Upcoming IP Investor Dialogues: Spirax Sarco, FAST, COST, CPRT, POOL, SNOW, DDOG - Register your interest at help@inpractise.com 

Anonymous

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:03:15} At B&M, could we get into what your day-to-day responsibilities involved?

{audio:0:03:25} An important point was, in the journey of B&M I first met Simon, as I talked about, in 2010. I joined the business in 2011 and it was a very interesting stage. It had bought the business in 2005 with, as we know, only 22 stores. When I joined them, they had reached just over 100 stores with the acquisition of Woolworths, in 2008, and a number of smaller businesses that they had taken over. Literally, the principles of the business that we will dig into, were still there; they were probably already cemented. But as regards to my role, they had bought 22 shops, they had acquired 50 plus Woolworths stores, a few other businesses and it’s more that the day-to-day was bringing a consistency.

{audio:0:04:24} Whether you were shopping in an old, historic Woolworths store, up in Scotland or a converted warehouse type store that they had taken over in the Midlands, what did B&M stand for? It was a really interesting time because discount – particularly GM discount – wasn’t on trend; it was growing. I’ve always said that when you buy 58 Woolworths stores, you want to trade them straightaway. You haven’t got time to gold plate and put new floors down and so on. Every shop was at a different stage. Ultimately, the overarching priority was to get some consistency, so the customer could understand what B&M stood for.

{audio:0:05:19} That was the very top level for what our initial day job was and then it was to put processes and procedures in place. When we talked, initially, they always had plans to grow. Not to the extent that they are at now, because who could have written that story. Literally, when I first spoke to Simon it was more of, can we get to a billion-pound turnover and can we get to 400 shops? That was one headache; the 100 plus stores that I’ve just inherited need to have some consistency. Then on top of that, we’re planning to open – in those days – 50 shops a year. It’s separate fields. One, we’ve got the day to day of the current estate and fixing that, whilst opening 40 shops a year. For those 40 shops, the secret is, how do you open and how do you create a team to open that level of stores whilst not affecting the day to day? That’s a real challenge for lots of retail businesses. The interesting bit for a retailer – opening new shops – is all very exciting and it’s all new. But actually, the important part is, what happens after 12 weeks because it’s not a new store anymore and it’s part of the core estate.

{audio:0:06:58} It was very much about consistency and operational standards. Something we will probably touch on a lot is, whilst doing that, we’ve got to keep the operations simple. It’s to create a simple, day to day operation, whilst expanding at the rate that we continue to expand at. That was the overarching day job.

{audio:0:07:26} What did you really focus on when managing the store level economics, at that time?

{audio:0:07:33} Pulling on some experience from other retailers that I’ve worked with it was, again, the simplicity; we don’t need to gold plate the operations. How do we stay legal? What principles do we want our store managers to adapt to? Available for the customer; clean for the customer; and ticketed. Pricing is quite a key driver for a B&M customer. Additionally, a consistent and efficient model. Let’s not do tasks that the customer doesn’t benefit from. Let’s keep that as simple as possible. Let’s not have a structure for vanity. If you wind the clock forward in businesses such as Aldi and Lidl, you see a lean team, focused on the customer, just on that delivery that’s coming in today. Therefore, you can delight the customers when they come through the door. When you look at the labor model now as compared to the labor model back in 2010, 2011, there is not a lot that’s changed. Turnover has increased; store numbers have increased. But actually, the operational cost of set up and day to day, have stayed very, very consistent. That’s to the credit of the current management team. With success, things change but, actually, the model is pretty similar to what it was way back in 2010, 2011.

{audio:0:09:33} It’s really interesting to look at what has changed versus what hasn’t. What would you say were the biggest differences that you noticed in the culture, Simon’s vision for the business and the way Simon operated in the business? I appreciate at the time that you came in, we were dealing with a work in progress and a much younger business than we have now. But what struck you about what was really particular about this business, relative to other retailers you had experience of?

{audio:0:10:14} It’s a really good question. I had been in retail with a number of businesses so, first and foremost, when I first met up with Simon, I’ve got be honest with you, I really didn’t know that much about B&M. Simon had continued to keep the business under the radar as much as they could do, so there wasn’t much out there. These are the days when Home Bargains were around and probably the best discount retailer in the marketplace, at the time but there were also the likes of 99p Store, Poundstretcher, Poundland, Poundworld and B&M. What struck me at that time was that they were the worst customer experience in the marketplace.

{audio:0:11:11} For me, my initial thought was, I can only move this one way. Actually, there were lots of discount retail players, way back then. It wasn’t on trend as much as it is now. But there was a marketplace and a strong marketplace for discounters. If you look back at the recession of 2008, a lot of retailers were doing quite well at that period of time. What struck me was that, actually, this is a simple model but it needed to be joined up. The distribution network which is very simplistic as regards to how products come in from the Far East, needed to be aligned with the retail operation which needed to be simplified, in order to delight the customer; it was the view that we could join that up. Also, because there was no history, because it was a relatively new business – they had bought 22 shops and had been around since the early 1970s, but it was still new – it hadn’t had processes and procedures deep rooted. You didn’t have to unpick anything. Basically, it was having to create what you wanted and that was a refreshing approach.

{audio:0:12:50} Back then, I met the Aroras and understood, by admission, that they weren’t retailers. They had bought a retail business but they’re not retailers. What they wanted was to keep it as simple as possible. It keeps coming back to the fact that I’ve got someone who has bought a business, he wants to keep it as simple as possible and he doesn’t want to copy other retail businesses.

{audio:0:13:26} One of the first times I met him he said, don’t think you’re going to do that and don’t think we’re going to do this just because those businesses do it. We want to do it the B&M way. That, actually, was really refreshing. To summarize, we’re not very good, we’re in a market that’s growing and there’s lots of players out there that are better than us, but weren’t world class and we can do it our way. That was the real appeal in the early stages. What does a customer really want? A lot of retailers chase the customer; that’s a phrase I use a lot. But what does the customer truly want? Do they really want a terrazzo floor that costs a quarter of a million pounds that would outlive you and I? Or actually, let’s put a vinyl floor down that might last eight years and cost £20,000. Does it actually matter for the customer?

{audio:0:14:36} Wind the clock forward, what matters to the customer is, yes, they need clean environments but also good quality products, at great prices. Whether it’s general merchandise or, as I alluded to before, Aldi or Lidl, the customers will vote with their feet. But they will also vote with their feet if they walk into a dark, dirty, disorganized environment. Maybe on top of my priority list, initially, was that I wanted a customer to walk into a B&M, at whatever time of the week, in whatever store and know what they are getting and that the product was available. Yes, there are new products that are coming in and one of the appeals is that there are 100 new products and that’s still the same as it was 10 years ago. But actually, I’m coming in for those Duracell batteries and I know where they’re going to be. I’m coming in for those cleaning products and I know where they’re going to be. I suppose, it was unpeeling all the things I had learnt over the years to say, actually, what is important and what is not.

{audio:0:16:00} A lot of retailers move products around for the seasons but, for the customer, is that actually important? I’ve got an anecdotal story to bring that to life. I remember showing one of my old trading directors around a B&M, after I had been there for 12 months. I was showing him around and I was quite proud of what we’d achieved so far. He was walking around and he said, it’s the summer and you’re still leading in, on the first aisle, with soup. You shouldn’t be leading in with soup; it should be salad products. At that moment it was like, actually, we’ve got this right. 52 weeks of the year, our customers know where that product is. You can flex the space, to two, three or four bays. But actually, why move it round because every other retail business moves things around in the seasons?

{audio:0:17:02} Then you go back to the model of, if you are moving things around for the seasons because other retailers do it, there’s a cost. Not moving it around 52 weeks of the year, your costs can stay pretty constant. Those labor costs, in a B&M model, can then be utilized for the basics and then, secondly, for the two key seasons; gardening and Christmas. Keep gardening and Christmas in the same space in the store but up it. Actually, in a B&M, the only two categories that change, 52 weeks of the year, are those two, where you’ve got other retailers moving things around all the time. It confuses the customer. Getting that confidence where they can say, I’m going into the B&M, I know it’s going to be there, I know where it’s going to be and, more importantly, I know what price it’s going to be and it’s going to be very competitive.

{audio:0:18:12} It was interesting times and, again, it keeps coming back to that idea of what does a customer truly, truly need and let’s not follow what other people do.

{audio:0:18:26} You’ve had experience with a number of other interesting retailers since leaving B&M. What have operators of those businesses that you’ve worked with, struggled the most to understand about the way B&M is operated and what really works about that model?

{audio:0:18:49} Again, a great question because that’s probably one of the biggest frustrations, sitting around the board room of another business that has got the history and experience around the table, but may not be as successful with performance and so on. It’s trying to get those established businesses, in set ways, to do something different and to break the mold. Businesses get into habits; we’ve always done it that way and it works. Can we do it a more efficient way and it can either work the same way or be more effective? Stop doing things for effect and stop doing things because we think the customer wants it that way.

{audio:0:19:48} It can be about what the store looks like. In a lot of cases, it is selling products for vanity rather than for profit and also the size of some management team structures. I used to call it stuff; what stuff are you actually doing? What task are you actually doing? Is it helping the customer and putting pound notes in the till? For a lot of businesses that I have worked with and also advised, they are stuck on this drug of, we think we need to this; we have to do this. Legally, we have to do this. Actually, when you look at it, to be legal, what do you actually have to do? That is the hardest bit for businesses.

{audio:0:21:01} Unfortunately, as we know, retail was out of time, on the high street, before Covid. With Covid, things have changed even more and we could spend the next hour just talking about the businesses that have fallen by the wayside. There are some common threads within some of those businesses as regards to, they have continued to do what they have always done. There are probably more efficient ways of doing that. For B&M, way back from 2010, they have kept it simple, kept a lean structure, kept the operational costs as tight as they can and they’ve stuck to that. I think that’s key learning.

{audio:0:21:53} The other thing that we haven’t touched on before that is quite relevant is, when is the right time to do something? Sometimes it’s good to be a leader but other times, it’s just as effective being a follower. Let someone else do something first, learn from that and then do it. But a lot businesses get wrapped up into, we need to be a leader in this. No; let someone else go through the pain first and then we’ll follow. What B&M taught me and what it continues to do is to say, when is the right time? That’s everything. When is the right time to increase the number of regions because the number of stores has increased? One of the big burning questions is, when is the right time to have a transactional website? For B&M, that has been debated for the last 10 years. You can then go back to other consultants and analysts and say, there’s a generation born clicking and, every year, after every Black Friday, people shop online. Since Covid, more and more people have shopped online and that becomes a habit.

{audio:0:23:20} The big decision in the B&M board room is, when is the right time to do it, for the business? Not for vanity; not for marketing; not for, look at us, we’ve done this. It’s about when is the right time for the business. That’s really the key for the success of any business. Unfortunately, I’ve been involved in businesses that do thing that, for the profitability of the business, is really not important. It might be and there will come a time but, brutally, right now, is it? They’re the big – and you could also say brave – decisions that businesses like B&M make.

{audio:0:24:11} Tell us a little bit about how you look at the core customer for B&M and what is or isn’t changing.

{audio:0:25:58} I think a good starting point is an article that was written, probably six or seven years ago now, by one of my old colleagues and the owner of Iceland, Malcolm Walker. He wrote that the prejudice of shopping at discount retailers is dissipating. That was probably the first time it was talked about. We can follow that over time, but going back to the early days is, yes. I’m referencing a PDIQ source from 2013 which says that, obviously, way back then, 31% of the customer base, for B&M, was Ds and Es, against 23% of the UK. They were over-indexing on Ds and Es. 27% of C2s, when the UK population was 21%. We can then generalize and say, yes; the core customer base was the lower demographic profile, single mums, unemployed and so on and that was the key customer. Yes, we obviously focused on that. Way back then, 15% of As and Bs out of 27% of the UK population shopped there. Even back then, that was still quite high. You’ve got to think about the fact that those 15% of As and Bs have got a lot of disposable income.

{audio:0:27:34} We went through a tidy-up process that we talked about, in 2011, 2012. We were pretty much getting consistency, understanding the model, making sure that the new shops that opened looked like the old shops and when the new shops became old shops, they continued trading as they were. We went through Christmas 2013 and we had a very successful time. People shop around at Christmas, as they do for lots of retail businesses. Iceland is a really good example that 70% of the UK shopping population only shop there once. They go into an Iceland at Christmas and they only go back again the following Christmas. B&M was similar to that.

{audio:0:29:07} They came once a year and then came back the following year. They didn’t really focus on, how do we capture that? There were some significant milestones for me and one of them was at Christmas. We had a really successful Christmas; we looked pretty consistent across the store’s trading estate. I believe we delighted those infrequent customers. We had a real kick on in January and February. That was one of those lightbulb moments that say, actually, we’re getting more people through the doors and it’s not the C2s, Ds and Es. You then overlay the Malcolm Walker quote and you overlay what Aldi and Lidl were doing, where it was becoming more fashionable to shop there, and it started to switch.

{audio:0:30:10} If we wind the clock forward to one of the latest trading statements and you look at where B&M are saying their sweet spot is, they call it rare indulgence and family backbone, where they over-index the UK shopping population. But the interesting bit that they didn’t really highlight – to me, this talks about future proofing the business as well and how the switch is moving – is that one of the larger categories which, at the moment, is slightly under-indexed, is dynamic workforce. Dynamic workforce, for the Barclay data that I am referencing, is 25 to 40 year olds, low to mid income, with no children. What’s going to happen? They’re going to get better jobs; they’re going to get married; they’re going to have children. And they are shopping at B&M. You are touching every socio-economic group. Well, a lot of things have happened over the last few months and it doesn’t matter what socio-economic group you come from or where you fit in with the B&M customer, which they quoted in one of the last trading statements. Every background has had nowhere to shop; fact. We’ve been able to shop at supermarkets or discount retailers. That has created a habit. If B&M have continued to delight the customer, when those shops reopen, there’s a fair chance that that customer will continue to shop.

{audio:0:32:48} They headlined on a fact that said that Barclaycard data indicates that 23% of B&M customers, in June 2020, had not shopped with B&M in the previous five months. Brilliant. If I was sat around that board room at B&M you’d be saying, right, they’ve been into us; if the service is right, we know that the product is good quality and a great price, there is a fair chance that that customer will come back. History says to me, that’s what’s happened over the years; it has become a habit.

{audio:0:33:31} Way back in my early educational years, I remember doing an article when Netto first went into a place called Poynton, which is an affluent area, south of Manchester. It was well-publicized and I copied some of the newspaper articles as you do, as a student, that people were going into Netto with Marks and Spencer carrier bags. They didn’t want their neighbors to see that they were shopping at Netto. True, but when you walk around the high street of the UK now – I’m attracted to it more because, obviously, I work for the business – but the number of B&M carrier bags I see is greatly increased. I used this in one of the IPO presentations which goes back to 2014. I used to use examples then, talking to city analysts and potential investors and would say, come and have a look at a B&M car park on a Saturday morning. You will see everything from a clapped-out Ford Fiesta, literally, to Bentleys. That’s back then. I challenge anybody to go and have a look at a B&M car park. You can judge the customer, not just by what they are buying and what you see in their baskets, but what kind of cars they are turning up in.

{audio:0:35:03} Aldi management [like to say] that you don’t take the shop home; you take the product home.

{audio:0:35:11} Yes; absolutely. Whenever I used to take any analysts or new investors around a B&M, I could guarantee you that 75% of them would buy something. That’s the beauty of B&M; you put everything into the mix. You still see things that you didn’t expect to see in there. Some of that is because of the new lines that come in each week.

{audio:0:35:45} Again, price is important but I do think that you are not going to grow a business and you are not going to grow, like for like, if your customer base remains flat. That’s a brutal fact. You can get them to spend a little bit more. Frozen foods are a good example because it’s a small market of only five billion, in the UK; you are either a frozen food customer or you are not; fact. Unlike in Europe and France, where it’s a little bit more fashionable. To grow sales in a frozen food business, you either have to bring new customers through the door, which is really tricky, because you’re either a frozen food customer or you’re not, or you’re going to get – as lots of retailers have to – your core customer base to spend more.

{audio:0:36:56} B&M have got the best of both worlds because they can still do that and you can see that from the trading statements recently, during Covid, that average transaction value has gone up, so the core customer is spending more; brilliant. But you’re also getting new customers through the door. I think that’s one of the key points that gets missed when you see the eye-watering numbers that B&M have produced over the last three quarters, and probably in quarter four. It’s the combination. They are spending more but, as they’ve said, 23% are new customers, who hadn’t shopped there for the previous five months. You’ve got that sweet spot. Get your core customer to spend more and get new customers through the door and that is the secret of a growing and sustainable successful business.

{audio:0:38:01} How have you seen the assortment evolve over time, over the last decade?  Secondly, I guess the business has got another 250 stores planned in the UK; who knows how that will evolve. But right now, it looks as if another 250 is the target. How well do you feel the current approach to the assortment supports that growth? I’m talking about the assortment as regards to product.

{audio:0:38:52} The range, pretty much, stayed the same. Again, this comes back to one of your interesting questions about other retail businesses that I’d worked with and a point that’s missed. B&M have kept to 5,500 SKUs and that was around before I joined the business. That is one of the key pillars and principles that they have kept. A lot of retailers that I’ve worked with and I speak to say, we manage range really well. Well, actually, trust me, that’s rubbish. It’s a long tail and businesses, unfortunately, chase the margin and chase profitability, which they have to. But they are not brave enough to deal with what’s not selling. They might say that they manage the range tightly but, actually, the tail is that long they’ve got old stock in the business.

{audio:0:40:01} B&M haven’t got that because they started with that principle and have maintained it. Yes, you might take a hit on the margin but it’s consistent, year after year. If something is not selling, the buying team at B&M cut it out. They don’t just knock 10p off it; they knock 50% off it. That enables them to deal with what’s not selling. That enables them to bring in the 100 lines a week. They are managed very, very closely and there is nothing wrong with that. If I’m the pet food buyer, I’m only allowed to buy 340 lines. Therefore, at the end of the week, how many are live? Not 344; not 320. But 340. They are managed very, very closely which allows that. So that’s stayed the same.

{audio:0:41:00} If you think, at top level, the range is pretty much the same as it was 10 years ago, when the growth story started. All key categories are exactly the same. What might have changed slightly is that pet food participation has changed, probably even in the last 10 months; pet food sales have gone up because we are all at home more and we’re all getting more dogs and cats. If the participation of pet food is changing slightly, they might make a decision. This is not every few months; this is every few years. They might say, let’s move pet food from 340 to 360. But if we’re going to do that, there’s a category that’s going to lose 20 lines. Let’s say furniture wasn’t doing so well, so let’s lose 20 lines there. It is as simple but as structured as that.

{audio:0:42:01} Over the course of time, FMCG and all the grocery lines have grown, as we know, so that SKU count has probably increased a little bit. They’ve kept categories, such as clothing, pretty tight. I think, over the last 10 years, there has been only one significant change and that was the introduction of frozen foods, when they bought Heron. That’s really the only massive change. They’ve just changed the balance, kept to 5,500. As I alluded to earlier, they’ve not gone down the, let’s chase the latest fashion route. What is fashionable at the moment and let’s get in after that. They’ve not been distracted.

{audio:0:42:59} Probably the first big change in the time that I’ve been associated with them, is when we took the leases of Focus stores, in 2013. So garden centers were first created in 2013; I think it was six Focus stores that we took and there are probably in excess of 130 garden centers now. With that, it brought an enhanced range of DIY, which has been maintained since 2013. The next significant one was buying Heron which allowed them, until the recent depot was opened, to put frozen food into about 100 shops that were close to the depot in Hull.

{audio:0:43:48} So stick to what’s working, in terms of categories. Then just slightly flex them. Again, why flex them? You flex them because the customer is telling you. The customer is buying more pet food so let’s get a bit more pet food in. The customer is buying a few more home furnishings because, over the last 12 months and the next 12 months, we’re not going to be going on many holidays, so we’re going to be spending more money on our houses. Let’s just flex that slightly. But on a Friday afternoon, have we got 5,500 live lines? Yes. Then that’s a successful week.

{audio:0:44:36} When I say it, it sounds so simple. But businesses don’t adapt it. Then you could say, why. The reason is, purely and simply, some of them aren’t disciplined. But the next big thing is they look at the numbers and say, I can’t afford to reduce these products because it will affect my GP. Once you get off the wheel of doing that, it’s hard to get back on it. If you’ve always been on the wheel and it’s been built into it, I can reduce these poor furniture lines, because it’s been built into my overall GP, therefore let’s deal with it quickly and effectively. That allows me to bring some more new lines in, which might be more successful. If you’re on that, the secret goes back to one of the look outs, as well, which is making sure you stay on that wheel. It also goes back to one of the key principles, which is that B&M price to maintain the margin; they don’t price to maximize.

{audio:0:45:51} Businesses price to maximize the margin, but then they have difficult board room decisions when it comes to, we’ve bought this category, it’s not selling. What are we going to do about it? Actually, it doesn’t fit the strategy; we’ll maximize the margin; it’s going to affect the margin so, I’ll tell you what, we’ll just keep selling a few a week and the problem might go away. Trust me, the problem never goes away. What happens is, the range just grows and grows and grows.

{audio:0:46:24} It goes back to one of the key principles, in that they’ve stuck with it and they’ve maintained it. The other thing that helps, maybe culturally, is that if there’s not a blame culture. If you are buying 100 new lines a week, are you saying, in any retail business, that all 100 are brilliant? It doesn’t happen. Realistically, probably 80% are going to be good and 20% are just not going to work and, to coin a retail phrase, might be dogs. Those dogs have got to be dealt with. The buying team aren’t lambasted for those decisions, so let’s just deal with it. No drama; that particular cushion, pet food range hasn’t sold. Let’s deal with it; let’s bring some new stuff in and let’s not make a drama out of it. Going back to businesses that I have worked in and businesses that I know of, unfortunately, buyers are scared to make some decisions. If you’ve got an environment that says, actually, go out there, find new stock, you might not get 100% hit rate, but let’s just deal with it, that is a really refreshing environment to work in and you can take slightly bigger risks. If you’re working in a buying team that is worried that every single wine you bring in has got to be a winner, there are going to be a few winners that slip through the net because you’re not going to be brave enough to make those decisions. I think that is a real competitive edge that B&M have. Interestingly, we talked about the customer, but that’s the people bit as well. Culture is really important because that can breed loyalty but also creativity.

{audio:0:48:36} You’re describing an organization that seems to be really adaptable and able to listen to more or less subtle tendencies on the customer side. That’s simple and, at the same time, dynamic.

{audio:0:48:57} Yes. It was said to me, not so long ago, buying and retail operations have always got to be like this. There have always got to be tensions. All I can say is, from past experience, when you’ve got a buying team working hand in hand with a retail team, that can be really powerful. That’s what we had at B&M and that is still the case at B&M. I’ve gone into businesses where, in board rooms of retail businesses, they’ve said, tell that buying team that that range is not working and that’s not right. Forget all that. If you’ve got a team that says, okay, I’ve got this new range coming in; what do you think; where should we put it? When will it arrive? By the way, it’s not selling; check your numbers. You’ll be able to see it but my gut feeling is that it’s really gathering dust. You know that, within days, that product will be reduced. That’s a healthier environment than going down the traditional, let’s fight and let’s look for fault. Rather than saying, actually, this was great but is there a better way of doing it?

{audio:0:50:35} I remember the significant times in my career at B&M. There was one time where it was one of those moments where you do a double take. I was meeting Bobby for one of the first times and he said, I will not put anything in your shops if you don’t agree with it. I was thinking, is he taking the mickey? Is he serious or is he just saying this because I’m new? But guess what, that continued. Trust me, that is very, very rare. As long as you deal with that autonomy properly, being told they are your shops, for the customer, get on with it, is really refreshing. Rather than saying, in different businesses, the buyer is determining where something goes; they buyer is determining when something comes in. Bobby and Simon, as I said early on in the call, always said, we’re not retailers. Therefore, ask the retailers when they want it.

{audio:0:51:49} Some people might say that there can be misplaced trust, but if you trust the people you’ve got and trust the team around you, then that’s a very, very healthy place to be. If I could take something to any retail business, that’s what I would take; have that joined up approach. Unfortunately, I’ve tried that in a number of businesses and, unless you change the whole team, it’s very difficult. The credit of B&M, for me, is that they’ve maintained that.

{audio:0:52:34} These are interesting things that you’ve pulled out of this discussion because I don’t see it written or talked about too much and I actually think it’s really important. I left the business five years ago and I could probably still list 90% of that buying team. The purists might say, that’s not healthy; you need to bring new blood in. Always deal with your bottom 20% and this, that and the other. Fine but, actually, if you’ve got a winning team, and they consistently deliver new products and we know they consistently deliver the margin – history determines that – then stick with them and work with them. To the credit of B&M those are some of the consistencies they’ve kept. For me, having left and looked at other businesses, I think that’s a real key point. You can say that stores are the heartbeat of a business, but you can focus on any part of the business and say it’s the integral part. The heartbeat is, if you’ve got a product at the right price.

{audio:0:54:01} When Bobby used to say to me, it’s your stores, I’ll never do anything to you, I used to say to them, get me a decent product, at a great price and I’ll sell it. That was it. I’ve spent a lot of time in my career trying to sell things that customers don’t want, at an overinflated price. Trust me, as a retailer, that’s tough. That’s like trying to sell someone a house when they don’t want to move. You can get wrapped up in theories and models when, actually, some things are quite simple; you’ve got a winning buying team and you’ve got a team that’s allowed to retail and focus on the customer. In a lot of retail businesses, the store management team are doing things that the center or the head office want them to do. Well, no. Strip it right back and just allow them to deal with that delivery that comes in, sell that product and delight the customer.

{audio:0:55:26} If you’re going to set up a new business, there’s a lot to learn from B&M. You can say that about Home Bargains, as well. But particularly with B&M, the growth that they’ve been on, they’ve not forgotten the customer and they’ve not forgotten those key pillars and what makes a successful business. I’m only surprised, with the work that I do now, in my business, about how few people try to copy that.

{audio:0:57:44} A good starting point, that normally gets mentioned is, how many, first and foremost. Going back to 2013, OC&C did some work and came up with 853. It was 853 pretty much because, what was unproven at the time is that they ruled out a lot of affluent areas, particularly in and around the south west and the south east. I think it was three years ago that the numbers were changed to 950. Interestingly, I just picked up on something when I was looking at the trading statement. It actually says, UK store target remains at least 950. That’s probably the first time they’ve used the words ‘target’ and ‘at least’. There might be a bit of a clue in there. It will support my view that I’ve always thought, with the model that they’ve got, 1,000 would have been a reasonable target. I’m not surprised it was 850 and then it moved slowly to 950. Now they are using the words ‘at least’, because that’s the nature of the exec team that runs that business. They are cautious. They said they were going to open 40 stores one year and I think the record was 76, in one calendar year. 1,000 is where I would be at.

{audio:0:59:38} Sometimes analysts get a little bit hung up on this south east, south west versus the north. You’ve got to look at the fact of, where does the business come from, where was the homeland and what sites were coming up and when? Some of it is just circumstances rather than a, we’re going to keep out of the south east or the south west. If you look at not just last year’s interim, but you also look at previous years, they’ve been quite up front and shown examples where stores in the south east and south west are just as profitable, if not more profitable, than stores in the north. I think that’s a mismatch of north-south divide; they need a different range; they need a different model in the south. Absolutely not. That 5,500 lines are exactly the same in the south as in the north and they stick to the same sort of pricing structure; the pounds per square foot structure. They will never buy a site over the odds, to stop another retailer going in there; that’s not their strategy. That might slow the opportunities down slightly in the south east and south west. But Homebase had a strategy of reducing their estate in the north and keeping the ones in the south. That exaggerated more store openings in the north. It’s just circumstances rather than strategy.

{audio:1:01:17} Yes, obviously, now their sweet spot, as they’ve listed, is 20,000 square feet, but that wouldn’t put them off. They’re not rigid in their thought process. If something comes up that they like, for 17,000 square feet, in the town that’s not well-represented, of course they’ll go for it. They could even go lower than that. That opens the door. Even though they say 20,000 square feet, they can operate from 10,000 to 50,000. You look at the number of opportunities due to unfortunate circumstances, but that’s never changed. They’ve picked up MFIs, Focus DIYs; they picked up JJB and Homebases; they picked up some Toys’R’Us. It’s creating this well-oiled machine – and I would like to say I was part of that – that they can open quite quickly and cost effectively, in any sized unit, in any part of the country, which is a good model.

{audio:1:02:40} Obviously, an out of town, car park is ideal. But that would not rule out going into a town center store, if it was 10,000 to 12,000 square feet, with the right pounds per square foot. It might not have a car park. They’re approaching 680 stores now and you could probably tick every type of location that B&M are in. But you can also say, actually, this is the best and a retail park, with an Aldi, a McDonald’s, Pets at Home and so on, is absolutely the sweet spot. Landlords are still building those types of outlets. It’s the flexibility and, I think, what will be interesting, as they fast approach their target of 950, is how do they just change it slightly? Do they go into slightly smaller towns which they wouldn’t have before? Another point that gets missed is, why go chasing those, is no different from, why go spending millions on a transactional website when I can open 50 stores a year and make contribution within eight months? Let’s focus on that. It comes back to, when is the right time to do something. When is the right time to think about, we’re getting close to 950; do we go into smaller seaside towns that we wouldn’t have done before? While 20,000 square feet units are coming up, with car parks and so on, then let’s do that 50 times a year.

{audio:1:04:39} I think there will be a change. You’ve also got to think about the fact that what they’ve been doing slightly, with Heron; they’ve been calling some B&M Expresses. It gives them different avenues and Heron is a different model because, obviously, it is a convenience format. People say it is a frozen food format but only 25% of the sales is frozen food. It’s a convenience food offering, but could they sell more general merchandise.

{audio:1:05:14} They’re sitting on 680 stores. The next two years, in my view, is going to be more of the same. You can over-analyze whether the south east outperforms the south west outperforms the north but there’s no real pattern. When I was looking at the Covid comments from Simon, in one of the trading statements, it pretty much supports that view. All five regions performed pretty similarly during Covid and the categories all performed similarly. Sometimes you can spend too much digging into something that doesn’t actually exist and the numbers support that. Actually, we’ve just gone through 10, 11 months that none of us could have foreseen. Yes, the sweet spot for B&M was that they were allowed to trade but not one part of the country outperformed the other. It’s probably a very boring answer, but it’s a consistent performance.

{audio:1:06:49} How have you looked at the issue of cannibalization, over time, as the footprint grows?

{audio:1:06:57} In the early days, as a retailer, I found it very frustrating because we never really put that into the numbers; in the numbers we produced, we didn’t strip out cannibalization. Over the last few years, as you’ve seen, on some of the trading statements, they stripped that out. A good example is, if you look at Bristol, the fifth biggest city in the UK – and I remember opening the first one in Bristol – I think they’ve got six or seven now. There is, obviously, going to be cannibalization. What I think they’ve done and said in a lot of trading statements is, if you look at the overall performance of Bristol, it’s still growing and still very profitable. That’s going to happen more and more but, again, the numbers have played out.

{audio:1:08:02} Going back to my early days, even in the small town that I live in, there was one of the first B&Ms which was a 5,000 square foot old Woolworths. Then Focus closed in 2013 and it took me nearly two years to be brave enough to open in my home town, an out of town, 35,000 square foot because I was too worried about it affecting the small one. Actually, it dropped X amount of thousands, but the combined net increase in sales and profitability was notable. They’re more up front about it now and it’s going to happen, but there are no examples where it’s affected the overall performance of that town, going forward. It would be foolish not to have it on the agenda but so far, getting to just short of 700 shops, it hasn’t caused a huge amount; it just gives them more data to say, that store might be affected slightly more so, therefore, let’s not do that. But there are examples where they have got sites that are less than a mile and a half away from each other and it works.

{audio:1:09:32} But they’ve got more intel now; more experience. It’s less of an issue. They used to call it the 12-week bubble. One of the biggest issues was the fact that you’d open a store and, for the first 12 weeks, the sales were massive. They probably fall back more dramatically than other retail businesses but that was just the nature of that type of business because, when a store opens, you’re going to go in there and you’re going to spend more. It’s getting that regular customer base. The secret is, making sure that those customers that come through the doors, for those opening 12 weeks, eventually come back regularly. It soon stabilizes.

{audio:1:10:29} I’m looking at a document here that says that contribution for a new store was six months, in 2013. You wind the clock forward to 2020 and it’s eight months. The only reason it’s changed by two months is because the shops have got bigger so they are spending that little bit more. But you’re not putting more kit in there; you’re not having a different quality of floor. Whether it’s six months, in 2013, or eight months in 2020, that’s unprecedented. If you overlay that in the food industry, when supermarkets are three to four years and Aldi and Lidl are one to two years; it’s the same principle.

{audio:1:11:27} Just so I’ve understood you correctly, you seem to be suggesting that, for those next 250 stores, in terms of locations, that you don’t really see a major difference that is likely to emerge in the economics of the next part of the footprint?

{audio:1:11:54} I don’t see that in the next 18 months to two years, being conservative. I think it will be more of the same. I’m pretty confident in that because if we wound the clock back three years, you would be asking me the same sort of question. There was still this emphasis on south east, south west and it still happens. Yes, obviously, the densities are more in the north but, when you look at some of the analysis that they produced not this year, but the year before, they’ve still got opportunities in the north west, to open more sites. For me, as they fast approach 850, 900, it will be interesting to see how they just adapt a little bit more. I would see them, probably, going into more smaller towns than they have previously done. If it was our business and those 20,000 to 30,000 square foot units are still coming out, out of town, with a car park, open 50 of those a year and continue on that. Why change?

{audio:1:13:22} Not so long ago, I read something by someone who said that B&M should fix the roof while the sun shines, alluding to doing internet shopping. Well, no. They will do internet shopping or a transactional website when the time is right. If you are opening 50 stores a year, making a contribution within eight months, why do you want to spend millions on a transactional website for a small percentage of turnover?

Former Operations Director at B&M and former COO at The Original Factory Shop

B&M Group - Business Model Pillars

Historical pillars of success of the business (price/quality, range, buying strategy, store format & economics)

How the relationship between the buying and the retail teams at B&M differs from a typical retailer

Limits to the roll-out of the B&M format in the UK