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Recession Boosts Retail CFOs, Fiscal Discipline

In its second annual survey of CFOs at 26 national specialty and department store chains in the United States and Canada, Karabus Management, a subsidiary of PricewaterhouseCoopers, determined that retailers have become more focused on return on investment and more concerned about the cost of growth.

While that makes sense in the recession, the circumstances have promoted the importance of the chief financial officer's role in progressive retail organizations, Antony Karabus, Karabus Management CEO, told Bnet.

To the extent that CFOs have gained influence â€" and can maintain it â€" retailers are likely to be more circumspect in their investments, which suggests that growth in the industry will be carefully directed and may turn out to be more sustainable in the long run. Karabus noted:

A great CFO is a strong voice at the table well beyond just the financial numbers. The end of cheap, abundant credit has made the CFO role much more critical as lenders will need to have high confidence and trust in the CFO in these times. Great CFOs in retail should hold the other C-level execs much more accountable for financial performance.
Retail was becoming more focused on financial discipline even before the recession as the largest companies transformed from regional to national chains. As they did so, they confronted issues including cannibalization as new stores opened in existing markets eroded sales at established locations and assortment rationalization as executives tried to make the most of their data and distribution capacities to focus on popular, profitable products.

The recession, however, forced retailers to scrutinize operations in more detail and set tougher criteria for expenditures at a time when they could no longer count on consumer spending or credit to provide funding for any but the most critical functions.

Retailers have restructured their operations to reduce fixed costs and lower the top-line revenue required to generate profits, Karabus, said, adding, "CFOs are carefully scrutinizing all capital expenditures, heightening the focus on performance and raising the bar for spending approval, examining sales forecasts more stringently as they are becoming the key foundational issue driving decisions regarding cost and inventory levels."

The Karabus study looked at four key areas -- real estate, marketing/advertising, electronic commerce and inventory management -- and determined:

  • Retailers are using weakness in the commercial real estate market to secure better terms on leases and, when not getting rent reductions, obtaining better co-tenancy clauses, more tenant allowances and enhanced lease terms. In fact, 35% of those retailers surveyed said their efforts to renegotiate leases in the past year had resulted in enough savings to effect operating performance.
  • Retailers are working to improve advertising effectiveness and productivity with 40% of those surveyed moving from traditional broad-based advertising towards more targeted promotions that focus on existing customers. Half the retailers in the study said that media and marketing savings allowed them to reduce their expenditures without materially affecting their customer outreach efforts.
  • Retailers are benefiting from additional sales and better customer communications provided by their E-commerce operations. Almost half of study participants said they had experienced better results in virtual stores than in their real-word equivalents, with 44 percent saying E-commerce sales were growing faster than overall revenues.
  • Retailers are examining methods beyond simply cutting warehouse stock to more tightly manage inventories. Of CFO's surveyed, 36 percent said that flowing goods closer to sales was the most important factor in reducing inventory levels this fall compared with last year.
When asked about their priorities, 40 percent of CFOs said cash flow management was their top concern. As the cost of accessing even short-term capital has increased significantly, retailers are managing their cash to avoid more borrowings and, where possible, are renegotiating credit terms. Following that, 24 percent of CFOs said tighter inventory management was their top priority as part of a greater organizational focus on preserving cash and emphasizing profitable sales.

Given a return on investment focus and increasing CFO influence, Karabus said retailers will run tighter operations at least for the foreseeable future.

"They should definitely be better disciplined financially going forward," he said. "They have tightened up processes and controls regarding overheads and inventory control and have raised the bar in terms of required ROI on new capital projects."

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