Rachel Senior and Justin Duffy chat to Doug Murray, former Chief Executive Officer at The Foschini Group Ltd, to gain valuable insights into crisis management. As a continuing non-executive board member at The Foschini Group Ltd, a company that operates over 3,000 chain stores globally, retailing clothing, cosmetics, jewellery, accessories and sporting goods throughout southern Africa, the UK and Australia, Doug was able to share valuable insights into navigating the cause and effect of the Covid —19 global pandemic.
BDA: The last few weeks have been testing times for retail. When a crisis like this happens, what key factors come into play?
DM: As a business, it’s critical to draw up disaster and business recovery plans. You look at what would happen if the head office burned down and suddenly we all had to work from remote locations. In this crisis, we’ve all had to work remotely and test whether we can manage with reduced staff and work from home with technology. We’ve all got used to using Zoom or Microsoft teams, you always think it all sounds very technical, will it or won’t it work? You adapt and get used to it, you do manage to communicate with people, make decisions and life goes on. It’s been quite a fascinating exercise, but one I would rather we didn’t actually have to test in this way.
BDA: You obviously did have a plan, but perhaps, not a plan for a pandemic?
DM: We had a plan, but you look at all the existing risks, a pandemic wasn’t there and it wasn’t going to be the cause of the building suddenly being emptied, but essentially it’s the same result. So, fortunately we did have a plan and it has sort of panned out.
The last few weeks have been very hectic! It’s been interesting because of the nature of the issues, you’re not trading, and in South Africa we didn’t even have online, we had nothing. None of the buying teams were working, we basically clamped down on everything, so it was really just the Senior Management. Some of the issues we’ve had to deal with are not just normal merchandise issues.
BDA: In a crisis the initial instinct is to protect cash and mitigate financial disaster, but what other key factors come into play when protecting a global retail business?
DM: The key factor is obviously cash, you know that’s natural instinct. It’s the first thing you have to deal with, if you don’t resolve it and get your balance sheet in order, you’ve not got a business to worry about.
BDA: Once you had your financial ducks in a row, so to speak, were there things you had to discuss which actually came as a surprise, or did you have an order for how to deal with this situation, once the financial panic was over?
DM: There’s a whole process you go through and you don’t resolve that on day one or day two or, in fact, over two or three weeks because you’re dealing with banks, the goal posts have moved and the terms of engagement have shifted.
So, the first thing was really just to focus and get the cash right, then the next thing is that you have a pipeline of stock which is all ready - this applied to us, whether in the UK, Australia or South Africa - and you’ve got the supply chain that is just moving along. You know you’re going to be locked down and your season for selling that stock is going to be limited. So, the next thing is, you have to somehow freeze your supply chain, which is difficult because the suppliers are your partners, but you have to, because that’s part of cash protection as well. Otherwise, the season you’re in is going to be hugely overstocked and when you do open up, you’ll have massive markdowns. Managing the stock in the supply chain becomes an absolute focus straight away, that’s essential.
You also have to identify the key staff to deal with the product issues. You’ve got to communicate to your staff, to your suppliers, and to your customers exactly what’s going on. That’s all part of the early days of crisis management.
BDA: Stock very quickly becomes a monster - if you multiply across every single brand and across the 3 territories - I can imagine the sort of figures you’re looking at!
DM: It does, and once your stores are closed, you’re not bringing in any cash. You’re still expected to pay your staff, landlords and suppliers. You can’t hand those decisions to the merchants, that has to be a boardroom decision, assessing the total amount of stock, and then try and identify what’s still in transit, what you’re going to actually hold back for next year and then, in that period, also decide what’s going to have to be kept, to go into stores when you eventually do come out of lockdown, not knowing when that will be.
BDA: The famous KEI’s! The importance of seasonless items has to be magnified in this situation?
DM: That’s right! The whole key essential item issue becomes a much bigger issue, there’s no doubt.
Then there’s the issues with rent. You’re never going to resolve it early on in this crisis, but it’s one of the big things you have to deal with. If your shops are closed, you’re not generating any cash and you’re not going to be paying any rent, that’s the same in the UK, South Africa and Australia, but each has its own jurisdiction. Inevitably it will lead to new rental agreements being essential.
So, once you’ve priorisited all that, you then ask, “how are we going to strategize the business for the future, based on a whole set of assumptions you have today, and those assumptions are different for different countries?” it’s interesting. They are different in Australia to the assumptions we make in South Africa, to the assumptions you have to make in the UK because of what each of the governments in those countries have legislated. I think the UK and Australia have been very good in terms of getting funding for staff who have been furloughed, but as you know, in South Africa the government doesn’t have leverage. You try and make all those assumptions, you get a strategy for each country, and all you know is that when you wake up tomorrow morning something’s changed, and you’ve got to adjust it.
BDA: Obviously when you talked about the risk assessment earlier on, some of those processes you can plan for but, like you say, anything can happen. There could be another spike, we don’t know how long it could go on for, so it just makes decision making a little bit more difficult.
DM: It is very difficult, I think this is where the non-execs complement the management team. As a management team you’re in the thick of it, whereas being a step back from the business you can assess the situation from a different perspective. You’ve got to be agile and adept at changing, you have to change all the time, but you have to make the best assumptions you can at any point in time and then stick to them. Unfortunately, as you say, something else can spike and then you have to change direction. You have to, it’s as simple as that.
BDA: Thinking about SA in particular, but perhaps also Australia, the market has seen a lift of lockdown ahead of the UK market. Is each situation unique or are there key lessons to be learnt from the different territories you operate in?
We’re regularly in contact at the top executive level, talking to each other, every territory learns from each other’s territory. They are all quite different but they also have a lot of similarities. You look at Australia for example, it’s an island, they were able to lock down and very quickly have this thing under control. They allowed businesses to trade online throughout and supported staff with the job keeper scheme and the landlords were very accommodating. They’re in a situation where they have a three phase approach, to get the country fully up and running by the third of July. They’re well ahead of anybody else. In South Africa, we had no online sales, no offline stores trading, and we’ve had a different experience with the landlords. It’s been a difficult set of circumstances, but the same principles have applied. So, you learn from each other as to what each jurisdiction is doing, but each of the countries is at different stages of lockdown. We talk very regularly with the guys in London and Australia, this communication is absolutely key, you learn from each other, but quite honestly the circumstances in each country are unique to those businesses.
BDA: You briefly mentioned online shopping, which wasn’t an option in SA, do you think as a result of the pandemic we will see a digital transformation of online shopping, particularly in SA?
DM: Just look at the online sales beforehand. In the UK our business was in excess of 30% online, and we were at about 1 or 2% in South Africa and 5% in Australia. It’s just so different. The online part of digital transformation is obviously huge in the UK and they understand online trading well. In Australia, they had to leapfrog two to three years of learnings from trading online over the last six or seven weeks because it was the only trading they could do. They’ve learned an enormous amount very quickly. They’re now opening up stores, and they’ll have all stores open by the end of May. They’ll probably find the percentage they do online won’t be at the same level they did during the last seven weeks, but they’re probably going to be at a level of online which would have taken two or three years to achieve had this not happened.
We’ve only had about a week of online being open again in South Africa, and the numbers have been significantly above where they were last year. We’re still generally in a lockdown situation here, and consumers are certainly moving much quicker towards online, but our base is so small. It will be interesting to see how that actually settles as we go forward.
BDA: We’ve been seeing spikes of so-called ‘revenge spending’ as people come out of lockdown in Asia. Talking to some of your team in SA, even though there are limits on the products you can buy, the numbers are surprisingly good.
DM: It has surprised us here in South Africa. I think the best comparison is Australia, but because they were trading online throughout the lockdown, consumers were able to buy their normal winter product online. They’ve re-opened stores and it’s been encouraging, but it’s not been any sort of frenzy buying there. In South Africa on the other hand, we had no online buying at all, so when the stores opened up on May 1st there was pent-up demand, which continues to be exceptionally strong. It surprised everybody and you’re right, the numbers are enormous. It’s never going to get anywhere close to making up what was lost over the previous five weeks, there’s a very sad reality here that many consumers haven’t been earning any money over this period. Unemployment numbers will go through the roof, so fundamentally, it cannot continue. In the UK, there’s been quite healthy online buying, so I expect their experience to be more in line with Australia.
BDA: Obviously, there’s managing the stock levels as well. If you’re clearing 60/70% in the first couple of weeks, you’re never going to be able to get back into stock of everything you need. You touched on protecting the relationship with the consumer, but how difficult has it been managing relationships with suppliers when you’ve had to make some really difficult decisions?
DM: You need to protect supplier relationships, and I guess at the end of the day you are going to be alot more selective. You’ve got to try and support your key partners, so communication with them is absolutely key, that applies in Australia, South Africa and the UK. In South Africa the jurisdictions are slightly different, we can start to look at doing more nearshoring and local production. We will be looking at every opportunity, which we have been doing anyway, so it’s not new to us. It may just be at a faster rate to get more production under our own control. Both Australia and London have been looking very carefully at the supply base and asking, for example, ‘have we got too much risk in supply out of China?’, so everybody is starting to look at how we diversify supply bases. That’s something I think will happen post crisis. Everybody will support the good suppliers, unfortunately, the weaker suppliers will fall by the wayside. It’s sad, but it’s a commercial reality I’m afraid.
BDA: In the UK we’ve obviously seen struggles on the high street for a while. It will be interesting to see which stronger brands emerge from this crisis. You look at Primark, for example, who’ve been in a very strong position, but went into this with no online presence.
DM: I think the problem with the real value end is with the costs attached to online, there’s just not enough margin in it for them. I think that applies to everybody. I’ve said for a long time that online can’t continue with free delivery, free returns, and a 50/60% return rate. It just can’t work. It was already starting to show in the performance of the purely online players in the last 12 months, they’ve really battled and I think that’s going to continue. There’s just not enough margin. With Primark’s price pointing, how cost-effective would it be to deliver 20 pairs of socks for £4? There’s some commercial imperatives which will change going forward, no question.
BDA: We’re seeing idle stock sitting in stores at the moment. When everything starts to open, there will be panic discounting and markdowns, can businesses really afford to react like this, given they may be working with smaller margins? It could actually do more damage to the brand as a whole.
DM: It’s going to be very difficult, especially in the reopening phase, because there will be panic and there will be businesses wanting to clear stock at any price, just to generate cash. I think there’ll be a bit of a bloodbath initially, but it will settle down. As I say, winners will come out of this and others will not. The total available consumer spend will reduce, but the number of players competing for that reduced spend will be able to grab quite a lot of market share, so that will compensate for some of the loss of disposable income. That’s a longer-term play. The rest of this year will probably be very difficult, and it will start to settle during the course of next year.
It also depends on the stock. Summer is in stock in the UK , for Australia and South Africa it’s winter stock, which, of course, is a shorter season for us, which probably plays into our hands a little bit. At the end of the day, it depends how good the stock is that we bought for the season and is now sitting in stores. The fundamental desire of the consumer will also come into play. Businesses are going to have to selectively manage how stock is cleared to ensure you have stock you can trade with through to the new season. When do you actually want that stock to hit stores? I do think buying will be closer to the season, and consumers, because disposable income will be an issue, will be a lot more selective about when they buy. We were getting to a stage where halfway through the summer you were already putting in winter stock and in the middle of winter you’re getting in summer stock. I think this is almost forced to change now, but I also think the behavior of the consumer will move in that direction. I also agree that trans-seasonal or seasonal product will become more and more important. You’ve got to de-risk your business.
BDA: The intel you would usually get from overseas travel, such as factory visits, comp shops and inspirational city visits, you won’t necessarily be able to do yourselves. How important do you see data, analytics and strategic partnerships being?
DM: I don’t think there’ll be any travel to the UK, China or Australia this year. I don’t know when or in what nature it will start. In the meantime you have to get as much information as possible. The data we’re looking at now, refers to a period which was pre-crisis, up to date data is only just starting to become available now. The discussions and debates BDA London have with the teams over here will continue, but I think they will be different. Key essential items become really key essential items, you’ve got to get that right, and you’ve got to have a degree of fashion going in as well. I think debates about how you layer that and the volumes, will be the most interesting part of how we move forward. Those discussions are going to be absolutely essential, and this is where long-standing partnerships and trust come into it, they’re going to be very important.
BDA: We look forward to some of those debates! There’s obviously a lot of negative aspects of the pandemic, but in a way, it’s an opportunity to stand still and ask, “are we actually listening to our customer, do we know them well enough, are we looking at the right data?”
DM: Yes, it’s almost going back to the very first point when we talked about the crisis management phase you go through. Slowly, you move from crisis management, to the execution of new strategies under the new set of rules, whatever they are and however they change, which will be less and less as time goes on. I think you’re absolutely right, there’s a reset button here for a lot of businesses, our business included.
BDA: To wrap up, is there one lesson you can take from this, should we find ourselves in a similar situation?
DM: To be absolutely honest, if you’ve got a strong balance sheet and good management you can actually deal with every and any situation. Any of these issues with products you can adapt to, but if you don’t actually have a strong balance sheet, you don’t have a business. If you cannot pay your staff or survive a period of time where your cash flow is zero coming in, but you have outgoings then you’re going to go bang. Fundamentally, it’s the one thing you have to have. The one thing you need to do going forward is future-proofing your balance sheet, and it applies to a small business as much as it applies to a big business.
BDA: The creatives need to learn to love the accountants!
DM: You’ve got to have the right balance sheet and the right administration. You can be the most creative person in the world, but if you don’t have any money to pay your supplier and you’re not being paid a salary, the business isn’t going to survive.
BDA: I think that applies to more than just business!
DM: It applies to our families and our households too, whether that means people will, in future, want to save more and spend less? Time will tell.
BDA: We’ve all learned a few lessons about what we can do without during this period, haven’t we.
DM: That’s quite right, it’ll be interesting to see how behaviour does or doesn’t change going forward, I think some of the new behaviours will remain and some will go back to old habits.