Published: November 01, 2012
Web-commerce giant Komplett Group has experienced substantial and rapid growth over recent years, both within its home market of Norway and internationally across Scandinavia. Key to the company’s success is the strength of its service concept, enabling customers to track their online purchases from order to delivery, leading to a high level of trust and customer retention. SEB and Komplett Group joined forces early in Komplett’s lifecycle. Not only does SEB provide working capital services, but the bank also supports Komplett Group across a wide range of advice and support across the company’s complete spectrum of cash, trade and financing needs.
Since listing on the Oslo stock market in 2000, Komplett Group has been rigorous in ensuring that the quality, timeliness and efficiency of its financial reporting and processes exceed stakeholder expectations and provide a benchmark for the retail industry. While strong financial performance is important to every business, whether a small entrepreneurial company or a publicly listed corporation, the board recognised that priorities and demands were changing as the company grew. While customer acquisition remained a vital consideration, building customer loyalty was essential to Komplett Group’s on-going success. Although Komplett Group delisted in 2011, the focus on long-term shareholder value and sustainable growth remains pivotal to its business strategy.
To achieve this, Komplett Group needed to create the most positive shopping experience possible. There were a number of factors involved in this. Some of these are easy to replicate, such as the look and feel of its webshops, product range and pricing. Therefore, while these were essential, they were not areas in which Komplett Group could derive long-term competitive advantage. Komplett Group’s customers particularly valued the quality of service including order accuracy and ease of return, and the ability to track orders from the point of order to delivery. These remain major factors in customers’ decision to shop through a Komplett Group webshop as opposed to sourcing goods through competitors. To optimise the service experience for customers, Komplett Group therefore made the strategic decision to invest in a central warehousing facility at the company’s headquarters in Sandefjord, near Oslo, now totaling more than 21,000m2 of capacity. This is a multi-storey, robotic facility with highly automated stock availability checking, picking, packing and distribution to customers. Despite the scale of this undertaking, Komplett Group knew that this was a vital investment to position the company for future growth, and strengthen the relationship of trust with customers.
In tandem with this major strategic initiative, Komplett Group also needed to rationalise and streamline its processes. Following the merger with Torp Computing Group ASA in 2008, the newly combined group had two different ERP platforms and duplicate business, storage and logistic functions, initially increasing operating costs and reducing profitability. Another, related concern was the company’s financial performance metrics. Working capital efficiency reduced between 2005 and 2008; similarly, return on capital employed (RoCE) was volatile and declining. Enhancing working capital was a key consideration as the higher the costs within the business, the higher the financing requirement and interest costs, putting further pressure on narrow sales margins.[[[PAGE]]]
Komplett Group already demonstrated industry best practice in its use of cash and treasury management techniques, so the company decided to focus on financial processes to identify scope for improvement. To facilitate this, and to help identify the key actions and priorities that would enable them to address competitive, operational and financial challenges, SEB introduced the bank’s unique Corporate Financial Value Chain™ approach. This structured analysis process identifies the underlying causes of sub-optimal performance across areas such as purchasing and sales, risk management, cash positioning, cash flow forecasting, short-term investment and financing, and payments and collections. The main objective is to optimise cash flow, reduce short-term deficits or surpluses and reduce risk (figure 1).
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As a result, SEB helped Komplett Group to integrate the physical and financial supply chain more closely. This involved working through processes from end to end, and helping individuals and departments to understand how their actions impacted working capital and profitability. This was very valuable in helping different business functions, such as treasury and procurement, to align their processes and objectives more closely. While a bank does not have expert resources on areas such as inventory, SEB helped Komplett to identify the financial impact that physical processes, such as the speed of inventory turnover, could have on the business. In addition, the bank was able to highlight how processes such as purchasing from overseas, could be improved.
Based on this detailed analysis of its business, Komplett Group identified a variety of ways in which the supply chain could be accelerated and currency exposure reduced. In addition, Komplett Group and SEB identified a potential working capital improvement of 11 days, equivalent to NOK 109m of unlocked working capital. While in many industries, days sales outstanding (DSO) and days payable outstanding (DPO) are the major drivers of working capital, inventory management is a priority for retailers. Consequently, one of the most important elements involved in achieving working capital and RoCE objectives was to optimise stock turnover and increase the accuracy of forecasted demands, to reduce surplus stock and ensure sufficient supply of popular goods. This required close collaboration with suppliers and customers to understand their processes, behaviours and constraints, as well as identifying potential bottlenecks in Komplett Group’s own business. As a result, in the first year alone, Komplett Group achieved an improvement of eight days in working capital efficiency, with similar enhancements in performance across DIO, DSO and DPO. Working capital ratios have also been enhanced, with an overall improvement too in RoCE.
There are a variety of other initiatives that have the potential to increase financial efficiency, enhance working capital and mitigate risk for retailers. Supply chain finance programmes, for example, increase supply chain resilience by enabling suppliers to access liquidity more quickly and cheaply than they may be able to do by accessing financing directly. Meanwhile, the company benefits from working capital benefits by extending payment terms without compromising suppliers. Stronger relationships between the company and its suppliers also helps to secure supplies during periods of constrained availability, and may enable better price negotiation. Efficient cash and trade processes can accelerate and streamline financial processing, whilst reducing counterparty risk.[[[PAGE]]]
Retailers face a variety of challenges in the coming years, not least increasing competitive pressures, supply chain fragility and the need to attract greater market share to compensate for lower levels of spending during a continued period of economic uncertainty. Emerging sales channels such as social media, which could potentially reach $30bn by 2015 (Booz & Co), bring new opportunities as well as competitive challenges. Treasurers and finance managers have considerable potential to influence some of the factors that enhance competitiveness, such as working capital, supply chain stability, and financial process efficiency, and therefore improve margins and profitability, whilst reducing risk.
Through its expertise developed by working with many of the world’s most successful businesses, proven solutions and unique approach to analysing and addressing business and financial challenges, SEB has become a trusted partner to retailers and other industries alike. In an environment of fast-changing customer dynamics, emerging competitive challenges and opportunities using new technologies, SEB’s Corporate Financial Value Chain™ approach can help treasurers and finance managers to analyse, prioritise and enhance the business fundamentals which provide the platform for growth and success.
Global economic growth is expected to remain flat or to decline slightly in the year ahead, and as a result, the economic environment continues to be challenging for retailers. Online sales represent a significant threat to the traditional high street operators as they have a more efficient cost base and (at the moment anyway) trade on a more tax-efficient basis. This means they can offer product at a lower price point.
The successful retailers will be those that are best able to adapt to changes in consumers’ purchasing decisions and competition from on-line sites. A recent survey found that nearly half of retailers have an optimised mobile site or smartphone app, with 16% planning to increase their investment in mobile technology. Also many retailers have looked to the emerging markets, such as China and India, for growth as consumers are spending more freely. The difficulties faced by retailers have put pressure on their working capital as well as their profit margins.
Major retailers have significant negotiating power with their suppliers and can invariably agree very attractive payment terms.
Traditionally, high-performing retailers have been able to operate with negative working capital – whereby accounts payable exceeds the combined total of receivables and inventory. Receivables are usually limited to amounts due from credit and store card providers – typically only representing 4-5 days’ sales. So the secret is to finance inventory levels through amounts due to suppliers.
PwC’s 2012 European working capital benchmarking study highlighted that performance has declined steadily over the past three years. The median level of working capital as a percentage of sales has increased from 5.3% in 2009 to 7.0% in 2011 (1st quartile from -3.6% to -2.4%) – chiefly due to a build up of inventory.
If the largest 100 European retailer achieved 1st quartile working capital performance, they would release over €20bn of additional cash flow between them.
Typical working capital improvement opportunities in the retail sector include:
NOTES
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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