Special Report Podcast: Special Report Podcast: Doug Murray – CEO, Foschini
ALEC HOGG: In this special podcast, we speak with Foschini Group chief executive Doug Murray. Doug - a set of results released today which show that you're pretty upbeat in just about every field - does this suggest that the worst is very much behind us?
DOUG MURRAY: We would like to think so - we certainly a year ago were looking for some sort of pick-up in consumer spending. We’d been in an environment with interest rates coming down, inflation was at a low level and we’ve had interest rates at the lowest level they’ve been in 30 years and we always thought that the World Cup would be a catalyst for consumer spending which it was. Of course the fear was, would it stop after that, and it certainly hasn’t. In fact it certainly seems to have got stronger for us and we’re particularly happy with our last six months of trade where we grew our turnover 18.1% against the first six months where it was up 12.5%. So it has got stronger - we think that we are in more of an up-cycle - we understand the consumer is still relatively fragile, but all our statistics have been saying that they’ve been getting into a better position for some time no.
ALEC HOGG: It’s interesting to notice that a big group like yours is outperforming the overall Stats SA retail index by quite some margin, and it’s not just you - we’ve got Mr Price’s results today - similar story. Who is losing here - is it the Mom & Pops?
DOUG MURRAY: It has to be quite broad - it’s very hard to tell. We know that part of our strategy has been to - on some key initiatives to drive top line growth for our business. We’re a high margin player and we don’t want to take it in margin - we’ve been passing on any efficiencies to the consumer. We know from the RLC stats and from any reported stats that we certainly have been getting market share and some of the other retailers also say they’re getting market share - so it’s hard to read who is then losing market share - but we certainly have got two measures. One is RLC and we see we’re comfortably ahead of that, and also on reported growth - we look at how we’re performing against other listed companies and we’re obviously comfortable that we can honestly say that we are getting market share. So yes, somewhere along the line its coming from other people, but it’s always hard to say from where.
ALEC HOGG: But you must have a good ides - you're negotiating with landlords, you're seeing what’s happening in shopping centres - you are growing your stores - so presumably you're getting locations that might have been vacated by other retailers that haven’t don’t quite as well. Is it the little guys - the independents?
DOUG MURRAY: No I wouldn’t say that it is actually. I believe we’ve been broadly getting more space - not at the expense of smaller independents to be absolutely honest with you. It’s either been space in new centres or in revamps of centres - so not so much from closure of small independents. It would probably be unfair to say that it’s necessarily the smaller independents that are closing.
ALEC HOGG: But the real story I guess, coming out of a recession - is it has made everybody sharper and you talk about efficiencies in your supply chain, benefits from the stronger rand - just maybe to help others who not only your shareholders who are watching you, but other people who are in the retail business - how do you squeeze more efficiencies out of a supply chain when you are pretty efficient already?
DOUG MURRAY: We’d probably say that we weren’t as efficient as we should have been - and this isn’t something that we’ve just been looking at in the past 12 months. We started looking at our entire supply chain about three years ago and what we discovered was that our lead times were sluggish and some of our relationships with our suppliers wasn’t as good as we would have liked them to have been - we didn’t have appropriate measures in place - and when you start digging into supply chain, you are strangely enough find quite a number of efficiencies that can be brought to bear and it takes time. We certainly have been working very hard on that in the last two or three years and we’re starting to see some of the benefits of that coming through. One of the things that we had never been able to do was trade in season - in other words - either repeat stock or place stock during a season and we’ve put ourselves into a position to be able to do that now - that certainly reduces the risk from a season. And in terms of working with suppliers, we’ve found that we’ve been able to take waste out and gain some efficiencies. We are a high margin player anyway to be honest - we took a decision that we would pass any savings through to the consumer because the market is still fragile out there. We understand that and we were driving for top line growth and market share and we’re starting to see that coming through. So yes, you can still get efficiencies out of your supply chain and without doubt, from where we’re sitting - we believe we’ve still got quite a number of efficiencies to get in our supply chain.
ALEC HOGG: What about on the bad debt side - it is an improvement but still at 9l.2% of your book, it’s a very high level when compared even with the likes of an African Bank or those micro lenders?
DOUG MURRAY: Yes but you have to look at the margin - we make the money from the margin in our product and if you look at the micro lenders and that their margins are basically between the margin they can get from the NCA capping and their cost of capital. We have a margin that comes from product, so they’re not comparable - we can take greater risk and at a level of 9.2% we’re not unhappy with that - that’s quite a profitable level for us. We don’t think that there’s great risk in that sort of level and it certainly is to assist us in driving the top line. Also we have been quite aggressive - one of the other strategies has been to grow our account base, and we’ve been very aggressive on that over the last two or three years as well to the point where our active account base is up 10.5% this past year.
ALEC HOGG: It’s all balance isn’t it - did you make sure that you could grow at a rapid rate but not have too many bad debts?
DOUG MURRAY: That’s right - we’ve opened 590,000 accounts in this past year and we do know that accounts that are less than 12 months old will come with a higher degree of risk, but that is exactly the balance that one has to find. But they are the lifeblood of our business and I’m very pleased to say that we’ve been managing to grow those accounts and we haven’t changed our risk profile. So 9.2% - it is down on last year, but it’s certainly not an uncomfortable level.
ALEC HOGG: You’ve got a number of brands in the group - during this period - and I asked the same question of Grattan Kirk at JD Group - have you reassessed your brands - whether you need all of them, perhaps if there’s some savings and some benefits to have from consolidating?
DOUG MURRAY: No, I can say that we are very happy with the portfolio of brands that we have in our group and we have no intention of consolidating any of those brands. It’s the first time in a long time I’m able to say that every single one of them is in pretty good shape, and we’re very happy with our portfolio and the moment and aren’t looking at any consolidation.
ALEC HOGG: And I guess an expansion opportunity must be in the housewares and furniture where you only have the one brand - @home.
DOUG MURRAY: We have grown that brand quite significantly in the last eight or nine years and we did move into furniture as well, and in this past year, what we have tried to do is rather than focus on getting market share and establishing ourselves in the market, we really looked on the product side and the product efficiencies - and that has been very successful there. So we actually slowed down the growth in that business but again, we’re very happy with that and there could be product extension there, but that is all we’re looking at, at the moment.
ALEC HOGG: So if you were looking at acquisitions, would you be particularly favourable to the area of furniture and housewares?
DOUG MURRAY: No I don’t think that would be - it would be fair to say that we obviously - like all retailers - we continually look at what’s available and what acquisitions would fit with our group, but we are not favouring homewares in terms of as an area that we would look at, particularly going for an acquisition ahead of any other category in our group, like clothing for example.
ALEC HOGG: You're very big in jewellery - in fact you're the market leader in the country in that area with American Swiss and Sterns. I spoke earlier this week with one of your competitors in that area - NWJ - and they’re an interesting group because they have NWJ being vertically integrated, and also food operations. Have you ever thought of going, first of all, into the vertically integrated route, and secondly into food?
DOUG MURRAY: Well it’s very easy to answer - no we haven’t considered going into food. We think that that’s a skill set we don’t have and no, we’re not thinking of going into food. Vertical integration we don’t believe is the right way for us to go in jewellery and one only has to look at - there’s two other jewellery chains who I think are considered as probably number here and four in the country - they’re both vertically integrated and if we look at their results in the past two or three years versus our group results, that says it all quite honestly.
ALEC HOGG: Were you able to buy better?
DOUG MURRAY: We focus on retailers so we focus on retail only - look at where we can source the best product. If you're vertically integrated in jewellery you're sometimes - almost force feed product into your stores and I’m not sure that’s necessarily the best thing. But again, it’s a different model and it obviously can work for them, but it isn’t a model that we’ll look at introducing in our group.
ALEC HOGG: The tone overall from Foschini in this set of results is a very positive one as we mentioned at the beginning of the interview - headline earnings up 21%, your dividend very strong growth there again, 25% - is this going to be a banner year, or can you keep this kind of growth going?
DOUG MURRAY: That’s the million dollar question and we’re very aware of that. No, we believe that it is sustainable. We think that this result isn’t just driven by the economy. If it was then we would be producing turnover levels similar to everybody else. We have significant strategies which we are beginning to see bearing fruit whether it be on our credit side, or on our supply chain side. So we would like to think that it is sustainable and we realise that we’ve now got a tough base against us and we’ve certainly started the New Year well. So we’d like to think that it’s sustainable…
And the term ‘golden years’ banned.