Ted Black recently published a piece on British supermarket giant Tesco’s fall from grace and possible revival. The group posted a record annual loss last year. And while earnings in the first quarter of this year did improve, Black noted that all the trend lines pointed South West when looking at ‘Stockspin’ and ‘Return on Assets Managed. In his latest piece, he applies the notion of ‘Stockspin’ to whom he calls the ‘Big Three’ listed on the JSE Food Sector. His research shows that last year Pick ‘n Pay, Spar and Shoprite all made economic profits – cash profit after tax less the cost of equity – a tough measure to beat. – Stuart Lowman
by *Ted Black
A short while ago we looked at Tesco and asked what other companies in South Africa – not just retailers – might have in common.
Sticking with them for now, here’s a Scatter Chart of the big three in the JSE’s Food sector – Pick n Pay, Spar and Shoprite. It shows their “Stockspin” (Sales ÷ Inventory) and Return on Assets Managed (ROAM) compared to Tesco since 2006.
Apart from Tesco’s slight uptick last year when making its huge loss (-13% ROAM), all the arrowed trend lines point South West towards lower Stock turn and lower ROAM.
Given the growth they achieved in terms of Sales, profit and assets over the last ten years or so, you might well conclude that managing gets tougher and tougher the bigger you get… and it does.
On the other hand, showing numbers this way can also reveal a big opportunity. As firms grow, and complexity mounts, we can lose sight of the few numbers that matter most. They are the ones to use to educate people, clarify the critical tasks that have to be done and measured if you want to tap into the hidden potential to improve that exists in all organisations.
Pick n Pay’s performance is particularly interesting. Not that long ago it was #1 in profitability. Yet, despite the problems and decline of the last few years, if you were to levy a charge of 20% on equity, management has still made an economic profit every year. It’s Cash Profit after tax less the cost of equity. A tough measure but they beat it, as did Shoprite and Spar. That’s no mean achievement.
Another interesting issue is that PnP started a SAP ERP implementation in 2005. Why didn’t stockspin improve… or at least stay at similar levels?
It fell from 18.6 in 2004 to 14.4 in 2015. In other words, last year for every Rand of inventory, management generated R14.40 in sales – a drop of almost 23% from R18.60. Despite a new distribution centre coupled to state of the art technology and IT systems, there seems no evidence of a positive impact on asset productivity (Sales ÷ Assets). Maybe it would have been worse without the investment, but who knows?
Some years ago I was at a GIBS seminar to discuss ERP productivity effects, an expert ended the fruitless proceedings by saying, “You just have to trust us, the productivity will follow.” It doesn’t seem to… ask any operating manager at the frontline for views on that.
Maybe it’s because the financial and IT functions use the systems to answer the wrong questions. Instead of “How can we get the right controls in?” maybe a better question is, “How can we help operating guys pinpoint opportunities for lifting productivity…get inventory turning faster for instance?”
The last issue concerns suppliers. Managers who don’t understand what asset productivity means tend to focus on only one side of the ROAM equation – “For every Rand of Sales how many cents profit do we make?” In particular they look at cost and driving down suppliers’ selling prices. This focus can lead to destructive conflict – especially when the retailer then looks for any way to delay payment – which they often seem to do.
Managers also think supplier credit, like equity, is “free” money. It isn’t. It comes at a big “hidden” cost – like slowing “stockspin” – if the relationship is not a collaborative and constructive one.
For insights on this, do a Google search on Tesco and its supplier relationships. There’s a message in there for all businesses. As genuine entrepreneurs know, the first people to put you out of business aren’t banks. It’s suppliers.
Constructive, collaborative relationships with them are vital if you want stock to spin. Toyota started working on that issue many years ago. The sales productivity of assets (ATO – Asset Turnover) is the #1 measure in the ROAM equation and the one that’s least focused on by most operating managers.
Here’s a chart of the “Big Three” and their overall ATO and ROAM performance.
Is it time to think about giving the asset wheels a “spin” and head North East… like Woolies did a few years ago?
We’ll take a look at that next.
*Â Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at [email protected]
