By Gareth Evans, CEO, Proxima
One of the most painful impacts of the pandemic has been the devastation it has wreaked on the global employment market. Unemployment figures have soared as countless businesses have made the painful decision to cut staff in an attempt to shore up losses on their balance sheet.
Millions of workers in the UK and US have already been laid off, and many economists forecast increasing unemployment in the coming months. The reality is that with the contraction of demand, some businesses are just smaller than they were at the beginning of the year. But as well as a being a cost, people remain a core strategic asset, and will be key to the return to growth. Lessons of the past tell us to cut with caution.
With this in mind, as most of us enter a second wave of the virus and more businesses hunker down for the economic winter by cutting staff, they should pause. Where else can a CEO or CFO look to deliver savings, whilst still putting themselves in a position to grow in the coming years?
In our new report The State of Spend 2020, an analysis of the supplier costs of FTSE 350 and Fortune 500 companies in conjunction with the Centre for Economic and Business Research (CEBR), our research shows that reducing supplier costs has a much most dramatic impact on EBITDA then cutting staffing costs. In fact, supplier cost reductions would improve EBITDA of FTSE 350 companies by over twice as much as reducing headcount (by the same amount), while Fortune 500 companies would see an even greater boost to EBITDA from cutting supplier costs.
Within these wider statistics, there are also telling trends between industries that business leaders should note. External supplier costs are more significant among FTSE 350 firms in the utilities, energy and basic materials (mining) sectors, where labour costs make up just 13%, 16% and 17% of total outgoings, respectively. One salient example of this is the case of Centamin PLC, where gold mine production costs made up the vast majority of outgoings in 2019, leaving the share of employment costs in total expenditures at just 1%.
Similarly in the Fortune 500, high capital costs mean that supplier costs account for 82% of business’ total expenditure in the basic materials sector, reflecting very high levels of expenditure on raw materials, machinery, and other capital expenditures. The wholesale and retail sectors sit in a similar place in terms of labour costs, with relatively low wages and low fixed resourcing meaning that fixed headcount is a small percentage of overall costs.
The industrial and healthcare sectors in both FTSE 350 and Fortune 500 firms occupy the middle of the table. This is consistent with the fact that these sectors typically deploy a more balanced mix of both labour and capital in their production and operations.
In the main, margins are tight among both FTSE 350 and Fortune 500 companies. Given that in most industries external supplier costs make up the lion’s share of total expenditures,
the largest gains can be realized through reductions in these outgoings. On average, Fortune
500 companies could expect a 32% surge in EBITDA from a 10% cut in their supplier costs.
By comparison, a 10% reduction in labour costs would achieve just an 11% increase EBITDA In the FTSE 350, this means that a 10% reduction in external supplier costs would raise EBITDA by 27%. In comparison, a 10% decline in employment costs would increase EBITDA by only 12%. This emphasises just how important supplier costs are to business performance.
That said, this isn’t just a debate about cost. This is also about growth and having the right balance of internal and external resources to grow at pace when the opportunity arises. Understanding the roles suppliers play in major businesses has wide implications. For example, if businesses are becoming more reliant on suppliers, that positions them as a primary source of speed, innovation and change – but also risk. As the pandemic challenges the status structure of global supply chains, business must analyse and assess how they understand the supplier contribution, and how they choose to work with their suppliers.
The State of Spend report has pulled back the curtain on the strategic importance of suppliers to global companies. Whether business leaders are looking to free up spend to invest in new business areas or bring in external expertise to accelerate a project, suppliers are at the heart. Yet few businesses can truly say they have a joined-up approach to managing suppliers that at the same time optimizes costs, mitigates risks and focuses investment in areas that will drive growth.
As all businesses navigate these difficult economic waters, it is essential that they think in the long term as they cut costs. Headcount and staff are often the engine that can help drive businesses into recovery, and companies should therefore look elsewhere before slashing jobs. Our research shows that headcount is already often streamlined, and further highlights the crucial importance of managing external supplier costs to drive savings. Business leaders should now be treating supplier cost management as a strategic priority.
UK delays review of business rates tax until autumn
LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.
Many companies are demanding reductions in their business rates to help them compete with online retailers.
“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.
Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.
($1 = 0.7152 pounds)
(Writing by William Schomberg, editing by David Milliken)
Discounter Pepco has all of Europe in its sights
By James Davey
LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.
The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.
Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.
“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.
To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.
The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.
Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.
Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.
That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.
“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.
Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.
Sales rose 3% to 3.5 billion euros, reflecting new store openings.
($1 = 0.8279 euros)
(Reporting by James Davey; Editing by David Goodman)
Fashion-focused livery launch reveals new colours for Gasly, Tsunoda in 2021
Scuderia AlphaTauri debuted their colours for the 2021 Formula 1 season as drivers Pierre Gasly and Yuki Tsunoda unveiled the team’s new look with the livery for their AT02 racecars. The setting was a fashion-forward launch in the all-new showroom of AlphaTauri, Red Bull’s premium fashion brand.
Salzburg (AUSTRIA) – Formula 1 team Scuderia AlphaTauri served up a stylish preview of the new F1 season with a presentation of its 2021 livery alongside key looks from the upcoming Autumn/Winter 2021 collection of Red Bull’s premium fashion brand, AlphaTauri. The launch – held at AlphaTauri’s new showroom in Salzburg, Austria and presented digitally – marked the first time that drivers Pierre Gasly of France and Yuki Tsunoda of Japan have appeared together as teammates.
After a successful first season racing in AlphaTauri colours, the Italian outfit is looking to challenge the top of the ultra-competitive midfield in 2021, and the two young drivers have been assigned clear-cut roles. Gasly is Team Leader. The 25-year-old, who made his Formula One debut with the team in 2017 under its former name, Scuderia Toro Rosso, has earned two F1 podiums. During the 2020 campaign, Gasly’s maiden win at Monza was a defining moment for him and the team under its new name.
Tsunoda, 20, is the first Japanese driver to race in F1 since 2014, his promotion coming off the back of a fast, four-season trajectory from winning the 2018 F4 Japanese Championship and finishing third in the 2020 FIA F2 Championship to entering the top-level ranks this year. Expectations are high for his rapid style of learning to complement the experience of Gasly.
“The decision to go for Pierre and Yuki in 2021 was taken because Scuderia AlphaTauri’s philosophy is still to give talented young drivers from the Red Bull Junior Program the opportunity to step up to F1 and to educate them – this is why Yuki now gets his chance,” explained Team Principal Franz Tost. “With Pierre on Yuki’s side we have an experienced driver, who can help our Japanese rookie to develop faster, but at the same time we can aim for good results. I think this pair is the best possible scenario to achieve both our targets, and I’m also confident this will be a successful one.”
In 2020, Scuderia AlphaTauri won best livery by a landslide, and the team’s all-new, matte blue and white racecar livery took center stage with the drivers at the fashion event, anticipating the 2021 model that will debut at pre-season testing in Bahrain on 12 March. The test is the precursor to an unprecedented 23-race schedule, and in preparation for the demanding calendar both drivers have spent time at Red Bull’s Athlete Performance Center for intense fitness testing.
“I’m ready to take on the role of team leader. Yuki is a very quick driver, and he will help us move the team forward – we will work together to achieve that,” said Gasly, the team’s all-time top points scorer. “I really believe last year was the team’s best in terms of the way it worked, the development, the performance and the way it managed the race weekends. I’m always hungry for more, and I’m sure we can achieve great things in 2021.”
Tsunoda, who was honored with the Anthoine Hubert Award for best Formula 2 rookie in 2020, added, “I’ve been lucky enough to spend some time with Scuderia AlphaTauri ahead of the season, so I’m already developing strong relationships and learning a lot from them – including Pierre, who is an incredible talent. My main goal is to learn quickly and deliver results as soon as possible, and I’m really excited to get started.”
The launch at the AlphaTauri Showroom not only gave Gasly and Tsunoda a preview of the AlphaTauri Autumn/Winter 2021 fashion collection, but the drivers had the chance to select their new off-grid looks ahead of the season start.
Ahmet Mercan, CEO AlphaTauri, summarized: “This is a triple reveal at a unique point of time: a new AlphaTauri Showroom where fashion meets F1, a first look at the AW21 AlphaTauri collection and the unveiling of the new Scuderia AlphaTauri F1 livery and driver pairing.”
Scuderia AlphaTauri fans don’t have long to wait for racing action: The FIA Formula 1 season kicks off at the Bahrain Test on 12-14 March, in preparation for the Bahrain Grand Prix on 28 March.
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