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KPMG: FOCUS ON RETAIL

Welcome to the latest edition of Focus on Retail.

I know I scarcely need remind you that Christmas is just around the corner and you will all have pushed the button on your festive campaigns. Always the crunch period in the calendar, it feels like it will be as crucial as ever this year. The economic recovery has perhaps lost some steam in recent months, and consumers are still cautious whilst wage rate inflation has remained stagnant. The latest KPMG/BRC Retail Sales Monitor covering October showed that like-for-like sales were flat in October which, following a difficult September, is putting stocking pressure on clothing retailers which may lead to heavy pre-Christmas discounting.

There’s no doubt that competition for share of wallet will be fierce as always. It will be vital to get the timing of any promotions right, and also to maximise the effectiveness of channel strategies. I know that significant focus and investment has been made by many throughout the year to work all channels in harmony and Christmas will be bigger than ever again online this year.

In the meantime, we have plenty to bring you in this edition. There is a focus on getting the most out of data and maximising efficiencies - from analysing the mass of sales and cost data across a store portfolio and turning that knowledge into

new revenue or cost savings. We take a look at how some retailers are utilising mannequins, aisle and door sensors and other devices to track customers and their shopping behaviours. We also consider ways of introducing sustainable cost reductions into the operating model, and discuss the importance of keeping a tight control on working capital.

There has been much attention paid to the recent Employment Appeal Tribunal decision on the treatment of overtime in holiday pay, with many employers very concerned about the implications. We discuss this case (and another equally important pending case centring on the payment of commission in holiday pay) and look at what retailers can be doing in readiness for any final outcomes.

I am also delighted that we have an interview with Sir Charlie Mayfield, chairman of the John Lewis Partnership. With John Lewis recording a 9.4% increase in sales in the first half of this year, and Waitrose also growing market share, Sir Charlie gives us some fascinating insights into the strategy and ethos of the group.

I do hope you enjoy reading this edition – and of course that you enjoy a successful Christmas trading period.

David McCorquodale UK Head of Retail

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© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

https://www.youtube.com/watch?v=x9mwVINhL1g&list=UUvPEMdN_orGlB2PWWetg8yw

MINDING THE STORE / 25 Analysing the performance of store portfolios

CONTENTS

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red

REDUCING COST IN THE OPERATING

MODEL

DON’T FALL INTO THE RED IN THE NEW CONSUMER CREDIT REGIME

SHOULD CUSTOMERS PAY FOR CYBER SECURITY? / 20

/ 04

/ 30 / 17

/ 33

KEEPING ON TOP OF WORKING CAPITAL

INTERNATIONAL RETAIL EXPANSION SERIES / 27

Is your IP in the right basket?

INTERVIEW WITH JOHN LEWIS PARTNERSHIP CHAIRMAN

SIR CHARLIE MAYFIELD

CLOSELY OBSERVING SHOPPERS

/ 10 Producing data to help

better understand your customers

HOLIDAY PAY: ABOUT TO COST

A WHOLE LOT MORE / 14


We know we are in this business today,

tomorrow and beyond, so we can take the

longer-term view

Leading an employee-owned retail giant isn’t a disadvantage, says John Lewis Partnership

Chairman Sir Charlie Mayfield it helps the company make the big bets it needs to flourish.

Image source: Bloomberg/Getty Images

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aking over as Chairman of British high-street favourite the John Lewis Partnership in 2007, Sir Charlie Mayfield has led the firm through a period that has

buffeted many of its rivals.

Despite a recession, budget-conscious consumers and fierce competition, John Lewis department stores and Waitrose supermarkets have thrived. Sales at John Lewis rose 9.4% to £1.87bn (US$3.01bn) in the first half of 2014, with like-for-like sales up 8.2%. Meanwhile, Waitrose grew its market share in a torrid grocery sector to 5% and recorded on average 670,000 more customer transactions a week than in the comparable period in 2013.

Both retailers have significantly expanded their online service. Web orders were up 54% at Waitrose in the first half of 2014 and they account for around a third of sales at John Lewis.

The Partnership is still expanding its high-street footprint; John Lewis aims to increase its number of UK stores by more than 50% to 65 by 2023.

In a world where many brands and retailers are finding consumers increasingly fickle, the Partnership has retained the deep affection and loyalty of its customers with such popular product and service innovations as the offer of free coffee to Waitrose shoppers and the group-wide ‘click and collect’ service.

After joining the Partnership in 2000 as Head of Business Development, Mayfield stepped up to the board as Development Director in 2001 and was charged with formulating the Partnership’s online strategy. He then served for two years as John Lewis Managing Director prior to becoming Chairman in March 2007.

The John Lewis Partnership is owned by its 90,000 permanent staff, and comprises 43 John Lewis shops, 329 Waitrose grocery stores, an

online and catalogue business, a production unit and a farm.

KPMG met Sir Charlie at the Partnership’s headquarters in London’s Victoria to discuss the particular challenges of leading an employee-owned business, operating in a highly competitive, ever-changing retail landscape and developing strategies to succeed in an omnichannel environment.

The grocery market is tough right now. How has Waitrose gained market share? By consistently hammering away at shoppers’ perceptions of price. People have tended to think Waitrose is more expensive than it is, but we have been progressively making headway with our [budget] Essentials range, and with Brand Price Match messages.

We have also relentlessly focused on innovation. Customers want quality, newness and

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Sir Charlie Mayfield, Chairman, John Lewis Partnership

Image source: Bloomberg/Getty Images

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innovation, and we invest a lot in them. We’ve also been investing in the shopping experience. Supermarkets can be functional places, but our focus has been on making the Waitrose experience special through good wine and charcuterie offers. We are putting more cafés and juice bars in stores and enhancing bakeries, and adding spaces for events such as food tasting.

We are also making good progress on being more customer-centric. We now have five million myWaitrose cards. It has proved a great success in encouraging lighter shoppers to spend more, while encouraging loyal customers to keep shopping with us.

It’s all about relationship building. Simple schemes, such as offering free coffee and newspapers, have a high perceived value, and help people make their Waitrose shop a daily ritual, as well as reflecting the brand’s hospitality and warmth.

Unlike other supermarkets, Waitrose has many regular, but infrequent customers, who shop lightly with us. Data from the myWaitrose programme allows us to identify more accurately what would appeal most to different customers, so we can tailor promotions better than ever before.

How is the Partnership staying relevant in a fiercely competitive retail landscape? The traditional retail market has been defined by space and the need for high sales densities, but technology is changing the way customers shop. Sales densities remain important, but they aren’t the only crucial factor.

We have relatively less space than some retailers, but our ‘click and collect’ service makes the John Lewis brand much more accessible, as customers can collect John Lewis orders at 325 Waitrose stores. It’s a brilliantly convenient way to shop and a great example of how we can use the overlap between the two brands to our advantage.

Click and collect is growing at an almost startling rate. We have recognised that convenience really matters to customers. You can no longer base a business model on the belief that someone will drive for an hour to visit your store, no matter how fantastic it is. If there is a closer, more convenient one, they will shop there instead. Convenience is key and we have started to take the brand closer to people with a new Waitrose store at Kings Cross station in London, and the 3,600sqft John Lewis at Heathrow Terminal 2.

We also need to make sure that, if the customer is making the effort to go to the shop, the visit has to deliver a value-adding experience. It has to offer inspiration, ideas and knowledge from the partners (staff).

CLICK AND COLLECT IS

GROWING AT AN ALMOST

STARTLING RATE. CONVENIENCE

REALLY MATTERS TO

CONSUMERS



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John Lewis is experimenting with new formats such as this store at Heathrow Airport

Image source: John Lewis

What challenges does the omnichannel environment present for JLP?Logistics and supply chain are absolutely mission critical, and we have developed our understanding of that partly because of our presence in both retail and groceries.

The creation of our logistics hub at Magna Park, near Milton Keynes, is one of the most important things we have done in the last 10 years. It gives us a supply chain with the agility to deliver to shops flexibly, frequently, accurately – and therefore cost effectively.

Having the supply chain capability to pick orders in hours for next-day delivery is difficult and expensive, but it’s enormously worthwhile and gives us an important competitive advantage, one we are continuously investing in. We are building another 600,000sqft facility at Magna Park and adding a Waitrose national distribution centre. This will be supported by investment in systems, which is essential for the businesses’ improvement.

The group is famous for being an employee-owned Partnership. What are the benefits of running the business on this basis?The employee-ownership model is overwhelmingly beneficial, because the partners’ engagement with the business is so much greater. They are invested in the company financially, professionally and socially. Our AGM takes place with 70 partners who are elected from the business who work in it every single day, and they know what’s going on. Their greater than that of most shareholders.

Our focus on innovation and on investing in our partners’ capability stem directly from our ownership model. One of the things I most enjoy about my job is seeing our partners build up this capability over time, like the amazingly knowledgeable people in our large electrical departments. The food technologists at our research and development (R&D) centre don’t just wake up one morning being great at what they do, they have continuously developed their capabilities throughout their careers.

The Partnership model also allows us to focus on the long term; we can invest more money in our pricing strategy, even though it may not be the best thing for profits this year.

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How does the democratic nature of the Partnership affect the way you manage the business?It changes how we approach problems. For example, we are changing the way we do personnel, administration and systems, and it has not worked as well as we had hoped.

In July, the Partnership Council was forthright in its unhappiness about this, so I commissioned a report that validated some of those concerns. My executive team will report back to the council on what they are going to do about it.

That’s a very tangible sign of the Partnership Council effectively raising its opinion up through the business, for messages to be heard and acted upon. It does a very good job of holding management to account.

We also have a Partnership Board, and its elected directors are absolutely integral to our big strategic conversations. The board’s character is enhanced enormously by having elected directors who care passionately about the Partnership.

JLP customer shopping habits JLP operating profit 2013/14

Nearly two thirds of customers use both in-store and online channels when shopping with John Lewis.

Source: John Lewis Partnership annual report 2014 Source: John Lewis Partnership annual report 2014

64% Omni channels

+4.3%John Lewis Waitrose

+6.1%

2013 20132014 2014

£216

.7m

£292

.3m

£226

.1m

£310

.1m

20% Store only

16% Online only

Does the Partnership model lead to a different kind of relationship with suppliers?We look to develop long-term relationships with suppliers which we think leads to innovation and better products. For example, we’ve worked with one bedding company for 30 years. They have come up with better, much lighter versions of synthetic duvets for us with similar characteristics to down equivalents. Because they have long-term confidence in their relationship with us, they are not afraid to invest in R&D. It’s very difficult to get this if you just have a transactional relationship with your partners.

Pork is another great example. Most pigs are farmed indoors so they can be protected from the sow rolling over them. One of our suppliers, a Danish farming co-operative, has bred sows with lower mortality rates for their piglets. The result is better husbandry, better productivity and better pork. You don’t get these kind of innovations when you are haggling with your suppliers over pennies.



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JLP is one of the UK’s leading multichannel retailers. How do you plan to stay competitive in this respect?Logistics and systems are key. We have to make a significant investment in systems now. It’s difficult to achieve, because you have to do it in flight and it’s a complex architecture due to the range of products we sell. Even though the numbers are painful, we have to make that investment to make sure we have a systems architecture that is fit for the future.

From an ownership standpoint this is not profit maximising. Depreciation for systems is over five to 10 years, compared to 30 years for a store, which creates a drag on your profit and loss on top of the actual cost.

If you are in a business driven by executive remuneration or short-term profits, you have a disincentive in taking those big bets. But we know we are in this business today, tomorrow, next year and beyond, which enables us to take the longer-term view.

It’s also vital to understand the different cost and profit dynamics of the online and offline models. Shops are a fixed-cost business, whereas online is a variable cost model, and if you do both you have to figure out the blend between the two.

WE LOOK TO DEVELOP LONG-TERM RELATIONSHIPS WITH SUPPLIERS WHICH WE THINKLEADS TO INNOVATION AND BETTER PRODUCTS.

Thinking about how to better engage your workforce, boost productivity and foster entrepreneurialism? KPMG is delighted to announce our support of the Inspire Employee Ownership Conference, a one day event where business owners can find out more about the benefits and considerations of the employee owned model.This Conference is free to attend and designed for new and existing businesses of all sizes, as well as public bodies, who want to find out more about employee ownership.

REGISTER your interest now to receive more details.



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http://inspireeo.co.uk/

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A growing band of bricks-and-mortar retailers are using technology to track their customers in-store and generate more revenue.

CLOSELY observing SHOPPERS



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ONE US RETAILER TRACKED 29,000 SHOPPERS OVER THREE WEEKS AND USING THE FINDINGS TO TWEAK LAYOUTS AT 90 STORES INCREASED CONVERSION RATES BY 3%.

When a customer walks into a store and thinks one of the mannequins is watching their every movement, they might well be right. Armed with technology that tracks

customers’ movements, and recognises their gender and race, mannequins are being used to produce data that helps retailers better understand customers. With footfall under pressure – affected by an array of factors, including weather, location and consumer choice – retailers believe this knowledge can be used to increase conversion rates, the average value of transactions and the profitability of stores.

Analysing shopper behaviour can yield instant dividends. For example, one major department store studied traffic flow and found that less than 10% of customers visiting its shoe department engaged with the self-service wall display where merchandise was stacked. Some benches were found to be limiting access. Sounds obvious, but it might not have been spotted without the traffic-flow analysis. Relocating the benches prompted a double-digit boost in the department’s sales.

Mining the data with mannequinsRetailers are using a host of technologies to follow where customers go inside their stores and how they behave. Information can be generated from any or all of the following: aisles and door sensors, iBeacons (which require users to install compatible apps), mannequins, video cameras, Wi-Fi- and Bluetooth-based location triangulation.

Data can be presented in easy-to-read formats, such as heat maps, in real time and has helped retailers reposition sales staff, identify the real prime locations in-store and track whether local promotions attract new shoppers.

Even if the customer has switched off their smartphone and walked past a store, their movements can still be tracked. Using cameras and sensors, it’s possible to analyse how many shoppers walk by (and how this varies across any particular period), how many enter, how long they stay and how many buy products. Such data can be used to adjust opening times, staffing levels, sales techniques and store layout to boost revenues.

Italian mannequin maker Almax caused a stir two years ago with its Eye See mannequins, which use facial recognition technology. In one store, Almax’s mannequins alerted managers to a regular spike in Asian customers coming through a particular entrance after 5pm. When management moved two Chinese-speaking shop assistants to that location at that time, sales rose 12%. Elsewhere, Almax data noted unusual numbers of youngsters using the store in the afternoons – unusual because the shop didn’t sell any products to children. The store changed that and kids’ products now account for 11% of turnover.1

If customers have Bluetooth or Wi-Fi activated on their smartphones, retailers can tap into a much richer stream of behavioural data generated by customers travelling through stores. If shoppers have downloaded an in-store app, they have usually shared their personal details with the retailer. Even if they haven’t, their behaviour can still generate valuable insights. By aggregating data from other shoppers with smartphones, companies can learn what percentages make repeat visits or go to other branches even when they didn’t buy anything.

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Source: 1 www.bloomberg.com/news/2012-11-19/bionic-mannequins-spy-on-shoppers-to-boost-luxury-sales.html



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The allure of appsUsing in-store data to maximise the sales potential of store layouts and service levels is valuable but some bricks-and-mortar retailers are more ambitious, believing they need to transform the shopping environment so dramatically that people visit because they enjoy the experience. Technology can play a part here too: apps can be immensely useful in attracting shoppers. According to the US Mobile App Report 20142, the use of apps occupies seven out of every eight minutes spent on mobile devices.

“Consumer expectations will be that products, services and experiences should be shaped passively by their data in real time and personalised to them. If you’re not doing it, you’ll be seen as less relevant and exciting than those who are,” says David Mattin of trendwatching.com, who cites the Chune app as an example. Through Near Field Communication, Chune takes music playlists from cell phones over a small area, so customers’ favourites can be broadcast in store. Mattin calls it “crowd shaping through aggregating consumer data”. To others, it just sounds like something that makes shoppers feel good.

Shop apps can sort through product wish lists, personalise special offers, minimise waiting times at checkouts and construct the quickest, most productive route round a store. As customers approach products, they can provide key information. Timberland found discounts offered via in-store apps were twice as effective in generating sales as emailed discounts. Giving deeper discounts to customers loyal enough to download a store app – allowing retailers to capture their data – can make these apps even more attractive.

At supermarkets, the check-out experience is crucial. Russian startup Synqera’s Simplate platform scans and reads customers’ facial expressions at the checkout, combines the data with shoppers’ purchase histories (obtained via a loyalty card), and creates custom promotions that can be offered to consumers at the counter, or through SMS, email or mobile apps. If the software suggests customers are in a good mood, it could invite them to complete a survey. Ulybka Radugi, one of Russia’s largest cosmetics chains – with 2.5 million customers and 280 locations – began piloting the platform in July 2013.3

Motions and emotionsSnack food giant Mondelez plans to roll out facial type recognition technology in ‘smart shelves’ where its products are stacked during 2015. The shelves could use weight sensors and motion tracking to calculate what kind of person is buying which product and in what size.

Proctor and Gamble (P&G) is focusing on emotions, not motions. Using software developed by Californian firm Emotient, the FMCG giant can detect seven main emotions – sadness, anger, fear, disgust, contempt, surprise and joy – generating data for its product focus groups. By measuring the level of emotion

across a store, the software could help retailers identify and placate irate customers

by putting more employees on the floor or giving out samples.

When P&G tested three fragrances for its Tide detergent, there was a correlation between the product participants chose in an at-home survey, and the one that provoked the least negative reaction in shops.

IF THE SOFTWARE SUGGESTS CUSTOMERS ARE IN A GOOD MOOD, IT COULD INVITE THEM TO COMPLETE A SURVEY.

Source: 2 www.comscore.com/Insights/Presentations-and-Whitepapers/2014/The-US-Mobile-App-Report 3 www.prnewswire.com/news-releases/russian-retail-chain-ulybka-radugi-to-debut-synqeras-customer-

personalization-technology-213330341.html



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1. Discover which stores are most popular with customers.

2. Identify which products attract the most attention.

3. Evaluate conversion rates of shoppers passing, entering or buying.

4. Highlight necessary changes to store layout.

5. Influence where products are best sited.

6. Determine where staff need to be positioned, especially to tackle customer-service issues such as long queue times.

7. Measure whether various factors affect the likelihood of purchase (such as music or in-store temperature).

8. Enhance the shopping experience by offering personalised discounts, location-based loyalty programs and suggesting new products customers might like.

9. Help shoppers find their most useful path through stores.

10. Increase overall sales and revenue.

TRACKING THE BENEFITSUsing technologies such as sensors, beacons, and Wi-Fi networks can help retailers:

When collecting personal data, retailers and brands using in-store customer tracking technology need to carefully consider privacy. This is particularly relevant to apps, which can be vulnerable to hacking. For instance, the app for a recent live event organised by one IT security firm leaked the details for thousands of attendees. And some customers may just not like the idea of stores using their personal details or tracking their movements. “Retailers should communicate openly with customers about tracking, and always offer a way to opt out,” says David McCorquodale, KPMG’s UK Head of Retail. “This is particularly important in the EU, where new privacy regulations have been recently introduced.”

Brad Lawless, vice-president for Collective Bias, a social start-up linking customers and retailers, says: “Some people balk at retailers knowing too much about them, but we’ve seen shoppers parting with personal information when signing up for store loyalty programs if they receive additional convenience or savings in trade,” says Lawless. “Imagine walking into a store with a shopping list stored on your device. You get in and out more efficiently with less frustration and possibly experience a moment of delight as well.”

“The key to getting shoppers in-store – and converting more of those into customers – is to deliver an experience people can’t get online,” adds Larson. “Delving into their movements, emotions and thoughts is coming up with some answers, and could boost revenues. There will be winners and losers among the competing technologies, but that needn’t stop retailers experimenting. One US retailer tracked 29,000 shoppers over three weeks and using the findings to tweak layouts at 90 stores increased conversion rates by 3%.”

David McCorquodale UK Head of Retail

T: +44 (0) 131 5276718 E: [email protected]



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HOLIDAY PAY:

What is the issue?Employees who earn overtime and commission in addition to their basic pay on a regular basis have been asserting that these pay components should be included in the calculation of statutory holiday pay. Their arguments stem from the European principle that workers should be paid “normal remuneration” when they are on holiday. Employment tribunals have been grappling with how to interpret UK legislation, as the provisions on statutory holiday calculations do not perfectly reflect European law.

What is the position on overtime?A judgment on the inclusion of overtime was released by the Employment Appeal Tribunal (EAT) change on Bear Scotland v Fulton (and conjoined cases). They key points employers need to be aware of are:

• Non-guaranteed overtime payments which are paid on a regular basis should be included in statutory holiday pay calculations. For clarity, this is overtime which the employer is not obliged to provide, but if offered, the employee is obliged to work. Inclusion of non-guaranteed overtime is likely to make statutory holiday pay more expensive for most employers going forwards.

With a major decision from the Employment Appeal Tribunal out this week on employee entitlements to statutory holiday pay, we ask KPMG legal expert Felicity Weston what the ramifications could be for employers in the retail sector.

by FELICITY WESTON, Employment Legal Services team

about to cost a whole lot more?



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• Discretionary overtime (sometimes described as voluntary overtime) was not dealt with by the EAT. This is overtime which an employer may ask the employee to do, but the employee is not contractually obliged to work. The distinction between non-guaranteed overtime and voluntary overtime is important: if the overtime is genuinely voluntary then it will probably not need to be included in statutory holiday pay calculations. However, retailers need to be careful about relying on the ‘voluntary’ and ‘discretionary’ descriptors, because if in reality the overtime is obligatory or it is worked so regularly that it could be considered part of an employee’s ‘normal’ hours (and pay), the overtime may lose its discretionary quality and therefore should be included in the calculation of statutory holiday pay.

• Liability for retrospective claims is likely to be limited because the EAT has applied a series of strict time limits on unlawful deduction from wages claims. Put simply:

– if there is a period of more than three months during which the employer has paid statutory holiday pay correctly, Employment Tribunals (ETs) will not have jurisdiction to hear claims;

– if there is a gap of three months in between periods of holiday, this breaks the chain of unlawful deductions, again, potentially minimising the employer’s liability; and

– workers cannot retrospectively designate holiday as either EU (to which the more generous rules around overtime apply) or UK (to which they don’t). This has the effect of potentially limiting how far back workers and employees can claim.

• The interpretations on how to determine retrospective liability are new and in practice, will require detailed analysis. Although favourable to employers, the novelty of this interpretation leaves the scope of employers’ retrospective liability susceptible to appeal.

What is the position on commission? Running alongside overtime, the inclusion of commission has also been disputed. An Employment Tribunal sought guidance from the European Court of Justice on the subject of commission. The European Court held that commission should be taken into account when calculating statutory holiday pay if it is “intrinsically linked” to the performance of the tasks the worker must carry out under his contract of employment. The Employment Tribunal who will now hear the case must try, if possible, to interpret UK legislation so that it gives effect to European principles. Given the worker friendly decision by the EAT, many expect that the Employment Tribunal will adopt a similar approach. The issue for employers is that as the concept of “normal pay” broadens, including basic salary as well as additional pay components, holiday pay becomes increasingly expensive.

RETAILERS NEED TO BE CAREFUL ABOUT RELYING ON THE ‘VOLUNTARY’ AND DISCRETIONARY DESCRIPTORS...

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Why is the UK interpreting statutory holiday pay differently now?The European legislation – the Working Time Directive – is clear that workers should be paid the same amount during periods of holiday as when they are at work. The UK legislation which was implemented in 1998 to give effect to European legislation works on the simple premise that workers should be paid a week’s pay for a week’s leave. Unfortunately, in practice the calculations are not that simple and have given rise to claims that workers are not receiving the normal amount of a week’s pay when during periods of holiday. Following European decisions on how workers should be paid, UK courts and tribunals have revised previous interpretations on statutory holiday pay calculations. The EAT’s most recent decision being the most significant to date.

So what should I be doing about it?The retail sector will be heavily affected due to the large number of people who regularly work overtime beyond their normal working hours and/or receive commission in connection with the performance of their employment duties (not to mention other pay elements which could be considered “normal pay”). The costs could be considerable. Retailers can get ahead on this issue now by addressing some key questions:

• How do we calculate statutory holiday pay? What does our policy say?

• Should we change our holiday pay calculations?

• How am I going to communicate with employees and their representatives?

• Do employees take their holiday entitlement? If not, why not?

• What records do we have if any claims are brought?

• What could our potential liability be?

• How and when would we need to account for the costs?

• Would we need to reconsider our remuneration and reward structures going forward?

If you need any guidance on how to interpret the EAT’s landmark decision, or need advice on practical next steps, we would be very happy to help.

CALCULATIONS ARE NOT THAT SIMPLE AND HAVE GIVEN RISE TO CLAIMS THAT WORKERS ARE NOT RECEIVING THE NORMAL AMOUNT OF WEEK’S PAY

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Felicity Weston Manager, KPMG’s Employment Legal Services team

T: +44 (0)20 7694 5728 E:[email protected]



Whether cash-rich or cash-poor, tight control of working capital is vital for any retailer. Ben Tatham, Partner at KPMG, runs the rule over some of the key principles.

Whatever an individual retailer’s trading situation, one thing common to all is the importance of controlling and optimising cash and working capital. Whether to fund growth opportunities in an improving climate that some are seeing, or whether to enable others who may still be struggling simply to survive, managing working capital successfully can make all the difference. It is important at all points in the spectrum of financial performance, albeit for different reasons.

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1 Liquidity visibility

Cash is king. It may be a cliché but in the retail sector, and particularly in grocery, a large emphasis has often been placed on the topline performance and like-for-like sales growth. But what retailers also need to know and continually measure is quite simply: how much cash do they have and how much headroom have they got? Historically, the sector has not been especially sophisticated in its measurement of liquidity. I think there have been signs of improvement, with more retailers moving from monthly to weekly forecasting, for example, but it is important that they keep this going.

This is largely a matter of internal focus, prioritisation and providing the appropriate training. The systems are there – you don’t need any extra software over and above existing accounting systems – but it’s a case of making sure that the right KPIs are being tracked and that there is accountability in the right places through the organisation to produce timely and insightful information.

Having learned the lessons during the recession, it’s important that they don’t slip back into looser pre-downturn ways. I believe there are four key insights that retailers need to keep in mind:

2 Inventory control

There’s been a belief amongst many in recent years that it’s vital to have everything everywhere, with products always available. There’s no question that availability of stock is vital to retailers, it’s their life-blood, but inventory can be managed in a much more sophisticated way. Retailers need to ask themselves what an appropriate level of availability is relative to their customer-base – or whether a few percent less will do. This will obviously vary from retailer to retailer and even from category to category, but it is essential that retailers are making informed decisions about service levels.

But the best retailers have certainly been moving beyond a simple ‘pile it high’ mentality and are investing more time and effort in demand forecasting as well as looking at ways in which they make stock available within their networks or work with their suppliers.

The question that retailers need to ask themselves is, what is the appropriate availability for my stock, without driving my costs through the roof? 100% availability is expensive and impractical...



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3 Balanced scorecard approach to suppliers

In negotiating with suppliers, price has tended to be the main focus. Buyers are disproportionately incentivised and appraised on it, and it is what everyone looks at. And yet, there are so many other factors at play: quality requirements, lead times, payment terms, promotion agreements, etc. It’s my view that retailers need to move beyond just price and take more of a ‘balanced scorecard’ approach. They need to take account of the whole deal with their suppliers so that they can assess what a supplier really costs them – and brings them – as an organisation.

Payment terms have tended to be a static point in contracts that never move from year-to-year. But this has started to change recently with both retailers and suppliers viewing credit terms as a more dynamic variable, and I think that will continue. It’s a key part of the negotiation: is there something you can give away in the short-term for a longer-term benefit? Particularly for smaller suppliers, who tend to have a higher cost of capital than a large retailer, shorter payment

terms can be highly attractive and can be a win-win for both parties. Finance platforms

such as C2FO, with whom KPMG has entered into an alliance, have much to offer.

4 Supplier visibility

Relationships with suppliers are key but can only be properly managed if you have robust visibility of your terms with them. And yet it is surprising how often the details largely reside in buyers’ heads! I believe that there is more to be done at many retailers to ensure that all contract details – prices, terms, promotions, T&Cs and rebates – are held in a central database. Apart from the obvious question ‘what happens if the buyer is run over by a bus?’, you need properly held information if you are to do a comparison of terms with different suppliers. In today’s market, you simply need proper management information and you need it to be available instantly.

Generally, retailers have made progress across these areas since the beginning of the downturn. But it’s important not to relent. Not least because investors have become increasingly switched on to the importance of working capital, and look more closely at the cash and liquidity information in financial statements and trading updates.

Quite simply, if your business is to work properly, you need to be in control of your working capital.

Ben Tatham Partner, Cash Management & Turnaround Services

T+44 (0)20 7694 3801 E: [email protected]



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In the aftermath of a recent breach, cyber security in the retail sector is getting increased attention and we are seeing retail spend on cyber security beginning to rise.

This is not before time as, historically, the sector spends the least of any industry sector. For example, UK retailers spent just 6% of their IT budget in 2013 and less than 4% in 2012 on cyber security.4

Last year over 800 million personal records were stolen or compromised5 and one in seven debit cards6 were reissued in the US as a result of being compromised. These breaches often arose through attacks on electronic point of sale terminals. As firms move more and more of their business on-line we expect organised crime to pay increasing attention to electronic payment channels and e-retailers. In Europe more than 60% of all payment7 card fraud in the Single European Payment Area is “Card Not Present” fraud, which is often associated with e-retail transactions.

SHOULD CUSTOMERS PAY FOR SECURITY?

by GILES WATKINS, Partner

Source: 4 Department for Business Innovation and Skills - Annual Information Security Breaches Survey - 2014 and 2013 reports 5 Derived from Risk Based Security Data Breach Report based on data breach reporting from the Open Security Foundation Feb 2014 6 2014 Debit Issuer Study from Pulse Discovery 7 European Central Bank - Third report on card fraud - Feb 2014 - referring to most recent data available which is 2012

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Of course many retailers now blend conventional and e-retail channels in a sophisticated multi-channel approach, and we might reasonably expect cyber criminals to select a blend of physical and electronic attacks in response.

Retail customers are becoming increasingly concerned, reputations are being tarnished, and senior heads have rolled in the wake of the largest breaches. However, the retail sector is notorious for tight margins and information security officers are well used to robust challenge to any request for funds, even when they are aimed at reducing the impacts of electronic crime.

By contrast, the banking sector has long been familiar with organised crime. It has been the sustained target for electronic fraud and sophisticated malware over the last decade. Although the scale and impact of individual security breaches naturally remain sensitive topics and not widely discussed, the impact of such crime has been widely reported. In their recent study, McAfee put the global cost of electronic crime at more than $400bn8, bigger than the GDPs of all but the 26 largest countries in the world.

Against this backdrop, retailers have been very cautious about differentiating their customer offerings on the basis of security. Few are prepared to take the risk of selling a service which trumpets its impenetrability and may act as a lightning rod for the attention of hackers and criminals. As part of the fight against cybercrime,

and to retain consumer trust, perhaps greater transparency is now needed around breaches and the steps retailers have taken to improve security as a result. As we move more and more of our economy online, customers are increasingly asking themselves:

Simple questions, but surprisingly challenging to firms who expect a degree of customer loyalty and rely on customer lock-in to their services and offerings.

Just how secure is my data?Every retailer wants to assure customers that their data is secure – and there is “nothing to see here”. But the average customer would find it difficult, if not impossible, to reach any judgement on the cyber security of a service provider. Often, the only source of information is news headlines and the buzz on social media. Increasingly, it seems that social media is now the first recourse of a frustrated customer who isn’t receiving the service they require, or who has just been told that his or her account has been compromised.

Traditionally, we have had kitemarks around the safety of our products and trading standards organisations tasked with removing the most dangerous consumer products from our shelves. However, there doesn’t seem to be a cyber equivalent. While some retailers have begun to advertise their security certifications on-line they do so with caution. To date, the Information Commissioner has been somewhat distant and more abstract as our guardian of on-line privacy and security.

1.Just how secure is my data when in the hands of a bank or retailer?

2. What control do I have over how my sensitive personal data is handled and secured?

3. How do I know when my data has been compromised and what can I do about it?

4. Who is liable for the security breach and who will compensate me for my trouble?

5. Can I pay for more security and greater discretion?

Source: 8 Centre for Strategic and International Studies: Net losses: estimating the global cost of cybercrime, June 2014

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As the government rolls out Cyber Essentials to help businesses get the basics of security right (albeit with a focus on internet threats), perhaps we will one day see a Cyber Essentials mark on websites. The ongoing education of consumers, directly and through painful experience, is likely to lead them to be demanding in expecting increased assurance, and reassurance, that such a ‘virtual sticker’ might provide.

Many retailers might validly respond that they already comply with the Payment Card Industries – Data Security Standard (PCI-DSS). However, this is not a complete security solution. PCI-DSS focuses on payment card data handling, and therefore on the cardholder data environment (CDE). Retailers process many other categories of data which are also sensitive and fall outside the scope of PCI-DSS. Examples include commercially sensitive plans and intellectual property, and increasingly large volumes of aggregate data on customer buying patterns obtained through loyalty cards or data analytics. A broader security culture and risk management approach would look beyond just simple payment card data.

Nevertheless, if implemented with care and attention and not in a checklist fashion, PCI-DSS is a step towards enhanced security, and hopefully will set the scene for a more nuanced discussion of business critical assets and processes, and the cyber security risks inherent in doing business in the modern digital world.

What control do I have over how my sensitive data is handled?Many customers sign their digital lives away as they scroll to the bottom of a 20 page agreement on-line and agree that a retailer can collect, process and share their personal information, often to third parties, to offer added-value services. Sophisticated analytics mine increasing quantities of customer data derived from recording every aspect of our lives and our transactions with business (and of course government). Yet customers have little real control of how their data is handled, and even less understanding and ability to track just where that data has ended up and for what purpose. This “big data” world also presents a potential Aladdin’s cave of personal information for cyber criminals. The recent flurry of applications to a leading search engine to be “forgotten” may be just one manifestation of a push-back against mass aggregation of data creating a digital trail which follows us through our lives. Like an elephant, the internet never really forgets.

We can already envisage a future in which customers are more specific about just how their personal information is captured and used. We are already seeing more finely grained privacy settings on many social networking sites and online services. However, perhaps beyond this

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we should look to a world in which customers might actually get paid for allowing the use of their personal information and attributes by third parties. We are currently some way from having an open economic platform which supports this kind of micro-payment for information use. However, work being done by governments and forward thinking commercial organisations is moving us towards an open framework and standards for digital identities and, ultimately, open exchange of personal attributes. The potential for economic benefit through safer, easier, online transactions as well as the enhanced security and privacy that such initiatives enable should certainly appeal to industry and consumers alike.

How do I know when my data has been compromised and what can I do about it?Data breach notification has become a hot topic. In the UK, communication service providers are already duty-bound to notify customers of breaches. The forthcoming EU data protection regulation is likely to extend this obligation to any firm processing personal information by 2017. Data breach notifications are therefore likely to become commonplace, with large customer communities being notified within short spaces of time. A leading US retailer recently acknowledged the compromise of over 40 million payment card details, and over 70 million items of personal data. This is just one of many recent, well publicised, retailer security breaches. Managing the customer notifications and concerns in the light of these breaches is no easy task.

Customers can expect to be “pinged” by more and more firms as their data is hacked. Retailers can expect more and more questions from customers about what they are doing about it and what the individual’s rights are.

Of course litigation also seems to follow any major security breach. We can expect legal arguments over the extent of customer damage from such data security breaches to continue for some time.

With the risk of customer concern and legal recourse, it makes sense for retailers to have a well developed process for supporting their customers (or business partners, or suppliers) if there is a major security breach, allowing the business to respond quickly and decisively. This is vital if the impact on the brand and reputation is to be minimised.

We may see new cyber-response service offerings appearing in the market to help retailers manage the consequences of large scale breaches and the associated customer concerns.

Who is liable for the security breach and who will pay for my trouble?This leads to the question of liability, and of course the related debate around negligence. Cyber security is a relatively immature area in comparison with health and safety, and many of the debates around legal obligations have only just begun to surface.

At the moment it isn’t clear quite what constitutes damage to a customer, and also quite where liability lies, although we might expect to see many more class action suits in the US around security breaches. It seems inevitable that courts will increasingly intervene in this area and will seek to establish where fault may lie. In doing that, it is necessary to form a view on just what might be an appropriate level of cyber security for a competent commercial organisation entrusted with personal data. Judgements may then be able to be reached on the extent, and implications, of negligence in mishandling sensitive data.

The proposed EU data protection regulation currently intends to introduce fines of up to 2%-5% of annual global turnover (depending on final negotiations between the Commission and EU Parliament) for the mishandling of personal information. In the post-Snowden world, we may expect to see European Information Commissioners and Data Protection regulators to become increasingly interventionist. This combination is certainly significant enough to see privacy rising on most corporate risk registers.

Of course this will also fuel the growth in cyber insurance and a determination to better price risk in the market. Both areas that are currently immature but fast developing.

WE BELIEVE THAT SUCCESSFUL ORGANISATIONS ARE ONES THAT INTEGRATE CYBER RISK MANAGEMENT INTO ALL ACTIVITIES. THOSE THAT PRACTICE SOUND NSFORMATIONAL PRINCIPLES RATHER THAN SUCCUMBING TO KNEE-JERK REACTIVE SOLUTIONS CAN CREATE A COMPREHENSIVE APPROACH THAT FOCUSES ON WHAT THEY CAN DO – NOT WHAT THEY CAN’T.

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Whilst ‘fault’ and therefore liability may initially seem obvious in a large data breach, it is worth remembering that, not only are business processes complex and often extended across multiple organisations, but that people tend to re-use passwords which means one company’s password breach can rapidly become another company’s security problem. Equally the “big data” held by one firm can be a goldmine for the cyber criminal who wants to exploit another (often financial) organisation by masquerading as a legitimate client. So there is a community issue here which will inevitably complicate the process of assigning blame and liability.

Jump first before being pushed...Whilst legislators may be attempting to catch up with the new cyber risks, is something missing in the myriad of technical cyber security standards? There is much talk currently about ISO 27001, SANS top 20, CESG 10 steps for cyber security, PCI DSS and of course Cyber Essentials – but there is far less about a retailer’s responsibilities (and commitments) to its customers around cyber security.

Perhaps in all of this there is a code of conduct struggling to emerge – which sets out just how retailers will work with their customers if there is a security breach. This might cover how they would be notified, how they could expect to be helped to deal with the consequences, and exactly what they should expect from the company. In the business-to-business world, we may even see companies be prepared to help customers rebuild their compromised systems, getting some real insights into the attack that may help both parties strengthen security, whilst gaining some useful forensic evidence at the same time.

This isn’t about security per se, it is about organisations developing and maintaining customer trust whilst also protecting their brand and reputation. Maybe it makes sense for retailers to proactively jump into this debate, before being pushed.

Can I buy more security if I need it?To recap: we have customers who are increasingly worried about the security of their information; retailers who are pressured to disclose and notify breaches; and a shift towards customers exploring litigation options. Perhaps this will create more savvy customers, and perhaps a demand to be able to buy more secure services whether that results in different handling of customer information or perhaps a wrapper of cyber insurance and cyber response services just in case their data gets compromised.

We already see a number of banks routinely offering identity protection services and assistance with lost documents/cards. Should there be cyber equivalents helping customers deal with the consequences of compromised identities on-line, as well as helping with the practical problem of switching on-line accounts and changing passwords?

There may be a degree of fatigue around the fear, uncertainty and doubt being spread by many activists and some vendors in the cyber security arena. However, it would seem to me that the real catalyst for change will be a swathe of better educated and newly emboldened citizens, concerned about their personal privacy, their digital identity and the safety of their loved ones. Retailers should be asking themselves how ready they are to respond to this challenge and to maintain the trust and loyalty of their most important asset, their customers.

A NEW APPROACH TO CYBER SECURITY

www.kpmg.com/uk/cyber

Giles Watkins Partner, KPMG in the UK

T: +44 (0)20 7694 8190 E: [email protected]

To find out more, please contact:

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by SIMON TRUSSLER, Director

mindingthestore

Source: 9 http://realbusiness.co.uk/article/25788-5-ways-retailers-can-harness-new-technology-to-increase-footfall-in-stores

Although today’s consumer increasingly wants to buy products and services whenever they want, wherever they want and however they want, 90 per

cent of retail still takes place in-store.9

But at the same time, footfall is shrinking. So, turning every consumer in-store into a customer is crucial.

By analysing the right data in the right way, KPMG’s Simon Trussler says, retailers could diagnose the real differences in their stores’ performance and turn that knowledge into new revenue opportunities or cost savings.

Managing a portfolio of stores is mission critical whatever part of the business cycle a retailer is in.



A lot has been said in the last year or two about Big Data transforming the business landscape. But since the introduction of EPOS systems on a large scale, the retail industry already has a lot of data. The big question is whether it always makes the best use of it.

In trading meetings, analysis of performance can become overly focused on the weekly movement of short term performance metrics including margins and like-for-like sales. But when talking to investors, the focus becomes on longer term financial outcomes including like-for-like growth and the return on capital employed (ROCE) for the business as a whole.

Both are, of course, useful. But sometimes what is also needed is something to link the two together, in order to provide more insight into what actually drives financial performance outcomes.

This type of analysis can be particularly useful when analysing the performance of store portfolios. The cost of owning or renting this commercial estate is significant. And getting it right is essential with many retailers having to sign medium to long term leases committing them to years of cost outlays. Achieving a suitable return on these costs is essential and the need to drill down to fully understand why some stores perform well and others don’t seems self-evident.

The interplay of factors that affect a store’s ROCE is far from simple. But with coherent, structured analysis of the data, we believe companies can generate insights that will help retailers target:

• which stores are underperforming

• the source of any shortfall in their performance; and

• the possible underlying reasons behind it.

The insights from this analysis can help in a number of ways:

• targeting stores for improvement initiatives

• store refitting programmes

• store closures; and

• choosing new sites with the most suitable characteristics.

To understand the detail behind our approach to store portfolio performance click here.

Simon Trussler Director, Economics & Disputes

T: +44 (0)207 694 5497 E: [email protected]

click here to download the report

Store Portfolio

PerformanceEconomics & Disputes / 2014

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http://www.kpmg.co.uk/email/11Nov14/OM027616A/attachments/OM029073A_Store_Portfolio_Performance_a1.6_21041110.pdf

International retail businesses frequently have considerable amounts of intellectual property that generate significant profits. However profits invariably mean tax too. It’s essential to identify and understand your IP including which part of the business is actually generating the value tax too – so that the appropriate tax treatment is applied. Matt Whipp, Partner at KPMG, explains.

by MATT WHIPP, Partner

Is your IP in the right basket?

International. RETAIL EXPANSION.

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Economic substanceThe Organisation for Economic Co-operation and Development (OECD) has embarked on a major work project looking at international tax, of which the taxation of IP is a part. In September of this year, a paper was published as part of the Base Erosion and Profit Shifting workstream that dealt specifically with IP and the “transfer pricing aspects of intangibles”.

That paper made the direction of travel clear: it is about economic substance, not ownership. Historically, often the revenue stream for IP has gone to whichever part of the business contractually owns it – regardless of who is in fact managing, developing and exploiting it. There have been cases of contractual allocation to an entity registered in a low tax offshore location such as Bermuda for example, even though that entity has no active management of the IP. But it is clear that this will no longer do, if it ever really did! There must be economic substance to the arrangements, such that the part of the business that is creating or driving the value from the IP is the part of the business that is entitled to income and therefore taxed on it.

The key acronym from the OECD is DEMPE – development, enhancement, management, protection and exploitation. These are the areas of the business that create value from IP, so they are the areas that should be recognising the lion’s share of the profit – and the tax obligation that follows.

here are significant levels of intellectual property tied up in the retail industry – probably much more than some retailers realise. Brands, of course, can be iconic in themselves and have

a huge economic value. But it goes further than this. Trademarks and designs, customer-related assets such as lists and contracts, sales-maximising store layouts, bespoke display features – all of these can be aspects of a retailer’s IP.

The profit that IP generates, or helps to generate, also creates tax implications, including the question of where it should be taxed. And in today’s climate of public scrutiny, it is more important than ever for retailers to get tax treatments right.

YOU CAN’T MANAGE WHAT YOU DON’T KNOW, SO THE FIRST STEP FOR RETAILERS IS TO MAKE ABSOLUTELY SURE THAT THEY HAVE IDENTIFIED AND UNDERSTOOD ALL THE IP IN THE BUSINESS.

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Cataloguing your IPYou can’t manage what you don’t know, so the first step for retailers is to make absolutely sure that they have identified and understood all the IP in the business.

That IP then needs to be quantified and the value-generating part of the business for it identified.

From there, the next priority is to make sure that the most appropriate transfer pricing model is being used.

For example, if we take a part of a business that has developed and registered a particular sales-maximising store layout, they have a number of options open to them when thinking about how to charge it to operations internationally: a sales-based fee, a ‘cost plus’ basis, a royalty

payment, a profit-split, etc.

If you don’t get the transfer pricing model right, the value of

the IP will not be recognised in the right place.

Credits as well as debitsIt’s important to appreciate that

allocating the return to IP correctly need not lead to paying more tax. In

a global business, key functions (and therefore economic substance) can often

be mobile and international companies have a choice about where commercially

to base them. In these cases, there can be opportunities to secure tax efficiencies.

In some cases, due to the UK’s competitive corporation tax rate at 20%, it could well be beneficial to a UK-headquartered retailer to bring IP related returns back to the UK.

In addition, there are attractive UK incentive schemes such as Patent Box (relevant to retailers with a UK-only footprint as well as international players). Under the incentive, profits attributed to patents will be taxed at a reduced rate of just 10%. The regime applies to patented products as well as patent royalties and in this respect compares very favourably to ‘box’ regimes in other territories.

There is also a very attractive R&D tax credits regime in the UK. The R&D tax credits regime complements patent box and, it is possible to get the benefit of both incentives on the same IP.

Getting it rightThere can be significant benefits for international retailers in considering the options and putting the best and most appropriate IP arrangements in place.

Ultimately though it’s not about saving tax or paying tax – it’s about getting it right so that IP arrangements are fully in line with the commercial reality of the business and the principles of the rules.

Matt Whipp Partner, Transfer Pricing and Value Chain Management

T: +44 118 964 2108 E: [email protected]



IP

don’t fall into the red by KLAUS WOESTE, Director

aining authorisation under the new FCA consumer credit regime is about more than just gaining authorisation. Companies will have to fully embrace the new regulatory

culture and adhere to expectations, with staff training as an important part in making the transition, explains Klaus Woeste of KPMG.

Since April of this year, the Financial Conduct Authority (FCA) has been responsible for regulating consumer credit in the UK. Some 50,000 companies10 applied for interim permission to continue offering consumer credit while the FCA carries out its authorisation process, taking over from the Office of Fair Trading (OFT).

So now, as companies including large numbers of retailers wait to be authorised (a process which will happen in a phased schedule between now and 2016), what should they be focusing on in order to make a successful transition?

Why do I need to change?The financial rules have not and won’t change drastically from the past (many of the OFT regulation has been incorporated into the FCA’s Consumer Credit Sourcebook) – but the culture and awareness in consumer credit firms will need to. The way that financial promotions and interest rates are presented and communicated will be very closely watched, to ensure that customers are not in danger of being misled. Staff will need to demonstrate higher standard of regulatory adherence.

The FCA has far more ‘teeth’ than the OFT. It is better resourced and intends to be more proactive, utilising its risk-based supervision and intervention approach. The FCA has already actively sought out consumer credit firms operating without permissions and has ceased their trading. Wonga (a leading UK payday lender) is facing a remedial redress to make significant changes in order to carry on conducting business, and has been required to write off 330,00011 customer loans. The FCA has enforced millions of pounds worth of fines12 for financial promotion infractions and for unfair treatment of customers, and in fact, there is no maximum limit to the fines it can levy.

Clearly, the FCA means business. It expects any organisation that is offering credit to consumers to meet stringent standards.

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in the new consumer credit regime

Source: 10 http://www.fca.org.uk/firms/firm-types/consumer-credit 11 http://www.fca.org.uk/news/wonga-major-changes-to-affordability-criteria 12 http://www.fca.org.uk/news/consumer-credit-seminar



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have robust governance, organisational controls and business processes in place – there also needs to be evidence that these are working effectively and that customers ar

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Where will they focus?We have worked closely with the regulator in many capacities over the years and as such understand the change drivers and the areas that they are focusing on in their regulation of consumer credit. The diagram below illustrates where we believe they will be focusing their attention.



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Retailers on a learning curve – further details on training for the new regimeWhile the financial services industry has become used to more intrusive and searching regulation, for the retail industry this will come as something new. So the sector needs to prepare itself thoroughly for the changeover; it could represent a big learning curve for many. A targeted training programme is likely to be crucial in order to raise staff understanding of the new regime and help to embed the behaviours needed.

So what are some of the things that the FCA will be looking for, and how can training help?• Culture change, led by the Board and senior

managers. Indeed, under the approved persons regime senior people in control functions could become personally liable for any failings. Training will help them fully understand the new requirements and where their individual responsibility lies.

• Behavioural change for customer-facing staff, which training modules can demonstrate and bring to life

• Certain functions (eg Marketing, Risk and Product Design) need a deeper understanding of the new regulations, which they are unlikely to arrive at unaided

As well as the way in which products and promotions are marketed, other areas the FCA is likely to take a close interest in are customer

services and complaints handling (ensuring complaints are dealt with in an appropriate and timely manner) and debt handling and collections (how are customers being treated? If in difficulties, was it right for them to be offered/sold the product in the first place? Was the product in their best interests? etc).

Organisations are likely to need to have a formal compliance function. While larger organisations will probably already have one, for some smaller retailers this could be something new.

Training requirementsTraining and educating your organisation is a crucial part of preparations for the new regime – and something that the FCA will expect to see evidence of.

As a minimum, organisations will need to prove that:

• Customer-facing staff (eg sales staff) have been trained to a high awareness level

• Specialist teams (eg Marketing and Product Design) have also been trained

• Control functions are trained and enabled to effectively control the front line and manage the business according to the principles

• Senior management have a good understanding of what the Consumer Credit Act (CCA) means for the firm – and for themselves personally (and if approved persons – have they met the appropriate training and competency standards)

KPMG has launched a Consumer Credit Learning Academy with law firm Norton Rose Fulbright, to offer bespoke and interactive training for firms. It offers a combination of face-to-face training, webinars and e-learning modules. The portal is regularly updated with new developments, articles and white papers, and training can be updated each year.

We have already trained a wide variety of organisations across sectors, and assisted them in transforming for the new regime.

Whatever you do, don’t treat authorisation as simply a matter of filling in a few forms. It is much more than ticking boxes. It is about showing that the customer’s interests are at the heart of your consumer credit operations.

Klaus Woeste Director, People and Change

T: +44 20 73118939 E: [email protected]

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by Martin Armistead, Director at KPMG

With retailers’ margins under continuing pressure, Martin Armistead, Director at KPMG, looks at the challenges facing the sector and identifies levers that can bring about sustainable reductions to the costs of doing business.

The retail and consumer worlds have been tightening their belts since the beginning of the economic downturn. Increasingly, companies have found themselves straining to maintain

sales growth in the face of tightening margins and increased competition. Where consumer companies have been embarking on wide-scale restructures for some years, however, these situations are only now beginning to confront retailers.

Largely, the big retail businesses that have been undergoing restructuring activity are concentrating on a few different things: optimising the business model to better integrate digital; consolidating the

brand through reinventing fascias and labels; and aggressively taking cost out of slow-growth areas in order to invest more effectively in high-growth parts of the operation. Despite the efforts of retailers thus far, initiatives like these need to start being addressed in a far more aggressive manner, with cost reductions playing a major role.

The ways in which companies can improve their operating models revolve around three fundamental themes. Digging down a little deeper, these can be illuminated by looking at a series of cost reduction levers, which attempt to draw attention to the key steps towards balanced operational performance.

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So, what are the major themes by which businesses can deliver cost reduction? • Doing the same for less: can improvements in efficiency and effectiveness

be put into place to make cost savings, without affecting the customer proposition?

• Doing less with less: is there an opportunity to change or filter out non-essential standards or policies? (These may be viewed as an asset to the business, but invariably have a negative impact on the overall bottom line.)

• Fundamentally different ways of working: are there any opportunities to make structural changes to the business model?

Broadly, companies that initiate restructures are seeking to change things through one or more of these metrics. While businesses may seek to reduce their most significant costs first (such as store workforces), it is important that such streamlining is done in the right way; if a restructure is carried out without considering its impact on the organisation as a whole, it is unlikely that really meaningful change will take place. The cost reduction levers identified by KPMG shine some light on the alternatives to this; after all, it is unlikely that different retailers facing different individual challenges will be able to tackle a restructure using identical firefighting tactics.

However, all retailers will be aware of the broader lessons of the last couple of years - which have seen the soaring influence of discount retail brands on UK high streets - and what this can tell us about the gaps in many operating models.

Hardly a day goes by without another article describing how low cost retailers are succeeding by bringing methods and strategies borrowed from continental Europe into UK stores. European firms often base their value and premium ranges in entirely separate store fascias, something alien to the UK market. This has been shown to differentiate the overall offer and more clearly partition operating models, helping to focus attention on operating costs and margins. A leading high street retailer – a perennial leader in cost reductions – has announced in the last couple of months that it will experiment with new fascias, such as a dedicated greetings card venture. Could this be the way forward for UK retail?

The current environment is causing retailers to reconsider the basic tenets of their operating models. Despite these challenges, though – or perhaps because of them – there is plenty of scope for businesses to cut costs and improve operating margins.

European firms often base their value and premium ranges in entirely separate store fascias, something alien to the UK market.



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COST REDUCTION LEVERSThe issues already mentioned above are only really useful when put into a slightly more specific context. As such, it is helpful to think of the following methods for reducing cost as indicative of the different types of restructure that have been taking place over the last couple of years. Let’s see if these levers provide any guidance to companies looking to improve their operating models.

Reconciling online growth and store sales

In many cases, opportunities from online growth is cannibalising in-store sales. Radical changes to the way customers shop are forcing businesses to reconsider the footprint and structure of their store portfolios. To respond to these developments, businesses will need to ask tough questions about both their store portfolios and their online offerings, including how they can best take advantage of their existing asset base to capture available growth. Key issues to address include understanding how stores and other channels work together.

Some firms have begun prioritising online by reimagining workforce structures, creating new e-commerce manager roles and streamlining in other areas. Elsewhere, retailers are attempting to embed digital practices all across their organisations, as opposed to containing responsibility for online within one specific department. Whilst companies in sectors from grocery through to fashion are expanding their capabilities in initiatives like click-and-collect, the key is to do this in a way which leverages fixed costs and avoids adding more variables thanks to creating more unified fulfilment routes (more of which below), both for click & collect and for home delivery. This also provides a welcome use for excess floor space in bigger stores and also allows store channels to seamlessly complement the online offer.

Integration of selling and fulfilment

In addition to click-and-collect and last-mile logistics, online continues to have a pervasive influence when it comes to fulfilment. Traditionally, retailers have deployed parallel, separated fulfilment channels for store networks and for online. This is generally a major driver of variable cost, with any incremental growth being offset by concurrently heightened operational expenditure. The growing use of third party partner networks only exacerbates this problem.

Integrating these systems illustrates perfectly the principle of doing the same (or better) with less. Larger stores, for example, will be able to function as replenishment centres for other outlets; at the same time, increased focus on ‘drop and collect’ activities reduces undue reliance on third parties. These strategies all contribute to driving economies of scale, easing the strain on a business’s operating model.

The grounds for tangible operational improvement here stem from the sheer amount of variables one finds in online fulfilment. Value can be created through pairing different delivery options with different fulfilment methods. As an illustration, a retailer may choose whether to drive category margin or basket margin through changing delivery patterns for different kinds of order. Through this, for example, next day delivery offers on low margin baskets can be avoided or outsourced, creating opportunities to cut wastage in this crucial stage of the supply chain.

Collaboration with suppliers / partners

Retailers already work closely with partners right across the value chain. The question that needs to be asked is whether this collaboration is also leading to duplication of activities. Bearing in mind the need to reduce operating costs, areas which may offer opportunities to re-think the roles and responsibilities of partners include market research and consumer insight, as well as demand and supply planning. In-store and POS merchandising is another space with room to manoeuvre. The important and sensitive nature of many of these activities means that the solution should not come in the shape of wholesale outsourcing, but opportunities to create value should not be discounted given the pressure on operating costs. This provides a good example of the potential in doing less with less, while still creating a positive impact when it comes to margins.

Despite these all-too-frequent lapses, some retailers and their partners appear to be getting this side of the purchasing relationship right by working in tandem. Post-administration, a leading music retailer prioritised the rebuilding of its supplier relationships and contracts, contributing to a return to operating profit in the last 12 months. Arrangements like these must be mutually supported, however; for retailers looking to improve operating costs through better collaboration, communication will always be the key.



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Optimisation of the workforce

In all operating models, resources must be aligned with strategy whilst managing cost right across the organisation. A retailer’s staff is no different. Questions must be asked as to whether a company’s workforce structure fits with the demand profile. Is the business making best use of part-time workers? Are labour planning models structured in order to capitalise on and take advantage of busy periods?

In addition to this, it is important to consider the benefits of a holistic, inclusive attitude towards HR. Setting up reward and recognition mechanisms in order to drive the right behaviours from the workforce encourages retention and facilitates flexible working.

At the same time, some retailers are looking higher up the food chain to optimise their staff. A leading high street fashion retailer, for example, has culled employees at the centralised rung below the executive director level, across various functions including marketing and buying, after a tough period of trading over the last festive season. The firm’s management hopes that the newly agile business will be better placed to take on an upcoming expansion within the US. As such, retailers should be aware of the potential benefits to be gained from readjustments at both ends of the pyramid.

Martin Armistead Director, Operations Strategy Group

T: +44 20 76942501 E: [email protected]

FINAL THOUGHTS

Going through an organisational restructure or change is invariably a difficult period for any business, but the benefits of focusing intensively on cost reductions in a time of upheaval and change are myriad. The climate of UK retail is tougher than ever, and different kinds of challenge need different answers.

For some companies, the route to improving the operating model will stem from better integrating online and in-store sales. For others, it may be better workforce optimisation. In the majority of cases, the need to do the same (or less) with less - or, perhaps, to fundamentally change certain processes - drives the type of change which is carried out. It remains to be seen whether retailers will succeed by imitating the strategies of the discounters, or whether they will seek to effect change through other ways.

Despite the challenges currently facing the sector, we need to remember that the UK has a large number of vibrant and world-leading retail businesses alongside strong management capability. I’m confident that it will be successful in the long run.

retailers should be aware of

the potential benefits to be

gained from readjustments

at both ends of the pyramid.



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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

KPMG is committed to producing accessible materials. If you require a video transcript, please contact [email protected]

OLIVER for KPMG | OM027616A | November 2014

www.kpmg.com/uk/focusoncm

If you have enjoyed reading this magazine, you may be interested in some of the following publications.

Further reading...

FOCUS on Consumer GoodsIssue 2



FOCUS on RetailIssue 1

FOCUS on RetailIssue 2

FOCUS on Consumer Goods Issue 1

David McCorquodale Head of Retail, KPMG in the UK T: +44 (0) 131 5276718 [email protected]

Liz Claydon Head of Consumer Markets, KPMG in the UK T: +44 (0) 20 7694 3483 E: [email protected]


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