GOODS FOCUS ON CONSUMER - SIR CHARLIE MAYFIELD, KPMG United Kingdom
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FOCUS ON
CONSUMER An exclusive interview with
GOODS SIR CHARLIE MAYFIELD,
CHAIRMAN, JOHN LEWIS
PARTNERSHIP
Issue 4 // kpmg.co.uk
FLIP PAGE
BACK TO CONTENTS FOCUS 2
EDITORIAL
KPMG: FOCUS ON CONSUMER GOODS
Welcome to the latest edition of Focus on Consumer Goods.
Is the recovery still on, or has it stalled? After a OECD’s high profile Base Erosion and Profit
burst of relative optimism earlier in the year, it Sharing (BEPS) workstream.
feels like the mood has mellowed somewhat.
But we consider opportunities too: the huge
Perhaps this is recognition that any path to
growth of the older, ‘silver’ consumer market,
sustained growth will be a gradual one, especially
and what I think is a fascinating case study of
with continuing sluggishness in the Eurozone.
real innovation in the guise of the “discovery
All that just underlines, as we approach the end etail” subscription model of beauty products
of the year, that the Christmas period will once company Birchbox.
again be absolutely crucial for consumer goods
I hope you enjoy reading this edition. And,
organisations and retailers alike.
of course, that your organisation will enjoy a
In this edition, we take you through a wide range successful Christmas trading period!
of important issues. Our ‘Top of Mind’ survey
reveals the key strategic priorities and concerns
of executives in the sector – with technology and
supply chains looming large.
We also explore the link between corporate and
societal value creation, an essential area in an
age when corporations of all kinds are under
wider scrutiny than ever.
Other risks we consider here include the ever-
present (and growing) cyber threat, as well
as the more technical but equally important Liz Claydon
question of tax compliance in the light of the UK Head of Consumer Markets
© 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.
CONTENTS
/ 16 / 13
FOOD FOR THOUGHT
IN THE SUPPLY CHAIN
The implications of the MULTINATIONALS IN
Elliot Review CHINA: MAKING THE
RIGHT MOVES / 26
WHAT’S REALLY ON THE
MIND OF CONSUMER
EXECUTIVES? / 04
INTERVIEW WITH JOHN LEWIS KPMG International
surveyed 469 industry
PARTNERSHIP CHAIRMAN executives
SIR CHARLIE MAYFIELD
/ 22 / 31
BOXING CLEVER... / 10
The ‘discovery etail’ subscription model
CONSUMER
INSIGHTS PANEL: THE IMPACT
TURNING SILVER OF TAX POLICY
INTO GOLD AND BEPS ON
/ 08 IN A 2030 SCENARIO... / 28 CONSUMER
BUILDING STRONG DEFENCES The disconnect between corporate and GOODS
AGAINST CYBER CRIME societal value creation is disappearing COMPANIES
© 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.
BACK TO CONTENTS FOCUS 4
FORUM
WHAT’S REALLY
ON THE MIND
OF CONSUMER
EXECUTIVES?
KPMG International’s Consumer
Executive Top of Mind Survey 2014
reveals the areas of strategic focus
in the year ahead for 469 consumer
industry executives.
© 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.
BACK TO CONTENTS FOCUS 5
DATA ANALYTICS
FORUM
NO. 1
PRIORITY
DATA AND
TECHNOLOGY
56% cited data 60% said they lack
However,
analytics as being important of good or strong
to their firms’ strategy this year. capabilities in analyzing
and using customer data.
What the industry has to recognise is
that the key fundamental of data and
DATA AND TECHNOLOGY
analytics is not about spending more
on technology. Management of the
volumes of data is just one challenge
for the retailers. 54% of 57%
respondents said their
The driving forces to collating and digital strategy for
engaging consumers
collecting this data is investing in
meaningful insight and defining how this mobile
through
insight can help them differentiate the
and digital
platforms is a 54%
services they provide to their customers. top of mind concern. 57%
However, said they have
Mohneesh Paranjpe, lack
a possible of good or
Investment Director, Global Data & Analytics, leverage
strong ability to
KPMG in Singapore
digital technology.
© 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.
BACK TO CONTENTS FOCUS 6
Up to now, companies using process-centric NO.1 CHALLENGE FOR COMPANIES
enterprise resource planning (ERP) solutions
FORUM
have been collecting the ‘exhaust data’ from
their systems, spending large amounts of
money to reassemble that into expensive
45%
enterprise data warehouses, which by design
enable insights about ‘what happened’ in
their business. cited the need
to improve
NO. 1 speed &
flexibility.
CHALLENGE Many have then added additional analytics
tools to try to help them predict demand or
drive supply chain efficiency. In the main, these
SUPPLY CHAIN have been process-centric initiatives such as
marketing, supply chain or customer analytics,
but very few can directly correlate performance
across the entire value chain, for example,
translating the information to see bottom and
top line P&L performance.
NO.1 INVESTMENT AREA
The next step is to close the feedback loop
Notwithstanding the supply and for data and analytics to become the Supply chain
management
chain logistics challenges drivers of process and to integrate it into their
that omni-channel presents,
enterprises. This will be a big mindset change, 45%
as data typically crosses traditional functional
consumer companies also have
some of the most complex
boundaries and leveraging external ‘big data’
involves leveraging insights that no one in the
28%
Data analytics
organization controls. Consumer businesses
upstream supply chains of any cannot afford to have groups of data scientists
type of business. working in functional silos, the opportunity is to 32% 28%
cross boundaries in order to drive a step-change
International
in actionable insights across the enterprise. Digital strategy
expansion
Eddie Short,
Partner, Global & Analytics, KPMG in the UK
© 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.
BACK TO CONTENTS FOCUS 7
GROWTH OPTIMISM
FORUM
10% ‘Companies need to challenge
POSITIONING themselves ‘are we really set up to deliver
our accelerated growth? The research
FOR GROWTH suggests many are not. Only around half
of our respondents believe they have the
right portfolio mix, appropriate resource
allocation, and necessary competitive
advantage to deliver their growth
aspirations. That apparent disconnect
more than between ambition and ability to deliver
one-quarter
expect to see growth of will, if remaining unchecked, inevitably
cause many companies to fall short of
over 10 percent
in the next 2 years their growth aspirations.
Jim Grover, Senior Advisor, Consumer Markets,
KPMG in the UK
64% expect their organic revenues to grow
6 percent or better over the next two years
more than one-quarter expect to see
growth of over 10 percent.
This is in contrast to current consumer markets
trends that show low, single digit growth rates.
M&A is well down on the corporate agenda
with only 12% see it as playing a significant
role on the growth agenda.
CONSUMER MARKETS
However, only 50% say their resources
Transforming for growth:
Consumer business
in the digital age
click here
Global Consumer Executive
are allocated appropriately to support their
Top of Mind Survey 2014
Willy Kruh
to download growth expectations.
kpmg.com
Global Chair, Consumer Markets
the survey KPMG International
Twitter: @WillyKruh_KPMG
© 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.
BACK TO CONTENTS FOCUS 8
We’d like to welcome you to our second discussion which
looks at the opportunities, drawbacks and misunderstandings
presented by a rapidly aging, global population.
CIP
Consumer
Insights Panel
Report:
coming soon
Powered by
The Consumer Insights Panel is a forum of thought leaders
with extensive FMCG experience that come together to
discuss, debate and challenge ideas and customer insights
on a quarterly basis.
Click to meet the panel:
© 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.
BACK TO CONTENTS FOCUS 9
TURNING SILVER
INTO GOLD
CIP
I
t’s time for businesses Many of these consumers are rich, smart, tech
everywhere to think of the savvy, frequent travelers and generally living life
increasingly lucrative mature to the full.
market. We know it’s not easy, Report:
So if you really want to follow the money, you
it may not come naturally
need to follow them.
coming soon
and that older consumers don’t tend to be
considered ‘brand sexy’ or ‘edgy’ or ‘shifting Let’s be clear. We are not saying that you should
the cultural paradigm’, but you really need to go after the grey pound or the silver dollar
think about them. or l’euro gris just to be nice. We are saying
something quite different.
Why? Because of numbers like these:
• 65 and overs will almost double during You know that extra profit margin you’ve been scratching your head searching
the next two decades from 600m to everywhere for? Guess what? It might just be in granny’s purse, the designer
1.1bn globally.
one, on the marble kitchen top, next to her gold smartphone.
• By 2020, for the first time in history, they
will outnumber under-fives.
• By 2050, 60 and overs will make up
one-third of the adult populations of
Spain, Germany, Japan, Italy and Russia.
• For the rest of the 21st century the
fastest-growing consumer segment in
the world will be 60 and overs.
So... there are a lot of them and they have a
sizeable chunk of every nation’s wealth.
© 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.
BACK TO CONTENTS FOCUS 10
BIRCH BOX
How two young women changed the
selling of beauty products with their
‘discovery etail’ subscription model
BOXING
This business model had to exist. It was so
CLEVER obvious to us,” says Katia Beauchamp,
co-founder and joint-CEO of beauty platform
Birchbox. “There needed to be a way for
consumers to touch, try and experience
beauty products before buying them online.”
Consumers clearly agree with her and her
business partner, Hayley Barna. Each month
their NYC-based business ships a bespoke
‘Birchbox’ of five targeted samples of beauty,
grooming and lifestyle products for just US$10
for the women’s Birchbox (US$20 for the men’s)
to 800,000 global subscribers. If the recipient
likes one, they can order full-sized versions from
Birchbox’s e-shop, which sells more than 6,500
products from 800 brands.
“I like the way [Birchbox] does the editing for me
and gives me a non-noisy environment to shop
in,” said one time-pressed customer.
Beauchamp and Barna founded Birchbox just
months after receiving their MBAs from Harvard
Business School, where they met and first
conceived their business idea. “We thought:
‘Who wouldn’t want someone to cut through
the clutter and help them find the best beauty
products?’” says Beauchamp. With that simple
question, Birchbox was born.
© 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.BACK TO CONTENTS FOCUS 11
BIRCH BOX
Expansion came swiftly. Having moved into men’s products in April
2012, that September they acquired Joliebox, which operated in the UK,
Spain and France. “It allowed us to extend our service from the US to
three other markets, overnight,” says Beauchamp.
“Because beauty is regulated in the same way as pharmaceuticals,
overseas growth couldn’t be as simple as shipping from the US to other
destinations. We had to wait for the right opportunity.”
One of the key reasons for Birchbox’s rapid success was its founders’
careful targeting of what Beauchamp describes affectionately as “the
average, everyday beauty consumer”.
One of Barna’s friends, a beauty editor, “That choice is a critical element of what we want our brand to be,” she
shared her expert knowledge and spare says. “We knew that die-hard beauty experts would love to be exposed
samples with the pair. The first boxes shipped to lots of new brands that aren’t easily accessible. But we also designed
to subscribers in September 2010; four years Birchbox for people like ourselves – the more casual beauty consumer. No
later, the fledgling startup has grown into a other retailer was really focusing on her.”
global success story.
Now the brand sees a “reawakening of her [the average consumer’s] love
“Consumers understood right away that for beauty”. Subscribers – who also have access to ‘how to’ videos, insider
Birchbox was a valuable service to them,” says knowledege and loyalty points – post thousands of product reviews on
Beauchamp. Yet even its founders were taken Birchbox’s site, and many regularly share ‘unboxing’ videos through social
aback by how quickly Birchbox’s discovery retail media channels when their boxes arrive through the mail. It’s this close
model took off. connection with a community of consumers that beauty manufacturers
are keen to tap into. The stakes are high; in 2013 Euromonitor forecast the US
“We had realistic expectations, that it would take
beauty and personal care industry would be worth US$81.7billion by 2017.
some time to explain the value proposition to
brands and customers alike,” says Beauchamp. The relationship between Birchbox and its partner brands is mutually
“But our customers embraced it, and started beneficial. Beauchamp acknowledges that the company’s fast track to
sharing their experiences online through social success wouldn’t have been possible without establishing and nurturing
channels such as YouTube. Growth was truly viral.” links with manufacturers.
The popularity of Birchbox – and the rise of When launching the subscription service, Beauchamp and Barna recognised
competitors in the US and abroad – spurred that getting the right representation of brands in the first Birchboxes was
Beachamp and Barna to work harder. “We knew vital to “signaling to customers what we were, and what the quality level
we’d go global at some point, but while similar would be”. Beauchamp cites US premium brand Kiehl’s, Australian ‘indie’ firm
discovery retail companies were springing up, Lipstick Queen and San Francisco beauty powerhouse Benefit as some of
we had to focus on running our own business.” the first to lend their credibility to the initial boxes.
© 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.BACK TO CONTENTS FOCUS 12
Now, with so many subscribers sampling and “As an online-first beauty retailer, we
trading up to more expensive products, brands felt that we were best positioned to understand
BIRCH BOX
are vying to join the Birchbox portfolio so they and leverage our e-commerce experiences into
can tap into the reams of data and feedback creating a unique store,” explains Beauchamp.
freely shared.
“It wasn’t part of our original business plan.
The founders are convinced that Birchbox’s We did a few events and pop-up stores, and
ability to capture and analyse complex data realised this was a great way to connect with our
exceeds what manufacturers can achieve on consumers. We knew they appreciated the value
their own. “It’s a really exciting proposition for the Birchbox model brought to online shopping,
our partners,” says Beauchamp. “Before we and that they didn’t feel they were being served
came along, a company would hand out samples by the current options for shopping for beauty in
to consumers without knowing what their person.” The store is a one-off experiment, but
needs were, what products they were currently further openings are “not off the table”.
using, and what opportunity there was to turn a
Where Birchbox – or its business model
potential consumer into a loyal customer.”
– will be in another four years is anyone’s
Birchbox use detailed subscriber profiles and guess. Many online retailers already send out
product reviews to understand which customers recommendations based on customers’ past
respond most positively to samples and why, purchases, but only food seems to lend itself
and track if they go on to buy full-sized products. readily to the Birchbox model of fast reaction to
“Our relationships with our brands are getting consumer data. Graze delivers customised boxes
deeper and deeper,” says Beauchamp. “We’re of healthy snacks in the UK for £6 a month and
now talking with them about how we can help passed the 150,000 subscription mark only three
with product development, packaging and months after launching in the US in January. This
sharing feedback from consumers on how they has not gone unnoticed by the more traditional
think products could be improved.” players, a number of who have entered that
market. Selectivity could be the key.
The company’s growth plans don’t currently
include its own line of cosmetics but,
Beauchamp says, “it’s definitely not out of the
question that Birchbox could have more of an
ownership and stake in brands.”
This year has also seen Birchbox take the first
steps towards using its e-commerce knowledge
in the physical world. The brand’s first bricks-
and-mortar outlet opened in Soho, New York
City, in July 2014. Its aim is to offer the best of
Birchbox in a single experience: the opportunity
to purchase full-size products via editorialised
displays; to choose samples; to attend events
and beauty demonstrations; and review tailored
recommendations via touchscreens.
© 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.BACK TO CONTENTS FOCUS 13
FOOD FOR THOUGHT
FOOD FOR
With the Elliott Review
published this summer in
the wake of the horsemeat
scandal that broke in 2013,
THOUGHT
Annette Barker of KPMG
looks at the ongoing
implications for consumer
goods organisations in
IN THE SUPPLY CHAIN managing the supply chain.
by ANNETTE BARKER, Director, Dispute Advisory Services
© 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.BACK TO CONTENTS FOCUS 14
FOOD FOR THOUGHT
It’s not that the food supplied by our food
industry is harmful. Indeed, Professor Elliott says
in his review that the UK has “perhaps the safest
food in the world and all those involved... should
be commended for what has been achieved”.
THERE IS A No one has died from food substitution (that we
LOT MORE know of). But the old focus on ensuring food is
INFORMATION safe is plainly not enough. The product simply
must be what it says on the tin. It’s an issue of
ABOUT integrity and consumer trust.
SUPPLIERS The industry has made definite progress since
T
he horsemeat scandal of 2013 was a seismic event for everyone WITHIN AN those frenetic days of early 2013 – but there is
connected with the food industry, wherever they sat in the ORGANISATION still a way to go.
chain. Although it has receded to some extent from media THAN IS
consciousness since, it remains a hugely important issue that Knowing your suppliers
no one can afford to ignore. We all know that it only takes one APPRECIATED. There are a number of key questions that
major incident to set off the alarm bells and soul-searching again. organisations need to ask themselves:
The Elliott Review, published in September, was an important milestone in • How well do we know each of our Tier 1, 2 and
creating a coordinated response to the issues that lie behind the problem. 3 suppliers and what do we know about them?
Professor Elliott identified eight pillars of food integrity (link to report
perhaps, or put them in a box?) and recommended the establishment of • How often do we audit and assess suppliers
a Food Crime Unit (FCU) to crack down in a concerted way on criminal or our own processes to measure and manage
organisations that seek to substitute cheaper foodstuffs like horse into the risk?
food chain. • When did we last map our end-to-end supply
The creation of the FCU, when it happens, will be an important step forward. chain?
But for food manufacturers, brand owners and retailers alike it’s only one • Are all our suppliers approved against a
part of the puzzle. consistent set of criteria?
With so many of them, knowing all your
Achieving visibility
suppliers may seem like a horrendously difficult
The fact is that the responsibility for food integrity lies with all areas of problem to get your arms around. But in fact, one
the food industry. And like it or not, it’s the big food brand names and the often finds that there is a lot more information
retailers who sell the products to the consumer who will bear the brunt of about suppliers within an organisation than is
the fall-out from any incidents. appreciated. It’s just that it’s usually dispersed
That’s why it’s essential to achieve visibility across your supply chain and to across different departments, so that there is
know your counterparty. Other industries such as financial services and the no read-across through the company. There is
pharmaceutical sector are well advanced in this respect – consumer goods often no clear home for supply chain risk. Finding
and retail can learn from these other industries. ways of bringing the information together and
gathering it in one place can put you in a position
to reduce complexity and mitigate risk.
© 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.BACK TO CONTENTS FOCUS 15
ACHIEVING AND MAINTAINING SUPPLY CHAIN VISIBILITY IS,
FOOD FOR THOUGHT
QUITE SIMPLY, A CONSTANT REQUIREMENT THAT IS NOW A
FUNDAMENTAL ASPECT OF DOING BUSINESS – AND SOMETHING
THAT THE PEOPLE WHO CONSUME YOUR PRODUCTS EXPECT.
This will put you in a much better position should Not only food and horses NATURAL
a crisis arise (for example, if you need to know
which of your products have supplier X’s meat in
Knowing your supply chain is important in order DISASTER
to cover a much wider set of risks than simply
them in the event of an urgent product recall).
food integrity, of course. It is important from an
But having established visibility and knowledge ethics perspective (for example, child labour or Eighteen months ago the hard disk
of the supply chain, you can’t just leave it there. even slavery in the supply chain), bribery and drive (HDD) supply industry was hit
You need a way of continuously or regularly sanctions, and a host of supply interruption with a shock.
monitoring and checking – because, six months issues such as natural disasters.
down the line, how do you know that your
At KPMG, we use a risk management framework
suppliers’ sourcing hasn’t changed?
to structure our assessment of an organisation’s
It is therefore important to carry out supplier risk management against leading
unannounced audits to maintain visibility over the practice (see below). This can help you to
supply chain - and indeed the importance of such properly think through all the risks across your
regular monitoring was clearly underlined in the supply chain, and how they can most effectively
Elliott Review. be mitigated.
Achieving and maintaining supply chain visibility
A case for contracts?
is, quite simply, a constant requirement that is
This is where contracts can also come into now a fundamental aspect of doing business –
play. There can often be limited contractual and something that the people who consume
arrangements in place between brands/retailers your products expect.
and their suppliers. Whilst this may give more
There was a concentration of Tier 1
flexibility and agility–consideration ought to be
manufacturers and their suppliers in
given as to whether firmer contractual terms
Thailand when severe flooding hit.
should be put in place. This would give the
potential to stipulate that you expect a supplier Two of the biggest manufacturers were
to have visibility of Tier 2 and 3 suppliers and impacted in divergent ways – in one
to carry out checks or audits at a specified Annette Barker production had to stop and the cost was
frequency, for example. Director, Dispute Advisory measured at over $200m, whereas at the
Services other it continued and within six months
T: +44 (0) 11 3231 3273 they reported a 30% increase in shipping
E: annette.barker@kpmg.co.uk and almost doubling of gross margin year
on year.
© 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.BACK TO CONTENTS FOCUS 16
JOHN LEWIS
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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JOHN LEWIS
Sir Charlie Mayfield, Chairman,
John Lewis Partnership
Image source: Bloomberg/Getty Images
T
aking over as Chairman of British The Partnership is still expanding its high-street online and catalogue business, a production unit
high-street favourite the John footprint; John Lewis aims to increase its number and a farm.
Lewis Partnership in 2007, Sir of UK stores by more than 50% to 65 by 2023.
KPMG met Sir Charlie at the Partnership’s
Charlie Mayfield has led the
In a world where many brands and retailers headquarters in London’s Victoria to discuss the
firm through a period that has
are finding consumers increasingly fickle, the particular challenges of leading an employee-
buffeted many of its rivals.
Partnership has retained the deep affection owned business, operating in a highly
Despite a recession, budget-conscious and loyalty of its customers with such popular competitive, ever-changing retail landscape
consumers and fierce competition, John Lewis product and service innovations as the offer of and developing strategies to succeed in an
department stores and Waitrose supermarkets free coffee to Waitrose shoppers and the group- omnichannel environment.
have thrived. Sales at John Lewis rose 9.4% to wide ‘click and collect’ service.
£1.87bn (US$3.01bn) in the first half of 2014, with
After joining the Partnership in 2000 as Head of The grocery market is tough right now.
like-for-like sales up 8.2%. Meanwhile, Waitrose How has Waitrose gained market share?
Business Development, Mayfield stepped up to
grew its market share in a torrid grocery sector
the board as Development Director in 2001 and By consistently hammering away at shoppers’
to 5% and recorded on average 670,000 more
was charged with formulating the Partnership’s perceptions of price. People have tended to think
customer transactions a week than in the
online strategy. He then served for two years as Waitrose is more expensive than it is, but we
comparable period in 2013.
John Lewis Managing Director prior to becoming have been progressively making headway with
Both retailers have significantly expanded their Chairman in March 2007. our [budget] Essentials range, and with Brand
online service. Web orders were up 54% at Price Match messages.
The John Lewis Partnership is owned by its
Waitrose in the first half of 2014 and they account
90,000 permanent staff, and comprises 43 John We have also relentlessly focused on innovation.
for around a third of sales at John Lewis.
Lewis shops, 329 Waitrose grocery stores, an Customers want quality, newness and
© 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.BACK TO CONTENTS FOCUS 18
JOHN LEWIS
CLICK AND How is the Partnership staying relevant in a
COLLECT IS fiercely competitive retail landscape?
GROWING AT The traditional retail market has been defined by
space and the need for high sales densities, but
AN ALMOST technology is changing the way customers shop.
STARTLING RATE. Sales densities remain important, but they aren’t
CONVENIENCE the only crucial factor.
REALLY We have relatively less space than some retailers,
MATTERS TO but our ‘click and collect’ service makes the John
Lewis brand much more accessible, as customers
CONSUMERS 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
innovation, and we invest a lot in them. We’ve also been investing in the between the two brands to our advantage.
shopping experience. Supermarkets can be functional places, but our focus
has been on making the Waitrose experience special through good wine and Click and collect is growing at an almost startling
charcuterie offers. We are putting more cafés and juice bars in stores and rate. We have recognised that convenience really
enhancing bakeries, and adding spaces for events such as food tasting. matters to customers. You can no longer base a
business model on the belief that someone will
We are also making good progress on being more customer-centric. We drive for an hour to visit your store, no matter
now have five million myWaitrose cards. It has proved a great success how fantastic it is. If there is a closer, more
in encouraging lighter shoppers to spend more, while encouraging loyal convenient one, they will shop there instead.
customers to keep shopping with us. Convenience is key and we have started to take
It’s all about relationship building. Simple schemes, such as offering free the brand closer to people with a new Waitrose
coffee and newspapers, have a high perceived value, and help people make store at Kings Cross station in London, and the
their Waitrose shop a daily ritual, as well as reflecting the brand’s hospitality 3,600sqft John Lewis at Heathrow Terminal 2.
and warmth. We also need to make sure that, if the customer
Unlike other supermarkets, Waitrose has many regular, but infrequent is making the effort to go to the shop, the visit
customers, who shop lightly with us. Data from the myWaitrose programme has to deliver a value-adding experience. It has to
allows us to identify more accurately what would appeal most to different offer inspiration, ideas and knowledge from the
customers, so we can tailor promotions better than ever before. partners (staff).
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JOHN LEWIS
What challenges does the omnichannel The group is famous for being an
environment present for JLP? employee-owned Partnership. What are
Logistics and supply chain are absolutely the benefits of running the business on
mission critical, and we have developed our this basis?
understanding of that partly because of our The employee-ownership model is
presence in both retail and groceries. overwhelmingly beneficial, because the partners’
The creation of our logistics hub at Magna Park, engagement with the business is so much
near Milton Keynes, is one of the most important greater. They are invested in the company
things we have done in the last 10 years. It financially, professionally and socially. Our AGM
gives us a supply chain with the agility to deliver takes place with 70 partners who are elected
to shops flexibly, frequently, accurately – and from the business who work in it every single
therefore cost effectively. day, and they know what’s going on. Their
greater than that of most shareholders.
Having the supply chain capability to pick orders
in hours for next-day delivery is difficult and Our focus on innovation and on investing in
expensive, but it’s enormously worthwhile and our partners’ capability stem directly from our John Lewis is experimenting
gives us an important competitive advantage, ownership model. One of the things I most with new formats such as this
enjoy about my job is seeing our partners build store at Heathrow Airport
one we are continuously investing in. We are
building another 600,000sqft facility at Magna up this capability over time, like the amazingly Image source: John Lewis
Park and adding a Waitrose national distribution knowledgeable people in our large electrical
centre. This will be supported by investment in departments. The food technologists at our
systems, which is essential for the businesses’ research and development (R&D) centre don’t
improvement. 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 That’s a very tangible sign of the Partnership
JOHN LEWIS
example, we are changing the way we do Council effectively raising its opinion up through
personnel, administration and systems, and it the business, for messages to be heard and
has not worked as well as we had hoped. acted upon. It does a very good job of holding
In July, the Partnership Council was forthright in management to account.
its unhappiness about this, so I commissioned We also have a Partnership Board, and its
a report that validated some of those concerns. elected directors are absolutely integral to our big
My executive team will report back to the council strategic conversations. The board’s character is
on what they are going to do about it. enhanced enormously by having elected directors
who care passionately about the Partnership.
JLP customer shopping habits JLP operating profit 2013/14 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
64%
innovation and better products. For example,
we’ve worked with one bedding company for
30 years. They have come up with better, much
Omni channels 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
.7m
.1m
.3m
.1m
to invest in R&D. It’s very difficult to get this if
you just have a transactional relationship with
£216
£226
£292
£310
20%
your partners.
Pork is another great example. Most pigs
2013 2014 2013 2014
Store only are farmed indoors so they can be protected
John Lewis Waitrose from the sow rolling over them. One of our
Nearly two thirds
+4.3% +6.1%
suppliers, a Danish farming co-operative,
of customers use
16%
has bred sows with lower mortality rates for
both in-store and
their piglets. The result is better husbandry,
online channels
better productivity and better pork. You don’t
when shopping Online only get these kind of innovations when you are
with John Lewis.
haggling with your suppliers over pennies.
Source: John Lewis Partnership annual report 2014 Source: John Lewis Partnership annual report 2014
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Thinking about
JOHN LEWIS
how to better engage
JLP is one of the UK’s leading multichannel
your workforce, boost
retailers. How do you plan to stay
competitive in this respect?
productivity and foster
Logistics and systems are key. We have to
make a significant investment in systems now. WE LOOK
entrepreneurialism?
It’s difficult to achieve, because you have to do TO DEVELOP
it in flight and it’s a complex architecture due KPMG is delighted to announce our support of
to the range of products we sell. Even though
LONG-TERM
the Inspire Employee Ownership Conference, a
the numbers are painful, we have to make that RELATIONSHIPS one day event where business owners can find out
investment to make sure we have a systems WITH SUPPLIERS more about the benefits and considerations of the
architecture that is fit for the future. employee owned model.
WHICH WE THINK
From an ownership standpoint this is not profit LEADS TO This Conference is free to attend and designed for
maximising. Depreciation for systems is over five new and existing businesses of all sizes, as well as
to 10 years, compared to 30 years for a store, INNOVATION public bodies, who want to find out more about
which creates a drag on your profit and loss on AND BETTER employee ownership.
top of the actual cost.
PRODUCTS. REGISTER your interest now to receive more details.
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.
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BUILDING
CYBER
STRONG
DEFENCES
AGAINST
CYBER CRIME
by DEL HEPPENSTALL, Director
W
ith the threat of cyber crime
growing for organisations in
all sectors – and increasing
attacks on consumer goods
companies – Del Heppenstall
of KPMG considers ways of strengthening
the defences.
The growth in cyber crime has been one of the
standout features of the corporate risk landscape
in recent years. There’s no doubt it’s become a
top of mind boardroom issue.
But with hackers mainly concerned with cracking
customer credit card and financial information, it
has been financial services firms and companies
dealing direct with the public – such as retailers –
that have been in the front line.
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Consumer goods being targeted
However, as companies have worked harder
CYBER
on their cyber defences and the bar has risen
in terms of accessing systems, cyber criminals
have begun to look for other ‘low-hanging fruit’.
And, as some of the biggest brands in the world,
consumer goods companies are in many ways
an attractive target.
That said, the sector is still not a prime target for
criminals motivated purely by the desire to get
hold of individuals’ financial data.
infrastructures, which in turn leads to very large
The primary threat in the consumer goods sector and unwieldy IT estates that are both difficult to
is of another kind: industrial espionage and manage and provide a rich playing field for the
nation state attack. attacker.
Industrial espionage in the production The threat within
environment Organisations also need to be very alert to
Industrial espionage can have several different other threats aimed at individual employees. For
motivations. It may be to steal another example, phishing attacks are becoming more
company’s IP around the recipe or production common. An email might be sent to an employee
mix for a certain product. Or it may be linked to purporting to be from supplier X, asking the
M&A activity or takeovers – trying to learn who a employee to log in and confirm details. The login
competitor is interested in buying, or accessing details are then captured before the employee is
financial information to help decide whether to passed on to the genuine site. Criminals are then
make an aggressive bid. It’s all about trying to able to log into the system themselves, where
get a run on competitor organisations. they could alter or lift information.
Often such espionage can be politically However, the threat is not only external: often, it is
motivated or sponsored – nation states trying to insiders that can do the damage. Sometimes it is
boost their own economic productivity through unwitting, for example, if they have travelled abroad
accessing such information. to a market like the Far East and have unknowingly
had their IT infected with malware. Companies
As consumer goods organisations become need to have increasingly stringent IT policies for
ever more global, with an increased drive to employees travelling in emerging markets.
leverage technology in order to gain competitive
advantage whilst entering new markets But it can also be a knowing threat. Insiders
the manufacturing platforms have become can be bribed to provide sensitive information.
increasingly connected to Enterprise Resource Or, in an age where employees increasingly
Planning solutions and the front office. The move around within the jobs market, there is
production environment has moved closer the risk of “lift and shift” – downloading whole
to the front door. This approach of combining databases of information to take with them to
operations and IT has led to complex network another employer or a willing buyer.
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CYBER
Taking greater control
Faced with so many risks, what should companies be doing? The good news is that, by taking a determined and systematic approach, we believe that
companies can positively manage cyber risk and put themselves in a position of control.
Cyber risk is unique to the particular organisation in question and takes in a whole range of factors. Pinpointing which of these elements is relevant to you and your
organisation will ensure that you are able to identify your risk exposure and determine how you wish to treat that risk. There are a number of component parts when
considering your cyber risk as demonstrated here:
Hacking/malware –– Helpful – offering help to resolve a problem Distributed denial of service (DDoS)
they have caused
Flaws in software, systems with default or easily Online protests use floods of requests to
guessed passwords or confidential information –– Urgency – posing as a fellow employee overwhelm web servers, email delivery and
sent or stored unencrypted allow hackers to gain (often a new joiner) under pressure needing call centre switchboards to disrupt business,
access to steal or corrupt business information and assistance provide distractions for other crimes and extort
systems. –– Flattery – appealing to the targets ego or protection money.
Weaknesses in the supply chain or unauthorised offering a prize
Defacement/squatting
installations of software can add malicious code –– Threats – highlighting negative
to existing applications to grant attackers remote consequences for non-compliance Taking over existing or generating fake customer
control. • Convincing fake emails or web sites can communication channels on website or social
collect login credentials and other confidential media and using them to harm reputation or target
Social engineering/phishing information. customers for fraud.
• Customers and staff can be conned into • Entire false personas can be created to
providing information or assistance through Leaking
befriend and then defraud senior staff.
different psychological techniques: Publishing Internal information publically (up to
–– Authority – posing as law enforcement, entire email boxes) or detailed files on senior
regulator or senior management staff to embarrass, or encourage others to
harass organisations.
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CYBER
A commercial and strategic advantage
KPMG can help you with walkthrough scenarios
and incident planning. We will give you advice
and challenge you to help you make decisions
with confidence, as well as hosting forums where
colleagues from across industry can discuss,
share and collaborate on issues and solutions.
There are clear business benefits to effectively A NEW APPROACH
managing cyber risk. TO CYBER SECUR ITY
Understanding the value of corporate information www.kpmg.com/uk/cyber
assets and how their theft, disruption or
destruction would affect the achievement
of commercial objectives allows boards to
appreciate the business benefits of managing
cyber risk effectively. This process of discovery
also helps to illustrate how the board’s decision
making can raise or lower the company’s overall
To find out more,
risk exposure. Once a board has a clearer
please contact:
understanding of the shape and scale of cyber
risk, and what it means for their organisation,
they are better able to set the corporate risk
appetite appropriately and invest more efficiently
in the management of cyber risk, in line with
other business risks.
The worst thing a company can do about the
threat of cybercrime is to ignore it. We believe
that companies who accept cyber attacks as an Del Heppenstall
inevitable part of today’s business landscape, Director, Information Protection
and who build in proactive safeguards and
responses, will be best-placed to secure the T: +44 121 2323080
future of their business. E: del.heppenstall@kpmg.co.uk
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CHINA: RIGHT MOVES
MULTINATIONALS
IN CHINA:
Making the right moves
China continues to present many opportunities for
Multinationals (MNCs); and MNCs continue to play
a key role in the development of China’s economy.
A perusal of today’s headlines might incline a casual reader to think that
MNCs are becoming increasingly sidelined in an ever more confident China,
but the truth is in fact much more nuanced than this. In fact, given China’s
ambitious and visionary programme of policy reforms announced in 2013,
in many ways China’s need for insights, technology and know-how from
outside its boundaries has deepened across numerous sectors.
The growth rate of China’s economy may be declining as it matures,
but in absolute terms it is still significant and many of the world’s top
multinationals remain attracted by the opportunities arising from
increased consumer spending, urbanisation and infrastructure
development.
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Conducting successful business in the world’s These challenges and the increasing significance
CHINA: RIGHT MOVES
second largest economy is however increasingly of China to global corporates’ results have Multinationals interviewed include;
challenging. Competition, from both international resulted in an increased focus by multinationals VG Group, Marks & Spencer, Pepsico,
and domestic players, remains fierce; the rise on innovation, efficiency and the bottom-line. The Unilever, eBay and Lenovo.
of e-commerce and the sophisticated Chinese CEOs of the multinationals KPMG in China spoke
consumer are challenging established business to point out the need to be flexible and prepared Key themes include:
models; attracting, developing and retaining talent to adapt in the market, in particular as they • China is still growing and becoming more and
is more critical than ever. Added to these is tougher expand inland. They emphasise innovation and more complex;
enforcement and a higher emphasis on compliance differentiation as they face higher competition
• New business models are disrupting
in an already complex regulatory environment. from Chinese domestic players who have rapidly
multinationals;
moved up the value chain, have been quick to
embrace e-commerce, and are increasingly • Selling to China’s many cities is not as easy as
becoming global. They note how internal control, it looks;
compliance and corporate governance have had • China in the world: It is no longer enough to
to step up to a new level. simply claim a presence in China;
As China progresses through its next stage • Finding new efficiencies in a slower China.
of reform, new opportunities and challenges
will emerge, both for multinationals investing
in China and for Chinese domestic companies
investing overseas. The companies that succeed
will be those that have a clear direction and
strategy, and an ability to implement and adapt.
This report highlights the strategic importance
of the China market for multinationals and the click here
actions being taken by several leading to download
companies to grasp the opportunities and the report
respond to the challenges.
Stephen Mercer
Stephen Yiu Partner-in-Charge,
Chairman, Multinational Clients,
KPMG in China KPMG in China
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IN A 2030
VISION OF VALUE
SCENARIO
by Vincent Neate, Partner, KPMG in the UK
As economic, social
and environmental
megaforces transform the
operating landscape for
business, the disconnect
between corporate and
societal value creation
is disappearing.
© 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.BACK TO CONTENTS FOCUS 29
K
PMG International’s new In order to illustrate this, and to further develop
Vision of Value report identifies the approach and test its versatility, KPMG
VISION OF VALUE
three key drivers that are that member firms’ sector teams have applied 1
are closing the gap between the KPMG True Value methodology to three
corporate and societal value hypothetical businesses: a gold mine in South
creation: Africa, a brewery in India and a plastics plant
(low-density polyethylene) in the US.
• new regulations and standards;
• the growing influence of stakeholders; and ASSESS THE COMPANY’S
KPMG has developed ‘TRUE’ EARNINGS
• changing market dynamics driven by economic, the KPMG True Value
social and environmental megaforces. by identifying and quantifying
methodology in order
its material externalities
These three drivers mean that externalities to support companies
arising from the activities of business, which through this process: 2
historically had little or no impact on cash flows
and risk profiles, are bringing new risks and
opportunities with significant implications for
corporate value creation in the 21st century.
Traditional approaches to internalising UNDERSTAND FUTURE
externalities have focussed only the bad but EARNINGS AT RISK
we believe it’s vital to get a full picture of the
value of a business by looking across its value by analysing exposure to the
ONCE COMPANIES drivers of internalisation
creation, both positive and negative. Given the
average listed business’s value is now nearly HAVE A CLEARER
80% intangibles (which arguably represent the VIEW OF THEIR
externalities), we are seeing more and more EXPOSURE TO 3
analysts seeking ways of understanding what INTERNALISATION,
this comprises.
THEY WILL BE
The question is, how should companies respond IN A STRONGER
to this trend? Developing a more comprehensive
POSITION CREATE CORPORATE
understanding of a company’s externalities is
TO DEVELOP AND SOCIETAL VALUE
a useful first step, but does not in itself equip
the company to protect and build its corporate STRATEGIES by developing business cases
value. In order to do that, companies also need THAT CAPTURE that capture value creation
to understand which forces of internalisation are opportunities and reduce risk
VALUE CREATION
most likely to affect them and what the potential
impact of that internalisation is likely to be. Once OPPORTUNITIES
companies have a clearer view of their exposure AND REDUCE
to internalisation, they will be in a stronger RISK.
position to develop strategies that capture value
creation opportunities and reduce risk.
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In a 2030 scenario...
VISION OF VALUE
CHAPTER 04 Case studies Case studies CHAPTER 04 CHAPTER 04 Case studies
CASE STUDY 1:
UNDERGROUND CASE STUDY 2: CASE STUDY 3:
GOLD MINE, BREWERY, PLASTICS PLANT
WITWATERSRAND, MAHARASHTRA, (LDPE), TEXAS, US
SOUTH AFRICA INDIA KEY FACTS AND ASSUMPTIONS
SUB-SECTOR Low-density polyethylene (LDPE) is a commonly produced polymer
KEY FACTS AND ASSUMPTIONS used in the production of a wide range of plastic products such as trays, milk
KEY FACTS AND ASSUMPTIONS and juice containers, packaging wraps and computer hardware, such as disc
drives and CDs.
LOCATION South Africa was ranked as the fifth-largest gold producer in the world.1 In 2014
the country accounted for just 6 percent of global production - the country’s Maharashtra State is a major beer producing area in India due to the high-quality
worst year for production since 1905.2 The industry’s recent decline is due to
BREWERY LOCATION
water sources and proximity to local markets. Recent monsoon seasons have been PLANT LOCATION Brazos River Basin, Texas – one of the world’s major polyethylene producing
numerous factors, including increasing pressure on the cost-base due to rapidly record breaking. Climate projections for Maharashtra indicate an increase in severe areas due to its proximity to sources of feedstock from the local oil and gas
rising input costs, and prolonged labor disputes that have led to long periods monsoon rainfall events, which can severely damage crops and reduce transport industry. Ethane feedstock in the form of natural gas is available in such
of lost production. access across the region. Outside the monsoon season, Maharashtra is expected abundance that this region currently benefits from one of the lowest cash costs
to be a water-stressed area. India currently has a relatively small beer market, but
of production for polymers in the world. Diminishing water supplies and rapid
the beer industry in Maharashtra is seen as a growth sector due to a growing young
Underground mine: gold mines in South Africa are typically underground due population growth are critical issues in Texas, as reservoirs are limited and have
PROCESS TYPE population, urbanization, rising income levels and tourism.
high evaporation rates. Rising temperatures will lead to increased demand for
to the depth of the deposits.
water and energy.
TYPE OF FACILITY Integrated: the production process encompasses the value chain from brewing to
PRODUCTION VOLUMES 500,000 tons of ore, translating to approximately 881,850 ounces of gold. bottling, packaging and distribution.
PROCESS TYPE Tubular reactor following the typical structure of an LDPE plant: compression,
reaction, separation and extrusion.
EBITDA MARGIN This mine currently generates an EBITDA margin of approximately 29 percent. ANNUAL PRODUCTION 500,000 hectolitres of beer.
The ‘break-even’ EBITDA margin is considered to be 23 percent, which the mine
requires in order to service the debt on its initial capital investment.
VOLUMES PLANT ANNUAL 700,000 tons of ethylene, of which 60 percent is converted into polyethylene.
The remaining 40 percent is used in the production of other products.
PRODUCTION VOLUMES
EBITDA MARGIN The brewery generates an EBITDA margin of approximately 5 percent
of sales.
1 http://www.forbes.com/sites/kitconews/2014/06/20/worlds-largest-gold-producing-countries-south- EBITDA MARGIN The LDPE plant generates an EBITDA margin of around 36 percent of sales.
africa. Retrieved 31 July 2014.
2 http://goldinvestingnews.com/36495/2012-top-gold-producing-countries.html. Retrieved 9 June 2014.
60 | A New Vision of Value: Connecting corporate and societal value creation © 2014 KPMG International Cooperative © 2014 KPMG International Cooperative A New Vision of Value: Connecting corporate and societal value creation | 69 76 | A New Vision of Value: Connecting corporate and societal value creation © 2014 KPMG International Cooperative
The gold mine could see its The brewery could see its By contrast, the plastics
earnings margin earnings margin of plant was better protected from
reduced to a level of 5 percent turned into a the internalisation of its
externalities due to its location
1 percent that would make loss of 4 percent. and sector-specific
it financially unsustainable.
conditions.
The report also highlights how closer alignment
between corporate and societal value creation is
being held back by the current financial system in
which many investors and business leaders are Vincent Neate
focused almost exclusively on the creation click here Partner, Head of Sustainability,
of short-term shareholder value. to download KPMG in the UK
the report
T: +44 20 7694 3256
E: vincent.neate@kpmg.co.uk
© 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.You can also read
