

Tim is a senior tax partner and leads the Australian Total Tax Contribution initiative. Tim has extensive experience on the taxation and business issues facing corporate groups and is an advocate on the need to simplify Australia’s existing business taxation system. Tim is one of PricewaterhouseCoopers’ most experienced partners and is responsible for the tax practices’ institutional clients.

Tax

Per

form

ance

07


Retail and consumer companies operate in an uncertain environment. Chief executives around the globe are worried about issues from low-cost competition to security of the supply chain, sustainability and climate change,1 which is starting to have a powerful infl uence on consumer purchasing decisions in the United States and Europe.2

Australian companies face these challenges and more. Rising interest rates are making it diffi cult to forecast demand. Record keeping and reporting are likely to become more complex with the intervention of regulators such as the Australian Competition and Consumer Commission (ACCC). Continuing merger and acquisition activity among private equity and trade investors will force all companies to review their own performance – as a potential purchaser, a target, and simply to stay competitive.

Retail and consumer CEOs are less confi dent about revenue growth in the next 12 months than their peers in other industries. They see better penetration of existing markets as the best opportunity for revenue growth, and improved customer service as the key to gaining a competitive advantage.3 But to maintain that advantage, companies will need to better understand customers and respond more quickly to changes in demand.

Now, more than ever, Australian retail and consumer companies need accurate and timely information to inform their management decisions. Holistic, predictive information on fi nancial, operational and regulatory performance will be vital in meeting customer needs. Companies need to invest in systems and people that will allow them to better capture and analyse information and use it to develop a strategy for growth in the context of the bigger economic picture. Companies need a more strategic approach to corporate performance management.

Over the next few years, we expect Australian retail and consumer goods companies to:

Revise business plans to address emerging issues such as sustainability, carbon emissions and also changing competitive forces.

Perform deeper analysis of company activities to better understand what creates value and what destroys it.

Invest in better data warehouses, business intelligence tools and information portals to improve reporting and meet customer and operational requirements.

Review and streamline back office processes such as budgeting and forecasting.

Build strong relationships across the supply chain to better share information.

Invest in people and skills, including data analytics and data mining, to interpret data across the organisation.

Revise pay and other performance rewards to more clearly align behaviour to the company’s strategy and business plan.

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The outlook

Corporate Performance Management

Planning your success

1 11th Annual Global CEO Survey, consumer summary, PricewaterhouseCoopers2 An August 2007 Datamonitor survey found 54 per cent of European and US respondents actively avoided products they considered to be

environmentally unfriendly3 11th Annual Global CEO Survey, retail summary, PricewaterhouseCoopers


4 Management Information and Performance: CFOs face new demands for high-quality data that drives decisions, CFO Europe Research Services report for PricewaterhouseCoopers, June 2007. Nineteen per cent of companies surveyed were retail and consumer companies.


The shift to corporate performance management A key enabler which underpins corporate performance management (CPM) in all industries is technology – but it is perhaps most critical for the retail and consumer goods industry. CPM relied until relatively recently on a limited set of information tools including early versions of data warehouses, homegrown databases and spreadsheet models that sat above a company’s core applications – including Point of Sale (POS) and general ledger systems. Over the past decade, advances in data warehouses and analytical software, as well as skilled data miners, have allowed leading retail and consumer companies to capture and analyse a much greater range of data and to develop much needed business information.

A more complete picture of a business is now available through CPM, which is emerging as a framework that integrates strategy with business operations. True CPM gives management a prospective and real-time picture of what is really going on across the value chain and provides a robust platform to support growth. It helps executives address the fundamental business questions of:

How are we doing?

Why is that happening?

What should we act on now?

At its most benefi cial, CPM is about alignment of all decisions, activities and processes to create a clear vision for success. It is about making real-time decisions based on a comprehensive understanding of the external market, and the company’s capabilities, to tangibly improve its business performance.

Figure 7.1: Elements of corporate performance management (CPM)

Strategy

ALIGN

Plan

SUSTAIN

Corporateperformancemanagement

MeasureInsight

Execute

Rew

ard

EVALU

ATE

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PricewaterhouseCoopers believes Australian companies are falling behind their overseas peers in this important area, particularly in gathering information and mining data to gain real-time insights for decision making. We also see clear differences between the large retailers – supermarket chains and department stores – and smaller players.

Many companies lack applications that send real-time fi nancial information and non-fi nancial data – marketing, sales, procurement and operational – to the desktops of executives and store management. For example, few small or medium-sized retailers can drill down in real-time, or near real-time, from the business’s 5-10 key performance indicators to regional, merchandise category or store level. Few suppliers to retail and consumer goods companies have daily access to retail sales information to assist them with supply.

There is a stark difference between the performance of retail and consumer companies that have put the basic principles of CPM into action and those that have not. A report prepared for PricewaterhouseCoopers by CFO Europe Research Services in June 2007 found that the quality of fi nancial and non-fi nancial data was a key difference between top-performing and underperforming companies (see Table 7.1).

Table 7.1: Quality of management information and corporate performance4

Focus area Rating Top performer

Under-performer

Financial data Accuracy – excellent

35 per cent 5 per cent

Timeliness – excellent


Relevance – excellent


Non-fi nancial data

Accuracy – excellent


Source: PricewaterhouseCoopers (report prepared by CFO Europe research services)



What’s the plan? In developing their strategy, Australian retail and consumer goods companies generally focus on external factors such as customer demand pricing and competitor behaviour – perhaps more so than other industries. However, at the smaller end of the market, many organisations still do not have business plans. More than 59 per cent of those surveyed for PricewaterhouseCoopers’ Private Business Barometer October 2007 did not have a plan. However, nearly 80 per cent of businesses with such a plan exceeded their growth targets – clearly demonstrating the value of planning.

To be successful, a strategy needs to be based on a rich and creative mix of data forecast and historical, external and internal, non-fi nancial and fi nancial. Data on emerging issues, such as the impact of climate change, will be particularly important to position for the future.

Once a strategy is developed, stakeholder support is vital. These days, a corporate strategy must win the hearts and minds of employees, shareholders and customers as well. How a vision and strategy are communicated is vital. The strategy must resonate with stakeholders, and they must understand how it applies to them personally, if your company is to succeed.

Wesfarmers is one organisation with a clear vision and supporting strategies which drive planning and decision making. Its signifi cant growth year-on-year and out-performance of the market underline the value of its approach. Wesfarmers’ primary stated objective for many years has been to achieve a satisfactory return on shareholder funds – a strategy that is easy to understand and of benefi t to shareholders.5

To achieve its strategy, the company works to:

strengthen its businesses through operating excellence and satisfying customers

secure growth opportunities through entrepreneurial initiatives

review its portfolio through value-adding transactions

ensure sustainability through responsible long-term management.

Each of these strategies informs the business decision made by Wesfarmers – as outlined by the Managing Director, Richard Goyder, in the 2007 Annual Report. Mr Goyder outlines the key business decisions and highlights for the year, and clearly demonstrates the link to the relevant strategy.

Tools for effective action Creating a visionary strategy is one thing – how you put it into operation is another matter entirely. You can communicate your strategy and business plan clearly, but unless you provide tools to guide your actions and activities, you will fail to deliver on it.

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PricewaterhouseCoopers conducted a study in the United States that found:

65 per cent of respondents thought budgeting and forecasting needed to be more strategic and relevant

44 per cent said strategy and budgets needed to be more closely linked

70 per cent of respondents completed part or all of their planning using spreadsheets.6

Anecdotal evidence suggests that many retail and consumer goods companies in Australia also need to improve these linkages.

Sales and operational planning, and budgeting and forecasting, are the key tools that link strategy and the day-to-day activities of company employees. Accurately predicting customer demand at a store level, and ensuring supply can meet that demand, is critical for retail and consumer companies. Leading companies are using new data systems to balance supply and demand.

For example, Woolworths recently announced that it would use their technology platforms in planning and sourcing at a store-by-store level to fulfi ll its promise of providing customers with the widest range of quality products. The system will allow it greater fl exibility in deciding product ranges based on analysis of demand in each store.

However, we still see many companies relying on the traditional annual fi nancial budget to guide decision making. PricewaterhouseCoopers’ Business Insights Survey June 2007 found that 75 per cent of companies used a fi xed annual budget as their key performance management strategic tool, but only 57 per cent used a quarterly rolling forecast. Best-in-class organisations use an 18-month rolling forecast, coupled with weekly sales and operational planning meetings, to continually adjust to changes in the market and broader economy.

Budgeting is another weak area. This time and resource consuming process, which often takes six months, often seems detached from the sales and operational planning processes. Too often budgets are used as a way to limit costs and expenses, rather than providing the fi nancial blueprint to support sales and operational decision making.

One large Australian retailer, for example, takes nine months to develop its annual budget, building a bottom-up budget for each brand which it tries to reconcile with the top-down budget set by corporate through a number of iterations. This lengthy, costly process results in a fi nancial plan based on a strategy which is at least nine months out of date at the fi rst month of the new fi nancial year. The company has not performed as well as peers for some years.

Part of the problem in such cases is that budgets are not clearly linked to strategy, standard assumptions are not agreed and enforced, and there is an endless cycle of iterations

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5 www.wesfarmers.com.au/annualReport2007/section7-2.htm6 2007 Budgeting and Forecasting Study, PricewaterhouseCoopers Advisory, Performance Improvement, US. Thirteen per cent of respondents to this

survey were retail and consumer companies.



on hundreds of line items. In PricewaterhouseCoopers’ experience, many companies also spend too much time on budgeting because they have not automated data entry, consolidation and analysis. Too many organisations still run their planning processes in Excel, or in a series of disjointed and disparate applications.

Assessing what adds value Leading retail and consumer companies analyse their performance and strategy to determine their value drivers – that is, what creates, or destroys, value. These drivers, and resultant metrics, are not all fi nancial. They include external information such as customer and supplier relations and competitor behaviour, and internal information such as stock turn, the percentage of capacity used, and staff turnover.

A clear trend has emerged in PricewaterhouseCoopers’ meetings with staff from retail and consumer goods companies over the past year. A number of CFOs have begun working closely with staff to actively review preparation of monthly reports and to ensure they have the right mix of information. Many of the major retailers today who have the technology can report quickly and accurately across the entire value chain. The aim is to get information to executives and store managers quickly to help them make more timely decisions.

Many smaller companies still do not harness the real power of their POS systems and data warehouses to provide real-time analytics for decision making. Retail and consumer goods companies need to quickly and accurately match consumer demand with supply, so data must fl ow from their POS systems back through the supply chain to wholesalers and suppliers to reduce lead times and keep shelves stocked.

The growing complexity of the retail environment – often sales are now made through call centres and online as well as at physical stores – means that simply capturing relevant data in a timely manner is a complex task in itself. This data must then be analysed for trends, both expected and unexpected, and fed to the demand planning teams to allow them to update stock forecasts.

Best-in-class companies merge information from POS systems and suppliers with other fi nancial and non-fi nancial data in a comprehensive data warehouse, as frequently as every three minutes for POS data. In some instances, skilled analysts use business intelligence tools to extract information from data and disseminate it to executives every 20 minutes throughout the day.

To optimise inventory fl ow to meet customer demands, purchases (and returns) must be fed back to demand forecasting and to the suppliers. Use of third-party wholesalers adds another layer of complexity. Technology such as Sterling Commerce’s Yantra and SAP supply chain management software can signifi cantly improve data fl ow, though there is obviously also a high degree of trust involved in releasing detailed sales information. Large grocery retailers such as Wal-mart allow suppliers to extract data on sales, margins and other relevant information every four hours via web portals to help in their planning and supply processes.

Purpose-built tools are also being used to capture data for planning and budgeting as well as reporting. PricewaterhouseCoopers still sees many retail and consumer goods organisations continuing to rely heavily on Excel or Access for these processes, though Cognos, Business Objects and Hyperion are being used to make reporting transparent.



Analysing data to gain insightsRetail and consumer goods companies need clear and accurate information to make good decisions. To convert shoppers to customers and generate revenue, companies must understand what customers want to buy – today and in the future – and the demographics, behavioural attributes and geography that infl uence them.

Companies are well aware that the homogenous customer is a thing of the past. Leading retailers continually focus on better understanding customer behaviour and needs so they can best meet demand in different locations and consumer segments. The price of an item might be right, for example, but is the colour? Many companies have signifi cant room for improvement in this area.

PricewaterhouseCoopers see room for signifi cant improvement at the monthly management reporting level as well as in day-to-day decision making. One large Australian retailer has no standardised management reporting below board level – management reporting varies by brand, making it impossible to analyse performance across the portfolio, and making preparation of reports time consuming. Another major national retailer reports nearly 50 pages to the board – but explanations of variance to budget fail to identify the root cause for the variance. Comments such as ‘the summer season started slightly below expectations at minus fi ve per cent on budget though up two per cent on prior year’ are meaningless for decision making.

In a study by PricewaterhouseCoopers in the United Kingdom:7

55 per cent of respondents disagreed or strongly disagreed that they were satisfi ed with management information; only eight per cent strongly agreed

24 per cent of respondents felt that timeliness of fi nancial data was excellent

Six per cent held this view for non-fi nancial data

56 per cent of respondents stated that the accuracy of non-fi nancial data was poor or adequate; 46 per cent stated the relevance of non-fi nancial data was poor or adequate

57 per cent stated the timeliness of non-fi nancial data was poor or adequate

35 per cent of respondents include information on the external market in their standard reporting; 47 per cent include predictive analysis and commentary.

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Figure 7.2 illustrates the elements PricewaterhouseCoopers believe to be key in assessing reporting systems and identifying areas for improvement within a broader CPM project.

Note, however, that clarifying value drivers, automating data collection and consolidating reporting processes will still only get you data. Companies increasingly need to employ skilled business analysts who have a detailed understanding of data warehouse and business intelligence tools, as well as a deep understanding of the company’s industry and strategy, and its value drivers and key decision making points. Technology will provide data, but only people can give you information and insight.

Creating the right culture CPM program sponsors cite cultural change as challenging but the most important element for success. A cultural shift is fundamental to CPM as it is the people in your company who will enable the change required to realise its strategy. Global consumer CEOs noted that the ability to adapt to change (75 per cent) and the retention of key talent (74 per cent) were the main sources of competitive advantage to achieve growth.8

There is little point in setting a strategy at an executive level unless you communicate it to each and every brand, store and staff member in a compelling manner. There is a difference between ‘being briefed’ and signing up personally and as a team to the process outlined to achieve it. Optimal performance is achieved through breaking down silos. As noted above, leveraging the data and information collected across the company requires a wide range of technical skills and company and industry knowledge. Each employee should be able to understand what their role is and how it contributes directly to delivery of the business plan and strategy.

Many leading organisations now select staff from corporate, brand and store levels to help in deciding the company’s vision and values. This is an excellent method of developing a framework that resonates with employees. People involved in these projects can act as cultural champions in their day-to-day roles – helping the message to permeate throughout the company.

7 Management Information and Performance: CFOs face new demands for high-quality data that drives decisions, CFO Europe Research Services report for PricewaterhouseCoopers, June 2007

8 Annual Global CEO Survey 2008, Consumer Summary, PricewaterhouseCoopers



The key elements of good practice performance reporting

1. Balance

• Strike the ‘right’ balance of strategic and tactical measures

– Strategic – forward looking, aligned to strategic objectives, results focused

– Tactical – actionable, provide lead indicators of performance, focused on inputs, sales, margins and expenses

2. Accuracy

• Reports are valid, reliable and at the appropriate level of detail

• Measurement processes are consistent and repeatable

• Data sources are reliable and represent underlying business performance

3. Commerciality

• Non onerous – use existing measurements/reporting frameworks

• Automated measurement and reporting processes

4. Contextual

• Evaluations of performance take into account random/seasonal variation

• Provide visibility of competitive environment (eg market share)

• Comparisons (budget/forecast) overlay seasonal variation

• Where appropriate, display upper/lower control limits

5. Relevance and timing

• Refl ect underlying drivers of business performance

• Measures need to refl ect the value drivers of a business

• Represent the reality of the business

6. Utility

• Enable informed decisions to be taken on an immediate basis

• Easily digestible, easy to read/understand

• Clear, concise, accepted defi nitions

Figure 7.2: Key elements of good practice performance reporting

Leading to...

• Greater probability of making the ‘right’ decision to improve performance and hence achieve or exceed desired business outcomes

• Increased visibility of business drivers/value drivers

• Minimised cost of performance measurement and reporting

• Executives are presented with information that aids informed decision making and measurable actions


Rewards must be offered at all levels to encourage change. In many cases, we still see retail and consumer companies rewarding the top one or two layers of management only. Often performance measures are badly designed. They are either based simply on achievement of budget, which may not result in tangible contribution to achieving strategy, or they are extremely complex – too many KPIs is as bad as no KPIs. Half a dozen KPIs at each level are generally enough to give clear instructions to staff and management on what is important.

Retail and consumer goods companies that understand CPM set KPIs at the company, brand, store and individual levels that are clearly aligned to strategy, and encourage consistent behaviours and team work. At an individual level, each employee – and contractor – sets a personal development plan on an annual basis with their manager that aligns their tasks to strategy and focuses on specifi c training or development needs.

Finally, compensation and reward programs must clearly align to achievement of the established KPIs. Best-practice organisations structure compensation plans so that all targets – personal, store, brand and company – must be achieved to obtain the maximum available reward, and no one receives a bonus if the company as a whole does not achieve the overall targets. This encourages teaming and cross-functional/departmental assistance. We believe it is important for the defi nition of compensation to be broader than just monetary reward.


Take actionEngage your board: it is essential to the success of any CPM project and must spearhead change.

Benchmark your company’s performance and brands against rivals to establish key areas for improvement.

Reassess the key value drivers for your business and compare them with the key metrics used today.

Research external trends and changes – such as the move to carbon trading and the ACCC grocery pricing enquiry – to assess their impact.

Move to an 18-month rolling monthly forecast and weekly sales and operational planning meetings.

Review your technology: do you have the right information feeding into your data warehouse? Do you have business intelligence tools to access the information?

Review your staff: do you have people skilled at interpreting the data to gain insights?

Assess your KPIs at a brand, store and individual level to ensure they align behaviours to strategy.

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Sarah Laidlaw Meehan | Director PricewaterhouseCoopers Performance Improvement – Finance Effectiveness +61 8603 2327 | [email protected]

Sarah Laidlaw Meehan is the lead director for the Finance Effectiveness practice in Melbourne. Sarah has over 13 years experience assisting clients understand and resolve complex problems impacting fi nance functions. Her work focuses on assisting clients balance the need for controls with process effi ciency and to add value to the business.


ConclusionCorporate performance management is a fundamental cultural shift that, at its best, overcomes silos, politics and individualistic tendencies to create a unifi ed team that is striving for the same goal.

CPM is about developing a ‘fi t for purpose’ solution using technology and people. It is about reviewing the tasks you perform and determining how you can better link these to drive real change. Results will not come overnight; it may take two years or more to move from the 60 per cent who have not started to the 10 per cent who are realising the benefi ts.

If you execute a CPM project today, it will create competitive advantage. Leading retail and consumer goods companies overseas are using these concepts, as are major retailers in Australia. CPM is fundamental to organisations for private equity – its focus will also lift the bar. In three years time, CPM will merely give you a seat at the table. Can you afford not to make the investment?


Peter McClellandChief Financial and Administration Offi cer, Luxottica Retail – Asia Pacifi c

The way I see it

Luxottica Group is a world leader in the design, manufacture and distribution of prescription eyewear and sunglasses with a wholesale network covering 130 countries and almost 5,800 retail stores worldwide. We operate 850 stores across Asia-Pacifi c, turning over annual sales of $700 million. Luxottica Retail is also one of the largest speciality retailers in Australia.

The group’s portfolio includes house brands Ray-Ban, Arnette, Persol, REVO and Vogue as well as popular licensed brands Chanel, Dolce & Gabbana, Prada, Polo Ralph Lauren, and Versace. Our retail brands include OPSM, Laubman & Pank, Budget Eyewear, Sunglass Hut and Bright Eyes for which we have responsibility across the Asia-Pacifi c region.

Today’s market is competitive, not just in optical and sunglasses where we have increased low cost competition, but also for the overall share of customer wallet as our products are reasonably discretionary. Rising interest rates (which complicates demand forecasting) and even climate change all have the potential to impact revenue growth. To ensure success, Luxottica has increasingly embraced corporate performance management (CPM) tools to help us execute on our strategic business plans and link those plans to our key performance indicators, ensuring that everything aligns with our business objectives.

We use an ‘X’ matrix model1 to align major initiatives back to our strategic objectives and also our business KPIs to our initiatives. We will then focus our budget and forecast models to concentrate on those ‘levers’ that drive the business KPIs and we close the loop by aligning individual KPIs to these.

One way we are doing this is through technology. We use Hyperion Planning and other Business Intelligence and data mining tools to translate our top-level business strategy down to executable plans and targets throughout our retail stores and report back on outcomes.

In our business, having access to the right data is crucial. On average, customers buy eyewear every two-and-a-half years and we need to gather as much information as possible during that transaction and then optimise the use of that data to ‘talk’ to our customers between each repurchase and then put relevant offers to them. Thus we place a lot of importance on our Customer Relationship Management (CRM) tools.

We are taking a closer look at our customer information and reviewing our CRM processes and systems to determine how

we can make better use of the plethora of fi nancial and non-fi nancial information we hold to achieve our goals. It is critical that our business strategy is in tune with what’s happening down on the ground – at the coal face of our business.

For example, we look at our point-of-sale system not just as a mechanism for processing transactions, but as a tool to capture key customer data and use it in a meaningful way.

As discussed, we identify business ‘levers’ or lead indicators and set our budgets around these, rather than just focusing purely on sales. In other words, we are focused on value drivers as well as sales.

These indicators relate to customers and customer metrics. For example, we have indicators around optometry fi ll rates, numbers of optometrists, and the conversion of a customer appointment into a retail sale. We also have indicators that relate to recruitment and the stability of our workforce because managing labour is a key part for our business.

We haven’t totally nailed it. We don’t always get a clear line of sight between our business strategy and the activities of a store in Western Australia, for example, but we are certainly improving our processes.

The next step in this evolution of our business is to ensure the right systems and tools are in place to look deeper into our data warehouses, quickly pull out critical sales information and put it in the hands of our store associates.

Luxottica store managers and staff want to know which products customers have purchased in the past, and what they may want to purchase in the future. Additional information such as where they have shopped and even their purchase preferences in any particular store at any given time can be hugely useful when planning sales and marketing strategies.

Smarter decisions are based on targeted information and we are investing in areas that provide us with better information as a business priority. We have 5,000 of our colleagues talking to customers in our stores every day and they need to be armed with the right information at the right time.

Ultimately, CPM tools are providing us with a better understanding of the changes and improvements we need to make to our business in order to maintain our position as oneof Australia’s top retail groups.


1 The X Matrix is a strategy deployment tool originating in Japan which uses four quadrants to defi ne objectives, strategies, deliverables and timelines.

08

Shr

inka

ge


The outlookAustralian retailers lost an estimated $3 billion dollars to shrinkage in 2007, or an average of about 1.4 per cent of sales.

Evidence suggests that shrinkage has become less of a priority for retailers.

As the economy cools, retailers should take a fresh look at how they manage shrinkage and renew their efforts to achieve a sustained improvement.

Shrinkage represents a clear opportunity for retailers to significantly improve their profit margins.

A structured, whole-of-business approach is needed to manage shrinkage effectively.

Gaining the commitment and support of senior leadership, and focusing on people and culture, will be vital in the short and long term.

A set of tight, well-defined standard operating procedures is also important, as is the appropriate use of loss prevention technologies.

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The Australian retail industry lost approximately $3 billion dollars to shrinkage in 2007, a survey estimates, or an average of about 1.4 per cent of sales.1 While some retailers may be losing only half a per cent of sales or less, others are losing as much as fi ve per cent. Yet, despite the signifi cance of the dollar amounts involved, PricewaterhouseCoopers’ experience suggests that shrinkage has become less of a priority for retailers as they have concentrated on revenue growth and improving margins in other areas of their businesses.

However with the expected slowing of the Australian economy and monetary policy tightening, growth in revenue and profi t margins may prove more challenging than in recent years. Shrinkage levels should be an increasing concern because of a number of factors and trends. Record low unemployment is making it diffi cult for retailers to attract and retain the right type of people and casualisation of the workforce is increasing. Financial stress is taking a toll on the community, and serial shoplifters are becoming bolder.

It is time retailers took a fresh look at their shrink management efforts and renewed their commitment to achieving a sustained improvement. Shrinkage represents a clear opportunity to signifi cantly improve profi t margins, whether retailers are small and growing or large and with a mature footprint. Six of the many keys to success in controlling shrinkage are outlined in this chapter, focusing mainly on the control and reduction of stock loss.

1 The Global Retail Theft Barometer, The Centre for Retail Research, Nottingham, 2007

Shrinkage

Is your profi t walking out the door?

Retail & Consumer Outlook 2008 | 91Shrinkage

Figure 8.3: Supply chain issues included in the shrinkage measure

How do you defi ne shrinkage? One of the diffi culties associated with shrinkage measurement and subsequent benchmarking efforts against similar businesses is the defi nition of what should be included and what should not (see Figures 8.2 - 8.4).

Unfortunately there is no standard defi nition and survey results are often not clear on the defi nitions of shrinkage actually used. Clear evidence exists to indicate that a range of defi nitions is in use across the retail industry, making benchmark comparisons of shrinkage performance against others a potentially misleading exercise.

77%

61%

77%

23%16%

0%10%20%30%40%50%60%70%80%90%

100%

Rep

sons

e p

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ent

Out of date Pricemarked

Damage Donations Otherprocesses

Store issues measured

Figure 8.2: Store-related issues included in the shrinkage measure

58%

35%

19%

0%0%

10%20%30%40%50%60%70%80%90%

100%

Rep

sons

e p

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Losses at regional distribution

centres

Losses in transport

Lossesby third party

logistics

Other

Supply issues measured

Figure 8.4: How businesses value shrinkage: by retail sales, cost price or transfer cost

52%

39%

3% 6%0%

10%20%30%40%50%60%70%80%90%

100%

Rep

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Retail salesvalue

Cost price Transfer cost Other

Valuation method

Sources 8.2 to 8.4: “Measuring retail shrinkage: towards a shrinkage KPI,” Paul Chapman, Simon Templar Cranfi eld School of Management, ECR Europe, 2004

Know your numbersAn obvious and critical requirement in managing shrinkage is to know how it affects your business; that is, you must know what your shrinkage number is and where it is coming from. This seemingly simple question is often diffi cult to answer, at least with a high degree of certainty. Table 8.1 shows national average estimates from the United Kingdom Centre for Retail Research, which published the Global Retail Theft Barometer last year.

Table 8.1: Retail theft national average estimates

Australia 1.39 per cent

India 2.9 per cent

Japan 1.04 per cent

Singapore 1.25 per cent

Unites States 1.52 per cent

Canada 1.49 per cent

Unites Kingdom (UK) 1.34 per cent

France 1.34 per cent

Germany 1.36 per cent

Figure 8.1: Australian retailers’ losses to shrinkage 2007

Source: The Global Retail Theft Barometer, The Centre for Retail Research, Nottingham, 2007

Customer 37%

Employee 40%

Supplier 7%

Administration 16%

Source: The Global Retail Theft Barometer, The Centre for Retail Research, Nottingham, 2007

92 | Retail & Consumer Outlook 2008 Shrinkage

Take a structured approach Most medium or large retailers have a permanent loss prevention function within their business. This function is typically responsible for planning and setting loss prevention goals and working on initiatives to achieve those goals. The importance of taking a structured and systemic approach to managing shrinkage cannot be understated, so even where a formal loss prevention team exists, a review of planning processes could prove worthwhile.

Figure 8.5 is a roadmap from the industry body Effi cient Consumer Response Europe (CRE), and is frequently cited as a guide to tackling shrinkage by diagnosing problems, implementing solutions and measuring and monitoring progress. It is built on the existence of an integrated corporate policy for shrinkage. To get to the point of implementing a policy, businesses need to have a clear and accurate picture of their true levels of shrinkage. When the most senior levels of the business understand how much profi ts will increase if shrinkage is addressed, tackling the problem becomes a higher priority. Therefore a diagnostic assessment and measurement of total shrinkage may be an appropriate starting point.

One-off efforts will not ensure success. Rather, companies need to start an ongoing and often long-term project to build the capability to identify and understand the causes

of shrinkage and reinforce practices that reduce loss. Herein lies a major challenge. For many retailers, shrinkage is a focus immediately after stock-take periods and management efforts often decrease outside those periods as other issues come to the fore. A best practice, strategic approach over the long term helps build a culture in which shrinkage management is top of mind all the time throughout the organisation.

A structured approach to managing shrinkage includes:

setting objectives and targets to reduce losses

measuring losses accurately

reporting results and progress

assigning accountabilities

regular reviews to identify emerging and changing risks and weak spots along with new solutions

ensuring investments made deliver the required returns.

Tight integration of shrink management processes and activities into a broader enterprise-wide risk management framework, such as the PricewaterhouseCoopers framework (see Figure 8.6), helps create a strong culture of awareness and understanding of shrinkage in the broader context of risk.

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• Set a systematic approach to the project• Identify and execute project resources• Undertake a stakeholder analysis• Set project goals

• Map key processes• Gather measures

• Undertake a supply chain risk assessment• Identify root causes of process failure

• Design solutions that reduce risk• Balance solution cost against projected benefits

• Develop implementation plans• Implement solutions

• Determine impact of intervention• Integrate best practice

Corporate Policy

1. Plan

2. Map and measure

3. Analyse4. Develop solutions

5. Implement

6. Evaluate

Figure 8.5: Effi cient Consumer Response shrinkage reduction roadmap

Source: “Shrinkage: A collaborative approach to reducing stock loss in the supply chain,” ECR Europe, 2003


StrategyWhat an organisation will do about risk and its commitment to risk management

ProcessHow an organisation will manage risk - procedures, practices and tools

StructureWhat people, committees, forums and techniques are needed to support, promote and drive risk management throughout an organisation

TechnologyWhat systems and applications are best suited to monitor, prevent and report on high risk incidents

CultureHow does the organisations’ culture support appropriate risk taking behaviour

Strategy

Policy

Organisationstructures

Humanresource

mechanismsCommunications

Performancemeasurement

Managementeducation

Assurance

Riskmanagement

processes

Identify

Analyse

TreatMonitor

Report

Technology

Culture

Figure 8.6: PricewaterhouseCoopers risk management framework

Shrinkage



Take a whole-of-business approach A whole-of-business approach is unquestionably needed to address and manage shrinkage and bring about signifi cant and sustainable improvements, yet for many retailers it is seen as the sole responsibility of the loss prevention team.

Considering the potential causes and contributing factors across the retail value chain gives clear insight into the array of business functions and departments that can infl uence the shrinkage result. This underlines that there must be ownership and accountability for management of shrinkage across the breadth and depth of a retail organisation.

Because a wide range of factors contributes to shrinkage, objectives can often confl ict within and across departmental business functions. Natural tensions and cross-purpose objectives are commonplace.

An example of one such confl ict concerns defensive merchandising – the trade-off between maximising sales and product security. Moving a product category off-show to stop theft can lead to an immediate drop of sales of 15 to 20 per cent. Another confl ict involves sustainability – should you reduce packaging costs and size or go for a non-pocketable packaging design? A third is the trade-off between customer service and company policy – the choice between empowering staff to solve customer problems in real time and deliver outstanding service, versus requiring them to strictly comply with standard operating procedures in processing of refunds or returns.

There is no simple solution to these tensions. Retailers that demonstrate best practice are those that work across functions to make informed decisions and whose senior leaders ensure that performance metrics exist across departments and are aligned to remove unintended consequences.

As Figure 8.7 shows, many tactics can be used to manage shrinkage. These should be part of a broader strategy to address shrinkage across a business, which must be tailored to individual retailers and their respective risk areas. There is no right answer or complete template that can be applied to control and reduce losses.

Similarly, businesses must be prepared to modify tactics, equipment and processes through trial and error. Regular reviews are necessary to address changing circumstances within the business and in the broader environment.

Shrinkage


People and processes• Anonymous phone line• Civil recovery• Covert surveillance of customers and employees• Employee awareness and training• Employee stock loss training and education• Employee incentives – discount purchase systems• Employee incentives – stock loss bonus schemes• Employee integrity checks• External compliance monitoring• External security/loss prevention function• External stock audit function• Internal compliance monitoring• Internal security/loss prevention function• Internal stock audit function• Random checks on distribution centre picking accuracy• Store detectives• Test purchasing (mystery shopper)• Uniformed security guards

Design and layout• Product location strategies• Designing out blind spots• Designing out crime program• Distribution centre secure storage• Employee entry/exit access control• External security – fences, anti-ram raid, roll shutters• Risk-based design and layouts• Robust anti-theft packaging• Single direction product flow• Supply chain and logistics network design

Procedures and routines• Annual stock loss awareness campaign• Company-wide stock loss refresher training• Customer returns and refund controls • Damaged goods resale controls• Employee exit searches• Hot product identification and management • Hot products routine counting• Security newsletter• Internal key control• Patrol routes for employees• Point-of-sale information or data checks• Random till cash checks• Rigorous delivery checking procedures• Shelf replenishment techniques• Induction training for new employees• Unique till operator PIN numbers• ‘Watertight’ product monitoring procedures

Equipment and technology• Automated ordering processes• Cash protection tactics and equipment• Company-wide stock awareness posters• Dummy display cards in place of high-risk products• Electronic article surveillance (EAS) hard tagging (recycled)• EAS soft tagging (disposable)• EAS source tagging (disposable or recycled)• Employee purchasing arrangements• Employee panic alarms• Employee uniforms without pockets• Intruder alarm systems• Non-active CCTV• Point-of-sale camera monitoring• Protector display cases applied by retail outlets• RFID intelligent tags on pallets, cases or items• Replenishment equipment to support techniques• Secure lockers for employees• Security sealed containers/shippers• Shoplifting and theft policy posters for customers and staff• Specialist anti-theft display equipment

Figure 8.7: Tactics for reducing stock and cash loss

Source: A Guide to Collaborative Loss Prevention, ECR Australasia 2002

Shrinkage


Win commitment and support from senior leadership Managing shrinkage to gain a signifi cant and sustainable improvement is no different to any other initiative or program of change: its success will depend on the support of senior business leaders. Executive sponsorship over the long term is the key to ensuring cooperation across departments to achieve common objectives. Best practice begins at the top.

Leaders should endorse a clearly articulated code of ethics and associated code of conduct which states what is and is not allowed. Policies should be comprehensive and there should be a zero-tolerance attitude to breaches and non-compliance. Breaches should be dealt with quickly and decisively.

Board level measures can include reporting on shrinkage results in board papers. At executive management level, companies could require regular reporting on shrinkage as part of the business’ overall performance, for example as part of the ‘balanced scorecard’ approach.

Other steps include appointing a loss prevention director who reports directly to the chief executive, and tying rewards to a shrinkage result across the business and cascading down to middle and lower levels.

Budgeting is important too: loss prevention teams should be given priority in resourcing and when deciding on capital expenditure.

Internal communications should stress the importance of shrinkage control and report progress and celebrate success, highlighting achievements and special efforts. The core message is that shrinkage is an important issue for the business and everyone has a role to play.

It is only through these types of actions and behaviours that a retail business can hope to raise awareness of shrinkage and foster a culture across the organisation that makes its prevention and control a top priority.

Use appropriate technologyAdvances in technology have helped cut losses to shrinkage in recent years. Loss prevention teams now have available to them a wide range of systems and equipment through which they can investigate, identify, solve and prevent incidents of theft and fraud. Of course these systems come at a cost and may not be commercially viable for all retailers, however, they will continue to develop and we will see more of them enter mainstream retailing in years to come.

Fast adoption of emerging and new technologies is not necessarily the best practice. Rather, loss prevention teams should become familiar with the solutions and their potential. They should look at the indirect and intangible costs and benefi ts of solutions, such as their impact on customer service, in-store experience, staff morale and so on.

This will help teams develop detailed and compelling business cases for investment in loss prevention technologies, and to capture and express these costs and benefi ts such that they can compete successfully for capital expenditure sought by others within the business. The ability to monitor, measure and report on the value obtained from the investment will ensure credibility and secure future funding requirements.

A recent ECR Europe survey supports this viewpoint, noting that loss prevention practitioners need to show greater rigour and professionalism in developing the business cases for investment, and how they measure and monitor the performance of the solutions they recommend.2

2 Preventing Retail Shrinkage: Measuring the ‘value’ of CCTV, EAS and data mining tools, ECR Europe, February 2008

Loss prevention technologies include:

digital video recording systems.

cameras and digital video recorder incorporating pan tilt zoom and high-resolution controls.

internet protocol cameras for remote and continuous real-time monitoring

cameras linked to point-of-sale data for suspicious transaction analysis

camera integration with RFID to track product movement in store

intelligent surveillance incorporating people sensing and identifi cation of suspicious behaviours – congregating, dwell times etc

RFID including in-store applications such as intelligent displays, fi tting rooms etc

bottom-of-basket scanning

data analytics for exception reporting on suspicious transactions.

Additional capabilities associated with camera systems:

motion alarms

people counting, traffi c fl ow analysis and understanding consumer in-store behaviours

sales performance and training tools

staff rostering

out-of-stock detection

facial recognition.

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Shrinkage


Table 8.2: Shrinkage technology


Focus on people as the solutionAustralian retailers surveyed by the Centre for Retail Research in the UK indicated that 40 per cent of their total shrinkage was associated with employee theft.3 While this alone suggests that shrinkage solutions should focus on employees, best practice retailers also recognise that employees can be the best defence against all other sources of shrinkage, including customer theft, administrative errors and supplier/vendor theft.

As shown in Figure 8.7 employee-based measures are numerous. Some recognised best practices include:

screening recruits through rigorous reference, criminal and integrity checks and tests

a strong focus on company ethics, values and the impact and consequences of shrinkage and theft in employee induction processes

a zero tolerance approach to theft with highly visible consequences

regular refresher training at all levels across the business

anonymous hotlines for employees to report suspicious behaviours or concerns

open communication on the use and rationale for surveillance systems

incentives that reward desired behaviours and share in the gains made.

Building on these elements to create strong store teams with engaged employees and focused store leaders is where the signifi cant and more sustainable results lie – not only in shrinkage results but other critical performance metrics such as customer service levels, employee productivity, absenteeism, staff turnover and procedural compliance.

PricewaterhouseCoopers research4 has found that for theft or fraud to occur, two preconditions must exist: perpetrators must have personal reasons for engaging in criminal acts and be able to rationalise their acts to themselves; and most corporate victims lack suffi cient controls to detect economic crime and the ethics, values, programs and systems to discourage it.

The strong correlation between shrinkage levels and staff morale confi rms these fi ndings. We suggest retailers focus on employees as being part of the solution rather than the problem as they seek to control and manage shrinkage.

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Tighten procedural compliance The fi nal key success factor in controlling shrinkage relates to procedures and compliance. Shrinkage is often associated with a lack of tightly defi ned, well executed procedures. This point has been widely documented and noted by loss prevention operatives,5 yet many retailers do not have strong procedures that cover all the major weaknesses and shrinkage opportunities across the supply chain.

Retailers should develop strict procedures for in-store activities such as:

processing returns or refunds

cash handling

goods receipting

stock audits

security and key management.

There are opportunities to develop and implement controls elsewhere, as part of the solution to shrinkage is in reducing administrative or internal errors and supplier mistakes. These were identifi ed as responsible for 23 per cent of shrinkage in Australia in 2007.6 While human error will always exist, reviewing distribution, deliveries and price changes and developing procedural controls and sign-offs can lead to signifi cant savings.

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3 The Global Retail Theft Barometer, The Centre for Retail Research, Nottingham, 20074 “Economic crime; people, culture and controls,” the fourth biennial Global Economic Crime Survey, PricewaterhouseCoopers, 20075 Effective Retail Loss Prevention, Adrian Beck, University of Leicester, 20076 The Global Retail Theft Barometer, The Centre for Retail Research, Nottingham, 2007

Shrinkage


Take actionKnow your shrink:

how much is it?where is it coming from?what do the trends look like?

Carry out a shrinkage audit:

audit your storesreview procedures, policies, controls and compliance identify weak spots across your entire value chainassess exiting preventative mechanismstest staff awareness and attitudes.

Make shrinkage a strategic priority:

demonstrate the potential profit gainsengage relevant stakeholdersgain executive support and sponsorship.

Develop a plan:

identify and investigate available solutionsset targetsoutline initiativesidentify resource requirements track and measure results and progress.

Engage the business and execute:

communicate the need to control shrinkage to the entire businesscollaborate across departments to reduce lossescontinue your focus to keep shrinkage in check.

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Brendan Gibbs | Director PricewaterhouseCoopers Advisory Performance Improvement +61 3 8603 3501 | [email protected]

Brendan Gibbs is a Director in PricewaterhouseCoopers’ Retail and Consumer Practice. He has extensive consulting and senior management experience having worked with retail and consumer businesses for over ten years. His expertise is helping businesses grow and improve their performance by developing and implementing strategic and operational initiatives.

Shrinkage

ConclusionShrinkage is costing Australian retailers on average 1.4 per cent and up to an estimated fi ve per cent of their sales revenue.

In an environment where revenue and profi t margins will be under increasing pressure, addressing shrinkage should be a priority.

A whole-of-business approach is needed, beginning with an audit that identifi es how much shrinkage is costing the company and where it is occurring. Companies should then develop a structured plan to tackle the problem.

Leadership is vital in driving change and cutting losses. Efforts should begin at the top; executives must foster a culture in which reducing shrinkage is top of mind. Companies should tighten processes and monitor compliance with well-defi ned procedures, and staff should be treated as part of the solution, not part of the problem.

XXXXXXXXXXXXXXXXXXXXXXXXXXX


The way I see it

By the end of 2008, Cotton On will have 450 stores in fi ve countries delivering more than fi ve brands. We currently operate in Australia, New Zealand and Singapore, with Malaysia and Hong Kong next on the list.

I report to the CFO and have twelve people on my Loss Prevention team. When I joined Cotton On back in 2005, I was their fi rst designated loss prevention resource, so I’ve had a rather unique opportunity to come in and tackle loss prevention with somewhat of a blank canvas.

When I started, our store numbers were half of what they are now and management of shrinkage was not a priority as we were focused on growing the business. Since I joined we have built a strong Loss Prevention team and implemented a large number of initiatives and as a result have managed to halve our total shrinkage number.

The process we embarked upon two-and-a-half years ago centred on changing the culture within the company. We started with a diagnostic to determine just what our shrinkage was and where it was occurring. Then it was a case of snapping staff into a new attitude. This involved making them accountable to the company and to management, and clearly communicating a ‘zero tolerance’ policy for any dishonest practices.

In the fi rst 12 months we had to dismiss a large number of employees. While this was a diffi cult time, it was an important part of cleaning up the business and setting a new standard and culture.

We then went to work on improving our recruitment and training processes. We did things like incorporating shrinkage into new employee induction training, which included creating a loss prevention handbook that outlines our policies and procedures. Staff also attend bi-annual refresher courses.

In addition, we began conducting police checks for employees and established a confi dential hotline where staff can report concerns or suspicions about dishonest behaviour.

Other initiatives we have implemented include:

providing staff with a generous discount to remove some of the motivation for employee-based theft

implementing operational audits at both the retail stores and distribution centres

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introducing customer service metrics and bringing in mystery shoppers

delivering fortnightly store newsletters to every employee to educate them about loss prevention initiatives and investigations that have resulted in staff dismissals

implementation of cash handling strategies

system upgrades at both Point of Sale (POS) and back end.

Cotton On has also developed and implemented a ‘storewatch’ system where we report monthly on a whole raft of items including till variances, refunds, high frequency of lay-bys,stock adjustments and cash handling. Rankings are produced by store, region and state and this is part of their incentive program. This has been a major driver behind our loss prevention success and we recently developed a similar system for our distribution centres.

Other important factors that have helped us achieve results include senior leadership sponsorship. This has been vital. It was initially diffi cult to gain the support of the leadership to employ the resources required, given all the things we were working on to grow the business. But it got easier once they started to see the return on investment of these programs.

It was also important to build rapport and strong working relationships with other departments and educate them on the purpose of Loss Prevention. Natural tensions exist between the different areas of the business when it comes to preventing and managing shrinkage so the loss prevention team has worked hard to understand the shrinkage-related issues and challenges in each area. We now cooperate more closely with each group.

A particularly important partnership is with Human Resources. HR and Loss Prevention have joined forces and work closely on recruitment. We need to ensure we are employing the right people with the right values for our company – especially as we grow aggressively.

Initially staff perception of our function was negative, but through education and communication we have really turned this around. Today, people understand we are all working together for a common goal.

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Jacqui HennesseyGroup Risk Manager,Cotton On

Shrinkage

09

Peo

ple


Attracting and retaining the right employees is an ever-increasing cost for retail organisations. Some turn over up to 70 per cent of their staff each year, while others struggle to fi nd the staff needed just to open their doors. The shortage of talented and capable staff is making it diffi cult for retailers to do business as usual, let alone deliver on competitive growth strategies.

Current forecasts suggest the labour market will only get tighter. The smaller labour pool, driven largely by an ageing workforce and the resources boom, is creating a ‘war for talent’. In a highly competitive talent market, retailers can no longer ignore their high staff turnover rates or assume they will be able to take their pick of the young, part-time, mobile workforce.

At its core, retail is a people business. Getting good people to connect with customers, products and services is a key element to success. Organisations must plan, prioritise and strategise about their people like never before. Those that develop creative and competitive solutions will win the war for talent and achieve sustained high performance.

Low profi t margins make it imperative that retailers think strategically and pursue people initiatives that support their customer value proposition without increasing their costs. This involves tailoring the people budget appropriately to receive the strongest possible return on investment.

Retailers will continue to struggle to attract and retain staff in a tight labour market.

Quality staff are needed to deliver consistent service and differentiate a retailer from its rivals.

While Australia’s population is ageing, the retail workforce is relatively young.

Retailers need smarter people strategies to engage a young, mobile workforce.

Strategic workforce planning is one of the keys to a successful people strategy.

Creating an attractive employment value proposition is also vital to long term success.

A company’s brand is as important as financial rewards in attracting and retaining staff.

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The outlook

People

Why should I work for you?


Youth serves an ageing population The retail industry is Australia’s largest employer, providing about 1.3 million jobs or 15 per cent of total employment in 2006 (see Figure 9.1). The industry has a unique age profi le, with a median age of 30 compared with a workforce median of 39 (see Figure 9.2). About 46 per cent of retail employees were born between 1976 and 1991, and are part of the so-called Generation Y.

Furthermore, the industry has a high level of part-time and casual employment. According to the Australian Bureau of Statistics, at the time of the last census, about half the industry was employed on a part-time basis compared with almost one-third of the national workforce. The industry was also the largest employer of women in Australia, with females accounting for 54 per cent of employees. Most of these women are employed in positions below managerial level.1

In contrast to the youth of the retail industry, the Australian consumer is ageing. Between 1980 and the turn of the century, the number of Australians aged over 55 years grew by 98 per cent (see Figure 9.3). Over the 20 years to 2020, this age bracket will grow by 154 per cent while the number of people aged 15-24, who made up over one-third of our retail workforce in 2006, will grow by just six per cent.

The implications of the demographic trends are that they will present three main challenges for retailers:

attracting and retaining staff in a highly competitive environment

engaging a young, mobile workforce

creating a workforce that consistently delivers the customer value proposition.

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Full-timePart-time

Employees

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

Agriculture, forestry and fishing

Mining

Manufacturing

Electricity, gas and water supply

Construction

Wholesale trade

Retail trade

Accommodation, cafes and restaurants

Transport and storage

Communication services

Finance and insurance

Property and business services

Government administration and defence

Education

Health and community services

Cultural and recreational services

Personal and other services

Figure 9.1: Employees by industry, 2006

Source: Australian Bureau of Statistics, Census of Population and Housing, 2006

1 Australian Retailers Association, Balancing the Till: Increasing Profi ts and Building a Better Workforce, Australian Retailers Association, 2002

People


0%

3%

5%

15 20 25 30 35 40Age

45 50 55 60 65 70 75

Generation Y – 46 %

Generation X – 27 %

Boomers – 22 %

Veterans – 5 %

Australian workforce

% o

f wor

kfor

ceFigure 9.2: Age distribution of workforce, 2006

Source: Australian Bureau of Statistics, Census of Population and Housing, 2006

0%

20%

40%

60%

80%

100%

0-15 15-24 25-34 35-44 45-54 55-64 65+

Age

%ch

ange

1980-2000 2000-2020

Figure 9.3: Population growth by age, 1980-2020

Source: Australian Bureau of Statistics, Australian Historical Population Statistics, 2006 and Australian Bureau of Statistics, Population Projections (2004-2101), 2005

People


Attracting and retaining staff in a highly competitive environmentHow will you attract the volume of employees you need, especially those most sought after by competitors?

The ‘war for talent’ has made attracting employees a key business risk: it was the number one concern cited by Australian CEOs in PricewaterhouseCoopers’ 2007 CEO survey.2 The demographic double-whammy of increasing life spans and declining fertility is resulting in an ageing population. Accordingly, retailers have a shrinking labour pool from which to draw staff. The impending retirement of the baby boomers and the small size of our newest generation of employees – Generation Y, currently aged 16-30 – will make matters worse.

In addition, retailers recruiting low-skilled, front-line staff are increasingly being gazumped by employers in the mining industry, particularly in Western Australia and Queensland. Lowering recruitment standards is not a sustainable solution. Retailers must recognise that, when it comes to front-line employees, non-technical skills, such as a passion for the product, are key.

A tight labour market shifts power from the employer to the employee and allows employees to be highly selective in choosing an employer. This is resulting in increasing resignations3 and a decline in acceptance of job offers. Salary is undoubtedly a factor, and the premium wages being offered to workers in remote locations and booming industries present a challenge to lower-paying retailers.

Retailers will have to be smarter about how they market and deliver on their employment brand to ensure they attract high performers and win employees over despite paying lower wages. A compelling employment brand can have a magnetic effect in attracting a large volume of staff, and reduce recruitment costs. Quality candidates actively seek out employers of choice, thus cutting the cost of advertising. A clear employment brand also encourages people who are the right ‘fi t’ and have reasonable and informed expectations of the organisation to approach it for employment.

Engaging a young, mobile workforceHow will you reduce staff turnover and convert your people expenditure to an asset by engaging your young mobile workforce?

Historically many people enter the retail industry in their youth (see Figure 9.2) and often on a part-time or casual basis. A high proportion of these employees are students in transient employment and, as such, staff turnover is traditionally high. While there are clearly direct costs of staff turnover, there are also hidden costs. These include lost sales and productivity, increased overtime and contractor costs, hiring and on-boarding costs, and decreased customer satisfaction and institutional knowledge. Saratoga, PricewaterhouseCoopers’ human resource benchmarking tool, found that when combined, these staff turnover-related costs represented more than 12 per cent of pre-tax income for the average company.4 Understanding the real costs of staff turnover is crucial to understanding the benefi t of targeting people policies to improve staff engagement.

Furthermore, investment analysts are increasingly taking into account how organisations manage their people. In line with trends in the United Kingdom and United States, investors and analysts now see people management as a major indicator of success and they therefore assess intangible resources such as workplace culture, employee satisfaction and intellectual capital.5 There is also a direct link to the bottom line. Companies on Fortune magazine’s list of the 100 best companies to work for in the US outperformed the market by eight percent between 1995 and 2000 outperformed the market by eight per cent.

High staff turnover is not a new predicament for retail. However, in a changing talent landscape, where attracting and retaining staff is becoming even more diffi cult and costly, engaging this group of young and mobile employees will be key to the sustainability of the retail workforce. Retailers need to have retention strategies for different generations, role profi les, tenure levels and those in permanent or casual roles. There is real evidence that leading retailers are beginning to actively use employment branding to promote their organisation, and indeed the retail industry itself, as a viable long-term career choice to young workers.

2 11th Annual Global CEO Survey, PricewaterhouseCoopers3 2007-2008 US Human Capital Effectiveness Report, Saratoga, PricewaterhouseCoopers4 “Driving the bottom line: improving retention”, Saratoga, PricewaterhouseCoopers, 20065 “Global talent war – how to get the most of your retail staff”, Inside Retailing Magazine, 9 April 2006

People


Creating a workforce that consistently delivers good serviceHow will your workforce meet the needs of a changing customer base?

Retail business models will need to change radically over the next decade to cater to shifting demographics and, consequently, the changing expectations of both consumers and the workforce.

Australia’s four million baby boomers, who are now aged 47 to 62, have large disposable incomes and active lifestyles and will continue to drive retail expenditure. However, retailers will continue to employ younger workers. Even with strategies to retain baby boomers in the workforce, the generational gap between employees and customers is predicted to widen. This increases the risks relating to relevance of retail products, marketing strategies and approaches to customer service.

Retailers will increasingly respond to the lucrative grey dollar with new store formats and customised products. For example, German grocery chain Kaisers has opened a pilot supermarket called Generation Markets and employs a high proportion of people who are in their 50s.6 This store has better lighting, wider aisles, non-slip fl oor, emergency buttons to summon assistance, smaller packaging, and even magnifying glasses attached to trolleys to help weary eyes decipher product labels. In addition to its tailored layout and products, Generation Markets employs people who are in their 50s.

As the population ages, Australian employers will need to consider strategies to attract and retain employees who better fi t their customer base. However, in a multi-generational workforce, employees and employers both will need to be more innovative and more technologically savvy, which will in turn require different performance management and skill development strategies.

Strategies to address these challengesOne way leading organisations are meeting staffi ng challenges is by applying a framework to determine what people they need and what they must offer to achieve their goals (see Figure 9.4 below).

The two essential elements of the framework are:

strategic workforce planning to identify and guide decisions about the management of labour force risks

developing an employment value proposition that will attract, engage and retain the right employees to produce desired performance outcomes.

Strategic workforce planning and an employment value proposition (EVP) are decision making tools that can help an organisation mitigate workforce risks and create an attractive work environment that enables its people to perform.

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• Right skills to deliverbusiness strategy

• People aligned toorganisational values

• Talent pipeline

• Profit/revenue

• Delivery of customervalue proposition

• Sales

• Risk and quality

• Development and careeropportunities

• Reward and recognition

• Work environment

• Employer reputation

• Culture/values/corporatesocial responsibility

To get the outcomes we want...

OrganisationalPerformance

And what deal do we need to make with them?

Employment ValueProposition

Who do we need?

Strategic WorkforcePlanning

Figure 9.4: PricewaterhouseCoopers integrated people framework

6 “What’s old is new: grocery store courts seniors”, ABC news, 2007

People



Strategic workforce planning involves designing the optimal labour mix of the future workforce and the means by which it will be realised. It takes into account not only the organisation’s business goals but relevant internal and external environmental forces which may affect the demand and supply of critical labour resources.

An EVP delivers a consistent experience to employees from the moment they join an organisation until they walk out the door. Put simply, an EVP refers to the benefi ts an employee receives in return for their performance on the job. It is a deal that typically has several elements, both tangible (eg staff discount cards) and intangible (eg a supportive and enjoyable working environment, see Figure 9.5).

It is a little acknowledged fact that every organisation has an EVP – whether they have articulated it or not. Organisations should use their EVP as a strategic tool to gain a competitive advantage by attracting staff and delivering a consistent experience to consumers.

Just as products and sales strategies are tailored to customer segments, the make-up and mix of EVP elements on offer should align with the individual preference of the employee. Your expenditure on human capital does not necessarily need to increase; instead it needs to be managed to satisfy individual preferences. This is because engagement drivers differ by segments: by demographic, hierarchy, occupation and tenure.

People

• Performance-based pay

• Constructive organisational culture

• Learning and development opportunities

• Strong leadership

• Flexible work practices/roster

• Quality or innovative products

Organisation to individual

• Sales revenue

• Constructive behaviour

• Industry knowledge

• Strong following (ie dedication and loyalty)

• Going above and beyond

• Passion for the product

Individual to organisation

Figure 9.5: Employment value proposition example



What the leading organisations are doingLeading organisations are actively shaping the make-up of their workforce to achieve business directions and goals. They are using strategic workforce planning to manage emerging issues such as generational change, evolving skills requirements, labour market shortages and work-life balance considerations.

A large Australian retailer recently developed a strategic workforce plan to determine the optimum number and composition of its workforce. Historically, this retailer used traditional resource modelling that looked at identifying the schedule of its staff based on customer traffi c.

After completing a strategic workforce plan, the retailer realised the hours it offered were not attractive and staff that did accept the hours didn’t stay long. By modifying its resourcing model to balance both effi ciency and labour needs, this organisation successfully reduced its labour costs.

Once leading organisations understand the mix of employees they require and the drivers which motivate them, they modify their employment offer accordingly to attract, engage and retain. This involves determining the most attractive characteristic of your organisation and using it to best advantage in all your people practices. For example, if learning and development is what high performers value most about your organisation, use that as a key selling point in employment branding and recruitment to attract people who value learning and development. Then reorganise your policies to enable plentiful training opportunities, develop front-line managers to facilitate learning and development on the job and build a learning and development component into every work process an employee touches.

From overseas travel opportunities to going ‘green’, retailers are developing and selling their EVP to the workforce. Organisations that do it well are clear about what they can offer and shape all of their people practices accordingly.

Google is widely known to provide its staff with a vast array of benefi ts including free gourmet food, a 24-hour gym, an in-house doctor, a bio-diesel shuttle bus to and from work and a casual clothes policy. These benefi ts are one of the reasons that Google receives over 3,000 unsolicited job applications a day.8

Closer to home, David Jones attributes its strong talent pipeline to the strength of its brand. In a world that is increasingly branded, retailers have a distinct advantage. Many are expert at delivering on a strong and consistent customer experience. However, it is vital to develop an EVP that enables your organisation’s desired customer value proposition.

The McKinsey consultancy fi rst emphasised the importance of having an EVP 10 years ago. In 2008, it now notes that successful businesses are tailoring their employment brands to target segments with different values, ambitions and expectations.7 For example, ‘want it now’ Generation Y employees are more motivated by the prospect of performance-based pay than ‘forward planning’ baby boomers who see additional superannuation as critical (see Figure 9.6).

Not all components of a successful EVP require fi nancial investment. Honest and timely communication helps engage all employees. In fact, the non-fi nancial aspects of an EVP are those that cannot be easily replicated and are therefore more advantageous.

Delivery is paramount: an organisation’s EVP should be aspirational while still achievable. To retain employees, organisations need to meet the promises made during recruitment. Just as a disconnect between the promise and delivery of a product results in a dissatisfi ed customer, a disconnect between the promise and delivery of an EVP results in dissatisfi ed employees. Low engagement, exemplifi ed by poor customer service and high attrition, has a measurable effect on the bottom line.

Super Training Benefits Salary Performancebased pay

Generation Y Baby boomers

Figure 9.6: Same spend, different composition – how to target your EVP


7 Guthridge. M, Komm. AB, Lawson. E, “Making talent a strategic priority”, The McKinsey Quarterly, 2008 Number 18 “Achtung Google! Cyber squatter demands a job”, The Age, November 2007

People


Some leading retailers are successfully articulating the full career potential of the industry to young employees. A career in retail can start on the shop fl oor and fi nish in the boardroom, however, the broader workforce perception of this potential career path is not the same. McDonald’s has been actively shaping its external employment brand in an attempt to tackle the perception of ‘McJobs’9 low-prestige, low-dignity, low-benefi t, no-future jobs in the service sector head-on through a series of commercials depicting McDonald’s executives who began their careers behind the counter.

Other retailers are tailoring people practices to the ageing workforce by encouraging mature workers to remain in the workforce, phase into retirement, or return to work following retirement. Older workers are said to have strong product knowledge, resulting in improved customer service and lower staff turnover rates.10 These retailers are considering the unique mix of benefi ts required to engage older workers. Non-fi nancial benefi ts such as training in new technology can be strong drivers. In the US, the architectural and engineering fi rm SSOE gives employees ‘credits’ (up to a certain value) and allows them to customise their own benefi ts package from a series of options including health insurance, life insurance, holiday time and lifestyle packages.

Another key value proposition for mature workers is fl exibility. In a bid to retain experienced workers, US retailers including Home Depot, Borders and CVS (pharmaceutical company) have developed ‘snowbird’ transfers.11 These employees split their time between two stores – one in the sunny south during the winter and another in the milder northern states during the summer.

Flexibility is also a catch for younger workers. As a strategy to differentiate its employment brand in a crowded market, St George Bank developed a way of retaining younger workers by allowing employees to structure their salary so that they can work for four years and then take a year-long paid career break in their fi fth year. In April 2008, Myer began offering six weeks paid parental leave, both to attract more applicants and encourage its predominately female staff to stay.12

In response to changing attitudes among customers and employees, many retailers are using a focus on corporate social responsibility to build a stronger reputation as an employer. UK grocery chain Tesco not only rewards its customers for environmentally responsible shopping via its loyalty card, but instills green values within the company. Staff are offered green travel plans to reduce the number coming to work by car, while the bonuses of senior management are linked to their ability to deliver on energy and waste reduction targets.13 Levi’s encourages community participation by donating US$500 to each organisation in which an employee participates each year.

9 Coupland, D. Generation X: Tales for an Accelerated Culture, St Martin’s Press, 199110 “More help wanted: older workers please apply,” New York Times, March 200511 “Job slots follow ‘snowbird specials’,” International Herald Tribune, March 200612 “Six weeks paid parental leave for Myer workers,” ABC news, 27 March 200813 10 Green Giants, Fortune 500, 20 March 2007

People


Take actionMake workforce planning an integral part of corporate strategy: develop a workforce strategy.

Consider social, political, economic, ecological or technological factors that might affect your business to identify opportunities and challenges for your workforce.

Conduct an employee capability review to determine the number of employees with particular skills required and to deliver on your strategic objectives.

Profile the skill sets you require to help you retain people with certain skills, develop strategies for those that need new skills, or attract new people.

Use focus groups and surveys to engage with your top talent and those who have recently resigned and understand what motivates them. Key questions could include:

– What aspects of your culture and brand are attractive?

– What attracts high performers to your organisation?

– Why do high performers choose to stay or leave?

– What type of organisation are you losing staff to?

– How does your EVP differ from your competitors?

Decide on a mix of rewards that will attract new staff and motivate existing employees to perform.

Tailor your EVP to different workforce segments and test it with potential recruits.

Send clear brand messages to employees, recruiters, customers and the community about what you stand for, both as a retailer and an employer.

Develop and evaluate your strategic workforce planning and employment branding.

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Lisa Eccleston | Director PricewaterhouseCoopers Advisory Performance Improvement+61 3 8603 2738 | [email protected]

Lisa specialises in providing clients with pragmatic, business focused People and Change solutions that are aligned to strategic business objectives. Lisa has over 17 years experience in Human Resources and has a proven track record of organisational change and development. Industry background includes; Financial Services; Manufacturing; Retail and Consulting. Experience covers the full range of HR functions including defi ning and implementing long-term HR strategies and working in partnership with Senior Leadership teams to develop and align organisational capability to execute business strategy.

People

ConclusionDemographic pressures, combined with the resources boom, have made a tighter labour market an unavoidable reality for retailers – and it will remain thus in the foreseeable future. Consequently, it is vital that retailers attract the right staff and engage them effectively.

Stakeholders will take a positive view of an organisation that is clear about what it is trying to achieve and the type of employees and skill sets it requires, and which puts systems and processes in place to ensure it delivers on its promises. Engaged front-line employees deliver quality service to customers, and make a retailer stand out from its competitors.

Your organisation may use a broad range of people practices. It is essential, however, that you play to your strengths to deliver an enhanced customer experience.


Paula BauchingerGroup General Manager – Human Resources, David Jones

The way I see it

Young people commonly see working the frontline in the retail industry as ‘just a job’ while they wait for their real career to take off. Often employed casually or part-time, they join us with an exit plan in mind and the idea that they’re only passing through on the way to a career somewhere else. A career in retail has not occurred to them.

In a tight labour market in which retailers struggle to attract and retain staff, convincing young people that there’s a career in retail for them is one of the larger challenges the industry faces. How do we as employers grab their attention? How do we convert the transient worker into a committed career-focused employee?

Paradoxically, at David Jones we see this challenge as a signifi cant opportunity. If we not only open the eyes of the young to the possibilities of a career but do it better than our competitors, then we turn a widespread concern to our advantage.

David Jones, it’s fair to say, works off a stronger base than other retailers, particularly when it comes to attracting, engaging and retaining staff. As an iconic department store, we have a strong brand. Retail employees aspire to work for us. But this doesn’t mean that we can rest on our laurels.

We have a HR person dedicated to overseeing the development and implementation of our sourcing and attraction strategy. This includes enhancing and delivering our employment brand: what is it we can uniquely offer prospective employees? It involves differentiating our employment brand from our competitors. How do we stand out, particularly to people entering the workforce?

One thing we’ve done is extensive research. All retailers tend to plunder the same labour sources, however, we’re looking to tap unique channels away from the mainstream. David Jones is a great brand and it’s important we get that right, from an employee’s perspective.

We have ensured our website has the right look and feel, and that the content is aligned. We’re dealing with candidates who are tech-savvy, mobile and have high expectations of employers. Selling the benefi ts of a career at David Jones through our website is absolutely vital.

Candidates don’t sit in a single demographic, either. Our offer needs to hit a diverse set of employee target markets. We have overhauled our recruitment collateral across every medium that is likely to touch and engage staff and potential employees.

First impressions are key. We have made sure our messages are consistent and highly visual. We have information across our store network highlighting to staff and the general public that we’re career-oriented. We have a wonderful new recruitment campaign, ‘A career like no other’, that feeds off our broader marketing initiatives.

The organisation continues to strengthen the way it informs staff about career possibilities. We are holding internal and external career information sessions. We are launching a care program that looks after candidates throughout the recruitment process. So, we focus on retention from the moment candidates apply. We seek to engage them, ensure that they understand the benefi ts of our offer and reinforce the aspirational qualities of our brand. This is key to attracting staff and holding onto them.

Line managers play a crucial role in working with frontline staff; helping them, for example, apply for internal vacancies or fostering a strong working environment and relationships with their peers. This assists David Jones to deliver on its promises consistently. It is critical that our employment value proposition has the infrastructure, programs and commitment from managers to ensure employees’ expectations are met.

We have extensive on-the-job training and development, succession planning and fast-tracked career advancement. We have a pay-for-performance philosophy supported by an incentive scheme for frontline employees, staff discounts and recognition programs – all of which signifi cantly motivate staff and produce a better trading result for the company.

Working your way to the top is not some old-fashioned, outmoded notion of a bygone era. At David Jones, we can point to many stories where staff have risen to executive positions. And by promoting from within, we rely less on the vagaries of the external labour market.

People

Tec

hno

log

y

10


The outlookTechnology will play a significant role in enabling retailers to meet the needs of increasingly demanding consumers.

Companies must understand the trends towards interconnectivity, personalisation and sustainability as a first step.

Retailers must review their technology and integrate it across sales channels to meet consumer demands.

Business intelligence systems are fundamental in helping companies know their customers and respond seamlessly to their needs.

Internet blogs are becoming another valuable source of business intelligence in an interconnected world.

The service-orientated architecture (SOA) is a solution to the challenges of multi-channel retailing.

Web 2.0 is paving the way for further personalisation of retail services.

Mobile marketing technologies are helping companies connect more efficiently with consumers.

Sophisticated in-store technology can encourage customers to keep shopping at bricks-and-mortar stores.

Sustainability will be an increasingly important consideration in infomation technology (IT) investment.

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Advances in technology have helped retail and consumer goods companies to compete in the global marketplace and to respond to economic and demographic trends as well as regulatory requirements. But companies are only just starting to use technology to connect with consumers to better supply their wants and needs.

In our rapidly changing world, companies must be fl exible and agile. They must continually invest in technology if they are to keep pace with change and benefi t from the opportunities that inevitably arise. To invest in appropriate technology, companies must fi rst understand three consumer trends – interconnectivity, personalisation and sustainability.

Interconnectivity is dramatically changing the way consumers interact with companies. Its impact can be seen across the supply chain, from marketing and merchandising to store operations. Consumers expect to communicate and interconnect from any place, at any time, and will share more information than ever. But to serve them better companies must manage the information overload.

‘Better’ means more personalised. Consumers expect more individualised products and services in return for sharing details about their preferences. But while consumers are becoming more individualistic, all segments are united in one demand: globally, consumers are looking for products and services that support a more sustainable lifestyle, and Australians are no exception.

Retail and consumer goods companies must get to know their customers better, connect with them on a more personal level and provide the lifestyle choices they want. Finetuning marketing and communication strategies and streamlining supply chains and merchandising are no longer enough. Adjusting technology to meet consumer demands must be an integral part of the corporate strategy.

Technology

Helping you click with customers


Know your customerGaining a deeper understanding of what consumers demand from a brand, product group or company is an important fi rst step in identifying your technology requirements. The second is to analyse how existing or emerging technologies can help you meet those demands.

InterconnectivityInterconnectivity is becoming a way of life and changes the way consumers communicate, share information, transact and socialise. Technology such as mobile phones, laptops and e-mail has led consumers to expect to connect to anyone, at any time, about anything and from anywhere. Thirty per cent of respondents to the 2007 Australian Mobile Phone Lifestyle Index1 survey said their phone was 3G, allowing mobile access to services such as the internet, advanced payment options and e-mail. In 2006 only 11 per cent of respondents had 3G phones.

Online shopping has grown signifi cantly in Australia in recent years, although it still lags behind Europe and the United States (US). IBISWorld forecasts that the proportion of the adult population buying online will rise to 42 per cent in 2006-07, from 36.2 per cent in 2005-06.2 Australian internet monitoring company Hitwise found companies selling appliances and electronics, books, music and video and gaming products had 30 per cent or more website traffi c in the last quarter of 2007.3

Consumers are prepared to share more information than ever. Recent PricewaterhouseCoopers focus groups comprised of consumers in the 18-34 age group indicated that many young consumers are surprisingly willing to share information about their interests and hobbies;4 the facebook generation has integrated social networking sites into its daily life. However, consumers choose whom they let into their connected world. They select the place and the time when they communicate, let messages through or transact. Consumers demand products they want, via the shopping experience they want, from companies that do business in the ways they want.

1 “Australian mobile phone lifestyle index: Advertising on the mobile phone”, Australian Interactive Media Industry Association, March 20072 “Technology – internet/catalogue shopping”, IBISWorld business environment report, May 20073 “Retail sector winners; Apple iTunes grows 15 per cent year-on-year”, Hitwise Australia retail update, January 20084 “How to capitalise on lifestyle advertising in a customer-centric world”, PricewaterhouseCoopers, 2007

Technology

Figure 10.1: Technology implications of consumer trends

Customer

Merchandising Marketing

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Multichannel

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Retail environment

Macro-economy

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Improved on-line presence

Integration

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Informationoverload

Corporate social responsibility

Efficiency

ImplicationsTrends

Interconnectivity

Personalisation

Sustainability



5 Langdoc. S and Ortis. I, “Worldwide retail industry 2008 top 10 predictions”, Global Retail Insights, January 20086 Bracewell Lewis. V, “Trends 2008: European e-commerce and online retail,” Forrester Research, January 2008

To survive in an interconnected world, companies must upgrade their online presence and integrate their operations across sales channels. Processes and technology must connect to give a single view of the consumer, the order and the inventory across channels. Store-wide inventory visibility, in-store pick-up of orders placed online, automated online returns are still exceptions in today’s world but will become the norm in the near future.

A global provider of marketing intelligence for technology companies, IDC, judged that time is up for retailers that fail to integrate their channels.5 Consumers are demanding to have an individualised experience regardless of the channel they use, be it bricks-and-mortar or online. In the future they will move away from retailers that operate their sales channels separately.

PersonalisationRetailers today that are focused on getting the right product to consumers at the right time and right price are only satisfying part of the future customer value proposition. In the future they will have to know their customers better and be able to provide not just a product but an experience, be it more convenient or more entertaining.

Retailers need to connect in a more meaningful, interactive, personalised and convenient way to sell their value proposition to the individual consumer. Connecting means understanding issues important to consumers and making sure goods and services send relevant messages, and also having the technology to communicate those messages through the channel chosen by a target group.

Personalisation has become a two-way street. It is not enough to use the data collected to individualise the offer and to deliver relevant messages. Consumers, particularly Generation Y, want ‘collaborative personalisation’. They want to be actively engaged in the design and development of products and services and are adopting technologies such as Web 2.0 that make this possible. The ability to meet these demands will determine whether products and retailers succeed or fail.

The sheer amount of consumer information now available has become an issue for companies, requiring new levels of customer intelligence and co-ordinated actions. Retailers are being fl ooded with data and need to harness the information to do business in ways that are customer-centric rather than operations centric; understanding consumers is more critical than ever.

SustainabilityThe Chief Executive of British retail chain Tesco, Terry Leahy, identifi ed ‘green’ consumption as the most important trend during the World Retail Congress in 2007. “It is not just the expectation on how we do business,” he said. “The biggest single thing we can do is give customers the tools to make their own contribution.” Technology and market research company Forrester predicts that European consumers will increasingly make buying decisions on sustainability and environmental grounds.6

Technology


Although the trend is less pronounced here than in Europe, Australians have also become more environmentally aware because of issues including drought and climate change, and we expect to see those concerns refl ected in shopping behaviour. The Mobium Group surveyed Australian consumers from a cross-section of society last year and found health and sustainability were concerns for 26 per cent of respondents.7

Sustainability is an important element of corporate social responsibility (CSR), which has become a priority for retailers globally, and they need to have a credible strategy and take a lead in this area to gain consumer confi dence. Information about companies’ carbon footprint has become as important as product safety or child labour.

Retailers will need to increase their investment in technology that allows centralised monitoring and management of CSR variables, from responsible sourcing and supplier compliance systems, to energy and power consumption monitoring systems and carbon labelling.

Sustainability has a broad impact across organisations and is explored further in Chapter 1: Speeding up on Sustainability.

Update your technology The trends outlined above will require retail and consumer goods companies to review their IT systems as they seek to integrate sales channels, improve their online presence and interpret a fl ood of information to connect with consumers better. Market researcher IDC predicts that IT providers will play a leading role in enabling retailers to plan and act differently in 2008. So, which technologies will be the most important?

Business intelligence and integration will be fundamental: companies must fi rst get the basics right – know their customers and react to them in a seamless, integrated way. Integrating systems and processes across the enterprise will be a key for success. Retailers can then build on their knowledge and provide the personalised shopping experience consumers want by updating websites, improving digital marketing or rolling out more sophisticated in-store technology. And with the increasing demand for sustainable lifestyle choices, green IT has become an important factor in technology decisions (see Figure 10.2).

Technology

Figure 10.2: Technologies helping to understand your customer

Customer

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Interconnectivity Improved on-line presence

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Informationoverload

Corporate social responsibility

Efficiency

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Sustainability

Implications

Integration

Business intelligence


7 “Living LOHAS – Lifestyle of health and sustainability in Australia,” Mobium Group consumer trends report, August 2007.


8 Perry. J, “Customer service top of IT agenda”, 24 January 2008, www.retail-week.com/Technology/2008/01/customer_service_top_ot_it_agenda.html9 http://0301.netclime.net/1_5/321/241/133/Chicken%20run%20master.pdf

Business intelligenceTechnology is the enabler to know your customer. Retailers need to harness all the data fl owing in to do business in ways that are customer-centric. Data warehouses and analytical tools will become powerful marketing and merchandising instruments to provide new customer-driven metrics. Retailers will need to understand what motivates shoppers; consumer product companies will need to work with retailers to determine where a product fi ts within the retail mix and how the product will help drive sales and profi ts. With data fl owing in from these different channels, harnessing information is challenging and has become vital. More and more retailers are developing advanced business intelligence strategies to gain customer insights.

At this year’s National Retail Federation Convention in New York, for example, Harrods’ IT Director David Llamas revealed the company used an SAP-based service-oriented architecture to create a cross-channel customer database.8 Data showed that 55 per cent of sales came from the 5.7 per cent of customers categorised as the ‘jet-set elite’. This information allowed Harrods to develop a tiered loyalty program tailored to customer spending with the aim of motivating customers to spend more to reach the next level of the loyalty program.

Understanding your customers based on their shopping patterns across all channels is only one part of an advanced business intelligence strategy. With customers sharing more information than ever, understanding and reacting quickly to changing trends has become another crucial element. Retailers have started to use near real-time monitoring and analysis of internet blogs to keep abreast of trends and respond quickly to them. News headlines can create negative blogs within hours and ignoring the online buzz can put organisations at risk of losing control over their brands, as the following example shows.

British celebrity chef Hugh Fearnley-Whittingstall launched a campaign to outlaw intensive chicken farming in 2008. His ‘chicken run’ generated huge media coverage in traditional channels but also in blogs and social networking sites. Although sales of factory-farmed chickens slumped across all retailers, a poll by the online researcher Spectrum Consulting9 showed Tesco and Sainsbury’s were the focus of most negative sentiment expressed in blogs and online news. Spectrum polled facebook users because they are signifi cantly more likely to infl uence others through online word-of-mouth, which is rapidly becoming one of the most powerful drivers of reputation in today’s highly connected world.

In the poll of 1,000 facebook users, almost half of 13-to-49-year-olds (48 per cent) said they were ‘likely’ to stop buying from Tesco because it sold intensively farmed ‘battery’ chickens. One in three females (35 per cent) and one in four males (26 per cent) said they were ‘very likely’ to stop buying from Tesco. Tesco reacted with a press release announcing that it had doubled its order of free-range and organic chicken, but also by cutting the price for standard chickens, creating another outcry.

Integration and service-orientated architectureWith consumers now shopping online and by phone, as well as in bricks-and-mortar stores, integration across all channels has become a must. However, delivering a seamless shopping experience in a multi-brand, multi-channel environment is a challenge. Creating an integrated retail operation requires tight connectivity from ordering and fulfi lment through what is often a complex supply chain. Most retailers have stand-alone systems and lack the integration consumers demand.

Technology


The service-orientated architecture (SOA) is a natural solution to the challenges of multi-channel retailing. SOA requires thinking in processes rather than systems and as such leads to tighter integration across the business. It supports business integration by providing interoperating services that can be reused by different applications in a fast, cost-effective manner. The SOA architecture is designed to separate business processes and functions into distinct units. For example, it allows data entered into the system, when an order is placed, to be reused by other applications without being re-coded.

Woolworths is one of Australia’s leaders in deploying SOA. The architecture has helped it streamline business processes, integrate new acquisitions and improve visibility of all channels across the supply chain. SOA’s business process management (BPM) capabilities offer real-time oversight of supply chain processes and allow Woolworths to monitor key performance indicators for processes and people. Although Woolworths had the information beforehand, it was not standardised across the different brands, resulting in additional redevelopment costs.

Web 2.0The term Web 2.0 was coined in a brainstorming session between Tim O’Reilly and Dale Dougherty, both founders of O’Reilly Media, in 2004. It refers to a second generation of web applications that has a strong focus on collaboration and sharing. Figure 10.3 illustrates the concept.

Web 2.0, with its dynamic content and greater user participation, is paving the way for further personalisation of retail services. It is also infl uencing digital marketing and media, with traditional media declining and moving towards in-store technology. It has raised the bar for retailers that want to become an integral part of the interconnected life of their customers. Retailers around the globe have taken advantage of this new concept and successfully improved their e-presence, as the following case studies show.

British fashion retailer Topshop, a runner-up in the Retail Week awards 2008, has integrated blogs and podcasts into its website. Interested consumers can sign up to receive style notes, product updates and news by e-mail. Topshop has also launched on facebook. Its Topshop Fashion Fix allows users to view items in detail and stamp a ‘love it or lose it’ comment for their friends to see. Pieces can be shared and passed to other facebook friends, encouraging talk about the latest styles and outfi ts, and shopping trips.

Tesco launched its Web 2.0 site in May 2007, aiming to replicate the community feel of a local supermarket in cyberspace – ‘a selling vehicle with heart’ as Tesco.com IT director Jon Higgins described it. Offering social networking, interactive feedback and user-generated content, it responded to consumer trends of inter-connectivity and convenience. Other features include interactive mapping of all Tesco stores.

Figure 10.3: Web 2.0 meme map

Strategic positioning:> The web as a platform

User positioning:> You control your own data

“An attitude, nota technology”

Flickr, del.ico.us:Tagging, not

taxonomy

PageRank,eBay reputation,Amazon reviews:

user as contributor

Blogs: Participation,not publishing

Google AdScense:customer self-serviceenabling the long tail

Wikipedia:Radical Trust

BitTorrent:Radical

decentralisation

Gmail, GoogleMaps and AJAX:

Rich users experience

The long tail

Data as the “Intel Inside”

Hackability

The perpetual beta

The right to remix“Some rights reserved”

Software that gets better the

more people use itPlay

Emergent: User behaviour not predetermined

Granular addressabilityof content

Rich userexperience

Small piecesloosely joined

(web as components)

Trustyour users

Core competencies:> Services, not packaged software> Architecture of Participation> Cost-effective scalability> Remixable data source and data transformations> Software above the level of a single device> Harnessing collective intelligence

Design patterns

Business models

Source: O’Reilly.T, “What is web 2.0? Design patterns and business models for the next generation of software”, September 2005

Technology


New Zealand Company Ponoko defi nes itself as the world’s fi rst personal manufacturing platform, an online space for a community of creators and consumers to use a global network of digital manufacturing hardware to co-create, make and trade individualised product ideas on demand. It allows consumers to upload their own designs and to choose materials. The designs are then cut with the selected material and shipped to the consumer for ‘assembly’. Consumers can also choose to sell their own designed products via Ponoko, reversing the traditional retail concept.

Digital marketing and mediaThe web will be central to new forms of advertising and marketing. IDC predicts retail and consumer companies will step up targeted advertising in 2008, mostly online, based on opt-in personalised shopper data and internet use demographics. Mobile and proximity technologies are helping companies connect more effi ciently with consumers.

Mobile marketing is gaining momentum. Market researcher M:metrics10 found 74 per cent of respondents in a survey of European mobile subscribers had received an ad via SMS, and as many as 10 per cent responded to the ads. New ways of mobile marketing are being piloted, including use of mobile tickets and vouchers and proximity marketing, in which messages are sent to Bluetooth-enabled devices when they come in range. The benefi ts of these emerging technologies are already tangible.

Elizabeth Arden used mobile marketing in an integrated campaign to promote its Mediterranean fragrance. A print advertisement prompted readers of Marie Claire to send an SMS to receive an online voucher on their mobiles that could be exchanged in any David Jones or Myer store. The idea has been so successful that Marie Claire started similar campaigns with other companies.

During the football World Cup in 2006, Nike promoted its Play Beautiful message in an integrated digital marketing campaign. Print and TV messages led consumers to Nike’s website where they could win a ticket to the event by participating in activities such as a quiz. The vouchers were pushed through to their mobile phones, either as an SMS or via a WAP link. At the event, winners presented the vouchers and were allowed access.

Ford created four separate interactive Bluetooth zones across stands at the Australian International Motor Show when it launched its new range. Each of the zones offered a different interactive experience. Visitors had the choice of receiving animations, videos, ringtones, wallpapers and vouchers relating to each of the vehicle categories, making the experience more entertaining and more personalised. Across all fi ve motor show events more than 44,000 consumer opted for the downloads, allowing Ford to gain insight into peak activity periods and the variation of interaction levels across each vehicle’s zone.

In-store technologyDigital and proximity marketing is also being used more and more in stores. Interactive kiosks, digital screens with customer-context-sensitive functionalities and mobile phones are giving companies more consumer ‘touch’ points.

Kiosks allow retailers to expand their range of products and services by offering a variety of additional services such as home and content insurance, photo printing or renewing fi shing licenses. New technologies for in-store marketing, such as mobile marketing, are being trialled globally.

Technology has another important role – enabling store employees. Ninety per cent of respondents to a Retail Systems Research11 survey last year felt their primary opportunity to improve customer satisfaction in-store was to empower and enable store employees using technology. Customer-centric in-store technology can work to benefi t not only customers but employees and managers, as shown in Figure 10.4.

The maturity and application of these technologies varies signifi cantly. Modernising point-of-sale applications and enabling mobile access for store managers and employees has been an emphasis for retailers for some time, whereas customer-facing technology such as kiosks or mobile self-scans is still in its infancy, as the case studies below suggest.

The UK chain-store chemist Boots recently launched pilot kiosks offering customers in-store internet access. A Boots-branded self-service internet cafe in each store gives customers an alternative method of in-store shopping, enabling them to view and buy items from the boots.com website. This complements the fi rst generation of interactive in-store terminals that offered loyalty card holders instant promotions based on their personal profi le and individual shopping pattern, and is a signifi cant step towards multi-channel integration.

US chain Home Depot is testing a new form of in-store marketing in which messages are wirelessly streamed to a small screen in a hard plastic case that replaces the standard shopping trolley handle. Messages can promote specifi c in-store promotions or clearance items, or can be run across a geographical zone or the whole channel.

10 “Real numbers on mobile data consumption”, United States, United Kingdom, Germany, France, Italy, and Spain, M:metrics, spring 2007.11 Rosenblum.P, “Technology-enabled customer service in the store”, Retail Systems Research report, March 2007.

Technology


12 http://www.epeat.net/13 ComputerWeekly, 20 July 2007

Technology

Green IT

Technology is playing its part in CSR programs as consumers become more concerned about sustainability and regulators impose tighter restrictions on carbon emissions and water use. Companies must consider technology’s environmental impact as well as its role in managing CSR programs.

Environmental criteria such as power consumption, use of toxic material and e-waste are becoming important considerations in IT investment decisions. The Green Electronics Council, an offshoot of the International Sustainable Development Foundation, has launched an Electronic Product Environmental Assessment Tool12 as a guide to ‘green’ hardware. Within its fi rst six months, nearly 600 products had been certifi ed.

Overseas retailers such as Britain’s John Lewis have also started to track emissions over which their IT departments have direct control. John Lewis found that by consolidating and virtualising its data centre, it could cut 250 tonnes of carbon dioxide emissions a year.13

Companies face mounting pressure to manage and monitor CSR variables. Woolworths and the Australian Food and Grocery Council have said they will investigate the costs and benefi ts of carbon labelling, which allows consumers to see at a glance how much greenhouse gas was emitted to make the product. Core ERP systems will need to be adjusted to provide data across the whole supply chain, including on ethical sourcing, packaging, transport and logistics, and for consumer labels and ‘green’ in-store presentation.

Figure 10.4: In-store technology

Customer experience elements

Store competencies

Processes and applications

Infrastructure

Customerservice

Marketing and promotions

Humanresources

Inventorymanagement

Extended customer touch-points

Extended employee touch-points

Extended manager touch-points

Message-orientated middleware Wireless connectivity

Modern POS Integrated payment systems

Integration

Business intelligence

Constant connectivity



Take actionUnderstand your customer: is your business intelligence strategy customer-centric? Do you manage your data well enough to provide the required consumer insights?

Review your technology strategy: is it aligned to the business strategy? Has it become consumer-centric? Is it ‘green’ enough? Do you take advantage of SOA?

Review your online presence: is mobile marketing integrated in your communication strategy? Does your website provide the rich content, the personalisation and interconnectivity consumers are looking for?

Integrate your channels: is your customer identifiable across all access points? Are your processes integrated and do they deliver the same consumer experience? Do you know your true demand?

•

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Michaela Wagner | Senior Manager PricewaterhouseCoopers Advisory Performance Improvement+61 2 8266 1969 | [email protected]

Michaela is a global ERP technology expert and specialises in process and technology integration within the retail and wholesale distribution channels. She has extensive international process and project management experience across Europe, Asia, Australia and New Zealand and advises retail clients on business transformation projects.

Technology

ConclusionNew technologies allow retail and consumer goods companies to quickly adjust to changing consumer demands. Early adoption of relevant technologies can help companies build solid, long-lasting, interactive consumer relationships that go beyond price and location. Relevance is the crucial point – technology is no longer a goal in itself but a crucial enabler of business strategies.


Since opening in 1977, 7-Eleven Stores has grown to more than 360 stores up and down Australia’s eastern seaboard. Today, our sights are set on 400+ outlets nationwide.

Each year our customers spend more than $1.3 billion in our stores, 60 per cent of that on grocery items. Reading a retail and consumer market that is dynamic and fast moving is notoriously diffi cult. Consumer tastes and fashions forever shift. You don’t need to look any further than the members of today’s younger generations – a large number of whom shop at 7-Eleven.

Young consumers, in particular, are connecting with one another in new ways, buying in new ways and buying more often. They are tech-savvy, demanding and looking for shopping experiences that feel interactive and personal.

A successful retailer must be well-placed to react to consumer trends as they emerge by changing the way it does business. Technology provides crucial business tools that enable change to happen and enable a departure from the way that retailers have done things in the past.

For a 24-hour convenience store offering a broad range of products to a wide cross-section of the community, business intelligence technology is vital. It give us an excellent opportunity to reach consumers and it can be used to encourage shoppers to purchase more than a tank of petrol or a pack of cigarettes.

A major focus right now is to provide much better business intelligence than we have today. Our customer insight team already does a good job with the information that is collected internally through point of sale and our supply chain, as well as externally from market research and customer/franchisee surveys. But there are still opportunities to use the information more strategically. For example, we can do more basket analysis. What do consumers buy when they fi ll up the car? We have the data from point of sale but we can do more with it.

The organisation has invested considerable time and effort investigating consumer insights, understanding the marketplace and talking to our franchisees. We have invested heavily in SAP business software solutions. To leverage those investments, we have a four-stage roadmap for all areas of the business for the next few years.

If we are successful, we hope to buy more smartly priced merchandise according to different marketplaces and provide a product range to each market based on a sophisticated reading of the data. We also expect to provide our franchisees with better information to assist them in driving their businesses harder.

One area of high growth is commission-based sales, such as gift cards and phone cards. The challenge for us is how to increase the value of the transaction. This is where we hope our IT tools will give us the information to see what cross-selling opportunities exist. Without good accurate data, we are only making educated guesses.

Technology is also providing us with new in-store opportunities, such as integrating electronic services at the point of sale. Gift cards for a diverse range of suppliers sold in-store are a good example. A customer buys a card, which is valueless until it has been authorised online. When we scan it, though, the purchase is relayed back to a central database and the gift card is authorised.

We haven’t done much in the way of multi-channel retailing through, say, the internet or mobile devices, preferring to focus on convenience. But with more than a quarter of the population – and rising – with a 3G phone, many of them young, we’d be silly not to look at using mobile communication to reach customers.

Opportunity, however, also raises a dilemma. Just because someone with a mobile is walking past a store doesn’t necessarily mean they want to be bombarded by sales messages. You’re looking to endear yourself to customers, not alienate them. At this stage, there’s more benefi t in fi nding out how they think rather than telling them what they should be thinking.

We’re conscious, too, of the growing need to appeal to consumers by promoting healthier lifestyles and green issues. Our Munch range provides customers with a healthy option. As far as the issue of going green, it’s on the agenda but it is also early days. A large component of our technical footprint is outsourced, so it means entering into discussions with vendors. Consolidating the number of servers we use and virtualisation are options for us to think about.

We are also mindful of balancing our corporate Head Offi ce IT projects with those that are visible to both customers and franchisees. For example, we had great success with the store portal, launched a few years ago, which contributed to changes in the way merchandise was delivered to stores. Without that initiative, we wouldn’t have been able to roll out the Munch brand.

In the same way, we hope that the many IT and business projects we are looking at today will be the stepping stones for initiatives well into the future.

Dennis LewisChief Information Offi cer,7-Eleven Stores

The way I see it

Technology


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ents

For further information, please contact:

Stuart HarkerPartner, Retail & Consumer Goods [email protected]+ 61 3 8603 3380

We would like to acknowledge our specialist team of advisors for contributing their insights and understanding into the broad range of issues facing retail and consumer goods companies in Australia:

Sustainability | Sean Lucy, Director – [email protected]

Mergers & Acquisitions | Lorcan Barden, Associate Director – [email protected] and Greg Keys, Partner – [email protected]

Private Equity | James Gulbin, Director – [email protected] and Dan Cotton, Partner – [email protected]

Supply Chain | Oliver Sargent, Partner – [email protected]

IFRS | Daniel Rosenberg, Partner – [email protected]

Tax | Tim Cox, Partner – [email protected]

Corporate Performance Management | Sarah Laidlaw Meehan, Director – [email protected]

Shrinkage | Brendan Gibbs, Director – [email protected]

People | Lisa Eccleston, Director – [email protected] and Katie Bayley, Manager – [email protected]

Technology | Michaela Wagner, Senior Manager – [email protected]

We would like to thank our contributors for taking the time to provide their valuable perspectives:

Michael Luscombe, Managing Director and Chief Executive Offi cer, Woolworths Limited

Pierce Cody, Executive Chairman and Co-owner, Macro Wholefoods Market

Sarah Reynolds, Merchandise Planning and Distribution Manager, Sussan Group

Michael Cooper, Managing Director, The Athlete’s Foot and Hilton Brett, Director, RCG Corporation

Terry Smart, Chief Operating Offi cer, JB Hi-Fi

Martin Svikis, General Manager Business Development, Toll Group

Chris Lauder, Group Financial Controller, Myer

Peter McClelland, Chief Financial and Administration Offi cer, Luxottica Retail – Asia Pacifi c

Jacqui Hennessey, Group Risk Manager, Cotton On

Paula Bauchinger, Goup General Manager – Human Resources, David Jones

Dennis Lewis, Chief Information Offi cer, 7-Eleven Stores

PricewaterhouseCoopers project team:

Content development | Tracy Floro, Senior Manager and Peta Heeney, Business Assistant

Marketing | Kirstie Hutchison, Manager

Communications | Nina Anderson, Manager

We would also like to thank the following people for their contribution:

Steven Banks, David Baur, Steve Bourke, Paddy Carney, Helen Cosby, Debra Eckersley, Elizabeth Foley, Lisa Jervis, May Lawrence, Amir Lefkovic, Oz Ozturk, Andrew Porvaznik and John Studley.

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