Peter Birtles was acutely aware of Supercheap Auto's deficiencies when he took over as managing director in January last year. The auto-parts business was flat: during 2005-06 it declined by 2 per cent. The opportunity to develop the Supercheap Auto business through new store openings had diminished. Investors didn't share Supercheap's confidence in the newly formed Boats Fishing & Camping (BFC) brand. And in mid 2006, this scepticism translated into a share-price drop from $1.97 to $1.56. The situation triggered a widespread bout of melancholy among Supercheap staff. "We were used to smashing through goals," Birtles says. "We'd experienced 25 per cent compound annual growth in sales over a 15-year period."
Birtles can discuss these hardships today with relative relief. The share price has rebounded to about $4. A soaring dollar is helping the company. The Brisbane group posted a full-year net profit of $16.5 million, and an 11 per cent increase in revenue to $526.2 million for 2005-06. And its BFC division is expanding rapidly, chasing sales of $300 million by 2010.
Supercheap's policy of rejuvenating in-store merchandising and extending its product range is starting to pay off. It has achieved a 10 per cent increase in top-line sales by refurbishing existing retail outlets. IBISWorld analyst Mark Gant calls the refurbishment program a "key differentiator" for Supercheap, and one reason it is outperforming the market (see Supercheap shares outperform rival Repco, page 36).
Another reason, highlighted in the group's half-year results announcement in February, is that Supercheap is reducing the cost of doing business by improving inventory management through enhancements in its computerised supply chain system. The group's annual IT budget is about $6 million: $2 million allocated for operational expenditure and a further $4 million for enhancements in inventory forecasting and replenishment across Supercheap's 280 stores and 10,000 product lines.
The diversity of Supercheap's product range presents a particular challenge, Birtles says, and tightening controls promise a unique advantage over rivals. "We have highly variable product behaviour in the business. Some products turn over at a rate of thousands per year, per store; others turn over at a rate of one per store, per year."
A big investment in computer systems has allowed Supercheap to open new stores at a breakneck pace of 40 a year for the past few years. In the next five, it is expected to strip $5 million from Supercheap's bottom line by facilitating a direct sourcing model from China, where 30 per cent of group stock is manufactured.
"Our aim is to consolidate merchandise into loads in China and get it delivered directly into stores without having to handle stock in our Australian distribution centres," Birtles says. Eventually, the computer system will determine which store a specific stock bundle is destined for and route it to a shipment point with the most economical transport.
It is something of a vindication for Birtles who, as the group's financial controller in 2001, convinced senior management to spend $4 million on a heavy-duty supply chain software package from German vendor SAP, long before the company had a legitimate use for it. The software is favoured by multinationals such as BHP Billiton. Many would view it as overkill in a retail chain of 60 stores and 900 staff. "It was seen as a slightly unusual step to put in a system as robust and strong as SAP at that stage," Birtles says. "The business case was largely centred on our growth plans."
Supercheap wanted something that could handle multiple currency transactions as it expanded into New Zealand and China. It had to cope with continuous trading from 5am on the east coast to Perth's 10pm late-night shopping.
Supercheap was fortunate that its decision coincided with a renewed focus by the German software vendor SAP on small-to-medium enterprises. An analyst at industry research group Gartner, Denise Ganly, says many large-scale software vendors have been struck by a similar fever as sales opportunities among Australia's 500 largest corporations near exhaustion. "We've seen this trend really heat up in the past 18 months, although it's been building for three years," she says.
SAP's worldwide projections tell a similar story. Plans to double its software business by 2010 see crucial growth originating from SMEs and the cream of the smaller companies (see chart, left). Others are following suite.
Telstra and accounting software developer MYOB have restructured operations to better service SMEs following a trend set by the banks. MYOB has created a new division focused on accounting firms with between 20 and 200 staff, while keeping consultancies with one to 10 staff firmly in its sights.
Telstra has spent 12 months restructuring its small business division under group managing director, Business, Deena Shiff, pulling bigger small companies off the lower rungs of the enterprise and government (E&G) group, and micro-businesses from the retail division. The telecom has dedicated 400 sales staff and eight call centres (a further 600 staff) to servicing the new division, with a specifically tailored product range.
The move stems from extensive research highlighting two traits that caught Telstra's attention. Firstly, that particular groups of small business operators conduct 53 per cent of their operations outside of the office. And secondly, they are willing to pay a premium to access business systems, such as email, outside the office. That means high demand for mobile devices, but also that Telstra can push data services for which it charges higher rates. It's a volume business well suited to the utility's sales network.
Regardless of the motivation, SAP's game plan played to Supercheap's advantage. Today, the car accessories retailer has 280 stores and 4500 staff. It will open 35 new stores in 2006-07. A clear leader in its market, the crucial thing now, Birtles says, is not to rest on its laurels. "Range management and supply-chain competency are two of our core competencies and we cannot allow ourselves to be disadvantaged in those areas."
Although Woolworths is not a direct competitor, Birtles considers its supply chain success through technology a trend. "We recognise that if we don't move, our competitors will," Birtles says. "We don't see IT leading the business, but we do see it as an important enabler. We are looking to be competitively advantaged in our processes and see IT as an important tool in achieving that."
The goal is to double handle stock far less frequently. Supercheap is striving for cross-stock functionality, where product comes into distribution centres already packed for the store and is pushed through without having to put it away and pick it out. This, in turn, will support the group's foray into new retail segments, and Birtles' vision of a retail auto and leisure group consisting of four brands, achieving sales of more than $1 billion by 2010.
Punt on shopping centres
Westfield has been reluctant to shoulder any risk in Supercheap's experimental trials of a high-risk shopping centre model, despite Westfield's stated intention of attracting more male shoppers.
Supercheap managing director Peter Birtles says: "One party is taking all the risk and one party is taking all the reward. We are working very hard with them to see more of a sharing, though at this point I have to say we're struggling to do that."
For the Westfield concept to be successful, Supercheap has to achieve a sales intensity - that is, the amount of sales required per square metre in a store - of at least three times greater than what it achieves in standard outlets.
"It's a pretty significant challenge for us to make that channel work," Birtles says. "We're going into it very much with an open mind."
Supercheap will also test a super-store model this year incorporating basic services such as fitting car stereos, seat covers and wheel trims, for which the retailer will charge a nominal fee.
The idea is to gain incremental business on car accessories from time-poor customers, a concept that has taken off in the United States. Supercheap fears that if it doesn't jump on board it will lose business to competitors that do.
Westfield declined to comment for this article. BRW
© Fairfax Business Media
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