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The entire retail industry has seen extreme disruption caused not only by technology but also by aggressive acquisition and cost cutting. Warren Buffet’s partnership with 3G which acquired Heinz and then Kraft has disrupted the power balance in the world’s largest packaged goods companies. Now Heinz-Kraft or Mondalez is now the new global standard for aggressive cost reduction and margin optimization. The entire packaged goods and retail industry will continue to see aggressive mergers, acquisition and extreme cost reduction activity.
Richard Arthurs spent over 15 years in the packaged goods industry with General Mills, Pillsbury, and Pepsi. His last role at General Mills was as the Global Director of Internal Audit and Risk Management. Richard is currently a Partner, and National Leader of Governance and Risk Management at MNP LLP.
Disruption is accelerated when society adopts new technology faster than expected. No one ever expected Amazon to steal so much retail market share worldwide. When Amazon launched Prime, which provides unlimited orders with free delivery, consumers got addicted to ordering retail items in mass quantity through online shopping at home. Brick and mortar retail chains did not see this disruption coming. Just like Block Buster video rental did not take Netflix seriously. Online retail sales will continue to evolve. The question is what will consumers choose to not purchase online? Only time will tell how future consumers will choose to make retail purchases.
Shortly after Target opened stores across Canada people entered stores and could see that something was not right. Shelves were often empty throughout the store. To make matters worse there was a scent of spoiled food when you entered some stores. The unfortunate reality is if food does not turn fast enough, it will be obvious unless the retail store disposes the product and disposal losses or shrink become a material issue.
The golden rule for small and medium size business, is cash is king. Mismanaged and/or dried up cash flow is the fastest way for retail businesses to get into trouble.This issue is expedited when business owners take money out of the business for non-business expense, or try to grow the business too quickly and cannot manage cash flow requirements. When capital is restricted during tough economic times, the number of commercial insolvency issues arise dramatically.
Unfortunately, when a retail business doesn’t generate enough cash flow, it often slows down the speed at which it pays the largest expenses such as payroll and inventory. This can get more extreme over time, leading to suppliers and employees never being paid at all. When payments start to be delayed, it is common to see a significant escalation in complaints from employees and suppliers.
Regular maintenance and upgrades are required for the commercial equipment and real estate required by the retail business. Cutting these costs can start to have negative and obvious side effects immediately. This can become obvious to customers and it can also be very disruptive to the business, making it impossible to sell products and services.
Every retail business expects to have discount sales to move older or seasonal inventory. Sometimes, even deep discounting is required to convert inventory to cash flow and to reduce holding costs. Though when retail stores start to be seen giving excessive deep discounts or discounting excessive quantities this has a very negative impact on retail margins. Maintaining healthy margins is critical for the long-term success of a retail business.
Most violations that a retail business can incur are related to public inspectors looking at codes related to health, safety, tax, buildings, etc. These violations are usually communicated in a public form and can be discovered online or through public record offices. One more indicator of issues may relate to unexpected audits by Revenue Canada or other government offices.
Retail lenders expect to receive regular and accurate financial information. Sometimes retail businesses hide things such as off balance sheet financing that cannot be easily detected when reviewing the financial statements. Having an independent and qualified CPA perform an audit can provide assurance over the accuracy and compliance to professional standards. There are cases where accuracy issues and fraud are not detected by auditors, however when material inaccuracies are detected they should be taken very seriously. In some cases, even forensic investigations need to be conducted to determine if there is evidence of fraud.
When material issues cannot be resolved, it is common for a business to be served notice of being sued by a supplier, partner, employee or customer. A certain degree of legal litigation can be common for a business, especially when conducting business in the United States. When the frequency, scale, or absolute number of cases starts to escalate, it is an obvious red flag that the retail business may be experiencing problems caused by multiple potential root causes.
Many people witnessed Target enter Canada and then decide to exit before reaching their second anniversary. Also, many people who shopped at Target in Canada experienced hearing Target Canada employees’ express concerns over how bad the morale was, this obviously got significantly worse over time, and excelled to a critical stage when they learned Target intended to layoff everyone and close all stores. The Globe and Mail, Report on Business identified that the Target retail business failure destroyed over $4 Billion in goodwill value.
Many retailers today are investing in enterprise risk management programs to help leadership and boards continuously look at ways to proactively manage and mitigate risk. Leading retailers are supporting risk mitigation strategies with insight from data analytics, to be able to monitor and even predict adverse trends far in advance of them becoming material issues. Lastly, online digital sales continue to grow and gain market share. As millennials gain greater purchasing power it is probable that online shopping will continue to evolve and disrupt conventional retail business.
MNP Ltd. is one of Canada’s leading firms in corporate recovery and restructuring. For more than 50 years, we have served and responded to the needs of our corporate clients. Through a diverse range of services, our team of Licensed Insolvency Trustees have the experience and expertise to develop recovery and restructuring strategies that meet the needs of all retail stakeholders.
MNP can help retail business with online business development, enterprise risk management and building a high value data analytics strategy and implementation.
For more information, contact Richard Arthurs, CPA, CMA, MBA, CIA, CRMA, CFE, QIAL at 403.538.3187 or
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