Tuesday, August 06, 2019

How I/we dropped the ball at C&A

Rough draft. Not yet finished. My phone number +31629547689 Email: ajb@valuemachinesfund.nl
I would like to hear what you think.
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Old C&A colleagues reach out once in a while and are incredibly sad about the state of affairs at the company today.  How did this happen? Can something be changed? I don't know, I only have my subjective experience.

How could I/we be so incredibly stupid?

I'd like to share my experience. At just under 50, I have a few more decades to go, so I don't want to just say, I give up. This is more of a pre-mortem exercise, than post-mortem.

Reality is like an elephant people stumble upon in the dark. For the one in the front, the animal seems to be sort of hose, underneath the ears, is seems like a fan, by a leg a sort of tree trunk, at the back, there is a rope. At the side, it seems like a big rough wall. It is a good principle not to name names, but you could argue that when trying to clear things up, it is better to be as exact as possible.

Status quo: Today August 2019, my cousin Martijn is not speaking to me. My nephew Lawrence also told me, he doesn't want to speak to me, especially not about retail logic. Many of my friends and family have been fired over the years and cousins are in the papers squabbling over money earned in the past. How has it come to this?

We have forgotten how we made money: 

In 1906 Clemen's (the C of C&A) son, Bernard Joseph Brenninkmeijer, cut the margins in his store in half from 50% to just 25%. He discovered a surefire way to make profits snowball. The underlying Deckungsbeitrag (per m2) and Opportunity Cost system was kept so secret that it was eventually forgotten.

Today C&A and the Brenninkmeijer family has largely returned to the less profitable system and thinking we had before 1906.

It is so unfair! 

Every year young family members do a year of training after high school, here in Amsterdam. (I describe my own experiences below.) This year I spoke with 2 of them as they were preparing a final presentation and getting ready to leave for University.

"It is so unfair." exclaimed one of them. He had learnt that suits that are sold at C&A are sold for roughly twice the price at designer stores. "The exact same suit! They are earning so much more money. It isn't fair!"

I explained to them how and when you make more net profit when selling at a lower gross margin percentage, using a simple game without formulas. The reply I got was "My father told me you have a theory about that, but he has told me it is impossible." His father is a Cofra/C&A shareholder. I am not. Try asking a Brenninkmeijer what the snowball system is and how it works.


Relevance: What did we forget? Not many Anglo Saxon academics have a good idea of how discounting / underselling works. At C&A after 1906 we did, but slowly forgot. I am trying to figure how and why we forgot.

The next paragraphs are a short summary of what we forgot and why it is relevant. That is followed by my own retail background and quest through the years to figure out what was happening.

The Number 1 Threat to Retailers: The Gross Margin  % Death Spiral

The C&A / German concept of "Assortment Model" based on Deckungsbeitrag whereby Opportunity Costs being the only relevant costs in Assortment Planning is something is a key part of understanding Contribution for retail.

In practice, the following mistake was made at C&A during the late 1990s after the switch to BCP% planning: Planners said BCP Fund / m2 is fine as an expression of Gross Margin income, but a certain predetermined minimum BCP%  is needed to cover Operating Expenses. The BCP  target percentage was set about 5% higher for C&A England than C&A Germany because sales per m2  in England were lower than in Germany. Operating Expenses expressed as a percentage of sales were higher in England than in Germany. As a result the target BCP% was set relatively high and customers could get better value for money at Marks & Spencer than at C&A. The increasingly high BCP% target set for C&A England was an unnecessary constraint for Product Managers (buyers) and merchandisers who should have been focusing solely on increasing Contribution (BCP Fund / m2) with articles with either high or low BCP%s.
In short: If sales decrease in a bad year for any reason, a conven- tional store will often increase its BCP % target to maintain prof- its and/or ‘breakeven the next year. The next year higher prices lead to lower sales and the company calculates a new so-called‘break-even margin and raises its prices once again. Eventually the store goes bankrupt.

This has happened with Kmart and A&P in the USA and recently with Super de Boer Supermarkets in the Netherlands. If these stores had focused on the articles that Contributed the most to the bottom line instead of those with the highest BCP %s, they might not have done so badly.

The founder of IKEA, Ingvar Kamprad, described the problem as follows:

Our pricing policy is fundamental The stumbling block is when we price ourselves out of the market. Our economists constantly go on that we must keep our total gross profit  margin to a certain percentage. I say to the economists, What the hell is
percentage anyhow?’


Kamprad sees this phenomenon occurring at IKEA as the Number
1 threat to the company. As he wrote on the last page of The IKEA Concept Description:


I can depict at least seven major threats to the continued success of the IKEA concept in the future. I would like to share these with you so that you recognize them when one or several appear in your working place, organization or neighboring organization. False steps may be insignificant in the beginning, but prove to be fatal later on. Be aware of these trip-wires:
Number 1. Mark-upin pricing, resulting in an out-of-the- market situation,  due to wrong pricing strategies, too high costs, and/or unsound margin-raising instead of counting money.

Background:

In 1989 I finished high school in the Netherlands and went to Germany to do a year of basic training at the family company, C&A. The first day Martijn who had grown up in the UK and we lived together with trainees in Hamburg and worked in the C&A store there.

Crowd control:

The business was very profitable, we offered the best value for money and products over a range of qualities. On Saturdays, our job was in crowd control. Where 2 escalators merged into 1 on the second floor of the store, there was a constant danger that people would be crushed and we had to push people out of the way onto the sales floor.

Trucks of goods, trunks of data and safes full of cash:

Another challenge was running the goods elevator. On certain days, like the beginning of the Winter Sale, we had a dozen or so trucks filled with goods coming in. Everything had to be sent up to the 6 different floors via 1 elevator. I remember Martijn being very stressed and being overwhelmed. When somebody on the 3rd floor called and told him: "By coincidence up until today the person manning the elevator has always been able to deliver effectively." he snapped back: "Well coincidentally today he isn't."

The goods that flowed into the store were paid for mainly in cash or cheques. We would walk through the stores with the boxes full of tens of thousands of Deutsch Marks in cash towards the safe room where everything was counted.

Another flow you good track was sales data. Everything that was sold had a punchcard ticket that put aside in big metal trunks (suitcases) that were delivered to a local data center in the distribution center every day by the truck that had brought in the goods.

We had to do a little of everything and I made a lot of mistakes. I often wondered about the differences in culture with how I had grown up. What elements were German and what was C&A?

In general what we were doing seemed very logical, even if the tone was a little less casual than what I was used to in Holland or Canada. There was a lot of focus on meeting and beating the competition. Everyone was given a list of competitors to visit at least once a year and that way we kept an eye on what was going on in Hamburg and the surrounding towns and villages. When somebody else was selling something comparable for a lower price, we marked down our article to an even lower price.

Articles that weren't selling were also quickly marked down within one or two weeks, to keep the goods flowing. A description of the C&A Germany business system can be found in my thesis, that I wrote in 2001.

Link to thesis: https://drive.google.com/file/d/1zDPJYDuLLlX9uh_xDN0tVtHflafr8MDf/view?usp=sharing

After working for 8 months at C&A Hamburg. I went into the Dutch army in 1990-1991 where I became a reserve officer in the artillery trained as Platoon Commander and Ballistics Officer.

In 1991 I started a study of Business Administration in Rotterdam. Most of my family and cousin Martijn studied in the US, but I had a girlfriend in Holland and decided to stay here. I majored in Logistics and finished all my exams, but had a tough time writing and completing my thesis about Activity Based Costing in a Dutch supermarket distribution center (Konmar now part of Jumbo). So in 1996 I went to Dusseldorf to work at C&A and complete my thesis in my free time.

I became a shoe buyer (Product Manager) after a 3 month training in merchandise management in the store mentored by Thorsten Sturhan. I also spent 6 weeks working in production in an Ara shoefactory in Langeveld where we produced ladies shoes from goat leather.

It was interesting to work in the factory during the week and on Saturdays unload the trucks carrying the shoes I had just help make, put the in the racks and sell them. It gives you a good idea of the different speeds and which things happen and what adds value and what adds cost without adding value. If shoes are in the store but not selling, they incur costs (rent, higher chance of damage/theft, chance of being stolen) but a lengthy stay in the store does not add value.

The merger of 8 C&A countries / organisations: EBSCO

When I did my training at C&A Hamburg, Germany was an indepant business. Each C&A country was run separately with it's own marketing, buying, HR, store organisations, logistics, etc. Only a limited number of services were shared.

When I returned the European organizations had all been merged starting with buying and the shit had really hit the fan. It was an unmitigated disaster. A cousin Herman was named head of a newly formed European Executive Board when he was around 29 years old. He was smart but given a pretty impossible task. There was a lot of confusion and misunderstandings, partly because a lot of people didn't speak English very well. The logistics in different countries were also very different. The Netherlands allocated stock to stores based on floor space and Germany allocated based on sales (they had extra Gruppenreserve space in the distribution centers for stores) Holland did not, so stores like Rotterdam were flooded with stock. Etc, etc.

The UK sold clothing by style, Germany mostly by size, etc.

Trying to manage chaos:

The Board started setting rules to try and manage the chaos and dissent. Some were just bonkers. Product Managers (buyers) were at a certain point in time forbidden to enter C&A stores. I would come back to the office after a weekend and say what I had seen/learnt in the Dutch stores and would be told: "You know you are not allowed to visit the stores!"

Another thing was the MTV / Gas station theory. To simplify things, somebody or a committee had decided that the assortment in every store in Europe should be pretty much identical. There would be a small, medium and large store collection. Products would be pumped into the store like gas at gas stations. Everybody in Europe watched the same MTV (Music Television) so why shouldn't they wear the same clothing? Bonkers.

"Your most profitable items"

So when some things are stupid in hindsight to pretty much everybody, other changes are less obvious. People are confused, speaking in different languages, used to different goals, cultures, etc. and you bring in consultants and academics to help.

The English experts asked around. They wanted to know what the highest margin articles were and people especially the Germans, couldn't give them a ready answer. So they dove into the database and made lists of articles.

We got an A4 paper titled "Your most profitable articles" and it was a ranking of our assortment by Original Markup Percentage.

On our list the top ranking article was a flipflop we bought for DM 1 and sold for DM 9 and the bottom article was a leather shoe we bought for DM 50 and sold for DM 99. They both sold at about the same speed, which meant the leather shoe generated about 5x the cash flow of the flipflop.

markup targets

Letter to Uncle Martin : What the fuck is going on?

Cost = Space x Time

Presentation Andre / EEB

Madhouse

ALDI 2 step method Dieter Brandes

IKEA



Rudolf: Opportunity Costs : Martijn "Who else has this IP?"

Philippe Rainot: I didn't get that memo?

Maurice %

Willem Eelman: This could be big.



Thesis excerpt:


Over a period of two years, I worked as a men's shoe buyer for C&A Europe. During this time I started thinking about the traditional methods of price setting and cost calculation in retail. It seemed strange that retail accounting assumes a direct link between the cost of goods sold (merchandise cost) and selling, general and administrative (SGA) expenses (also known as operating expenses). Retail literature, especially books and articles on non-food retailing, are mostly concerned with aggregated margins and costs.  In the past, few authors questioned the fact that retail prices are calculated by multiplying the product cost price by a standard percentage.

During the last decades changes have occurred especially in the food sector (supermarkets) due to the introduction of information technology and the use of standard barcodes on products. Space management systems support the calculation and allocation of costs to individual products. Activity Based Costing in general and Direct Product Profitability (DPP) in particular are used by a great number of food retailers. The non-food sector however, lags behind in these developments. The constantly changing assortment and the way goods are presented, do not seem to be suited for the methods used in food retailing.

Within C&A I came across two separate studies, one empirical and concerned with costs, the other theoretical and concerned with revenues. It seemed that combined together they might lead to a supplement or alternative for the standard pricing methodology as it exists today.    

Subject and scope
The subject of this paper is the ways retail companies can calculate the costs connected with selling individual products (stock keeping units or styles).  The scope of the research is limited to the operational costs of the retailer. The focus is on costs that occur in the actual stores. The production process from raw material to finished product as well as transport to the retailer's distribution center is not included. The empirical data is mainly limited to the stores of C&A Germany during the years 1980-1991.

Aim
The aim of this paper is to describe and compare a number of methods used to measure the performance of products within a retail assortment. Based on this a new system will be suggested that should be able to reflect profitability better than existing measures. It should be possible to decentralize the authority to make decisions concerning gross margin percentages. Such a system must meet the condition that it is practical for non-food retailing.

Expected results
The research should result in an overview of the factors that influence the profitability of a store. The trade-offs between these factors should become obvious. For example, what the possibilities are to change margins without affecting overall store profitability.
The following question should be addressed:

How can the sales price of a product be set in such a fashion that it forms a reflection of the actual costs involved in selling that product?

This thesis consists of three parts. The first part is an explanation of retail management accounting in general. The second part is a description of empirical cost research done at C&A Germany into the profitability of parts of the assortment. A theoretical revenue model (the Assortment Model) is also explained. Finally aspects of the two models combined, offer possibilities for calculating the profitability of individual items. This alternative pricing methodology is discussed as well as the ramifications for overall company planning.

The first part is an explanation of retail management accounting. This part of the paper consists of the first two out of a total of five chapters. The first chapter is a general explanation of traditional retail accounting and merchandise management, focusing on systems which are used in bookkeeping. The second chapter explores modern systems such as Direct Product Profitability (DPP) and Activity Based Costing (ABC) which are used to calculate the productivity of different parts of a retailer’s assortment.

The second part of this paper is a explanation of work done at C&A Germany to study the costs and profits associated with different classes of goods. The first paragraph is a description of C&A Germany with particular emphasis on the organizational structure and the way merchandise management was handled. This is followed by an explanation of the way the C&A research was done and how it overlaps with other methods discussed in Chapter 2. Finally this chapter will examine whether this system would lead to other merchandising decisions than more commonly used indices such as gross margin or movement indicators (Lusch et al., 1993).

In Chapter 4, the Assortment Model developed by Kevin Corcoran of the Intercena International Economic Department. is explained. This model was meant to help analyze assortment profitability and support decentralized store level decision making on important aspects of retail such as price setting. The combination of the revenue focus of this model and the cost measurement in the C&A Germany research lead to a possible alternative pricing methodology, which is discussed in the third part.

In chapter 5 the alternative pricing methodology is explained. The ramifications of changing the way costs are viewed are explored using practical examples of different articles. An important aspect of any system is the way in which it can be fit into all levels of planning and thinking within a company. That is the reason that this chapter also considers planning at total company level.


The last chapter is the conclusion, which contains ideas for further research and action. 

To Be Continued:

Email to Martijn 2019 on not thinking:



It is math that a 12 years old can understand. On the other hand, it is an insight and only works if you think in terms of Opportunity Cost (Opportunitätskosten und Relatiever Deckungsbeitrag) as Oom Rudolf and your father Nico explained to me. 

For academics it is an "eye opener" , like at the University of Zwolle where I taught (as reported in a half page spread in a national newspaper, response?.. crickets). Many retailers (Board of Gerry Weber, Head of Buying Charles Vögele) don't realize it is an option... 

Highly intelligent, thinking organisations:

An investment fund manager that we at ValueMachinesFund benchmark against, Turtle Creek Canada (23% CAGR) invests in "highly intelligent organisations". Ones where people think. 

Uptil now it seems like the SK is more concerned about keeping appearances: "oh there is something on social media" than thinking about what people like Suzanne Sievers at the Bildungszentrum Einzelhandel are teaching: Rekenen in Centen. 

As Oom Alphons would say: A good team is one in which some people focus on cooking the hamburger (action and thought: Rotterdammers) and some people add sauce (appearances and communication: Amsterdammers). 

Last year I spoke with the C&A Brenninkmeijer trainees and showed them the most simple explanation, the most "crystal clear" way of communicating the concept I have been able to make uptil now and they say "Oh yes, we heard from our fathers you have a theory but it is impossible and doesn't work anymore." and "Maybe we should test it." 

This is what I showed them: https://youtu.be/jkiUjfp2_ro (3 minute video) 

It is basic addition and subtraction. Wtf? 

Avoiding cognitive load:

Oom Martin said he didn't think about this math, he outsourced it to Oom Ernest. You said in Brussels in 2009 (a decade ago) after Oom Rudolf told me about Opportunity Costs as an alternative for Activity Based Costing that "the IP was new for you" and you outsourced thinking to Robert Deen, who refused to think about it because I used childish cartoons. Maurice didn't understand it or want to think about it, he did have a very good understanding of how to do retail math suboptimally with. the workaround you use if you assume computers (information systems) don't exist: Rekenen in Procenten. Which is what a generation of C&A managers was also taught during their Retail Masters in Tilburg. Procenten was also the basis of the McKinsey "Closing the gross margin percentage gap with H&M" strategy etc. 
Note: McKinsey consultant Marius van Es is one of the co-authors of our Profit per X and Opportunity Cost paper describing the C&A, Aldi and Lidl Rekenen in Centen system. 

At C&A itself executives changed so quickly trying to explain it to the different EEBs is like mopping with the tap open ;) 

What does Allan Leighton think of Opportunity Cost based merchandise math? Have you discussed it with him? How? 

Mostly people said "We are too busy to think." "We are changing the tires on a Formula 1 car whilst it is driving." or "We are performing surgery on a patient while he is running." and "Let's not run down the hill and fuck one cow, let's walk down the hill and fuck them all." 

Think (cognitive load)? 

Link to Breakthrough: Cover

Link to Breakthrough: Content 





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