Former Trading Director at Debenhams
Steve joined Debenhams in 1994 and enjoyed over 23 years at the business. He started in various buying and merchandising roles across categories before reaching the Director of Merchandising in 2003. He then spent over 9 years working as a Trading Director where he was responsible for driving the product and commercial strategy of the business. Read moreView Profile Page
Part of the whole strategy of the private equity owners of Debenhams was to drive cash flow they renegotiated the payment days. The payment days in Debenhams at the high were 120 days but I think they're falling now. Clearly that's going to cost suppliers to finance and they will then start to jack up their costs. You get into this vicious circle whereby your cost base is going up and you're starting to find that you're then putting pressure on your selling prices and you stop becoming competitive. That's part of the Debenhams problem.
They start increasing selling prices and therefore they need to promote more to drive sell-through and you get into this really vicious circle of ever-increasing cost price, ever-increasing selling price, more promotion activity, more pressure on margin. That is quite typical. To them because they're very own-label focused business unlike House of Fraser, it's particularly exaggerated and the real problem for them. Yes, I think that that is one very good example of where there's been a focus on trying to drive down or look at cost. Your margin is forever on deterioration.
This all stemmed from the time of Debenham’s under PE ownership?
Yes, it's coming from the PE time, and what you then found post private equity because there is relatively little money to invest there is still this desire to drive cash flow and to maybe try and do something better because you then got a need to become more sophisticated in things like Internet and omnichannel shopping. You're still in this world trying to drive cash flow plus all your like for like sales are built on the foundation of promotion activity. Unless you do something very different with product, the only lever you have got is promotion on price.
In that period then since the PE ownership as the days payables went from 30 to 120 days. Did we see a shift in the sourcing based at the far east and did this not approve landed cost?
Yes, you did, you've seen a movement from, let's call it a supply base, China, Europe include the likes of Bangladesh, then you really are then competing with Primark and all the value players but it's absolutely a change in the sourcing
How did that impact the margin profile?
On apparel, if you move from China to Bangladesh, you're going to get between 2 to 300 basis points improved into margin at a minimum.
Is that the landed margin? For example, if the raw materials for a product are £10 in China and I moved to Bangladesh 2-3% lower?
Something yes, as a minimum, if it arguably can be greater. The background at that time base you are working in a world of ever decreasing selling prices, the emergence at that time of Primark would have put pressure on selling prices anyway. You got downward pressure on selling prices mitigating some of the down pressure on cost price. You can't bank all of that margin improvement because you're trying to remain competitive and of course, you are discounting more and more. Yes, in theory on a like for like basis, you are going to see some significant margin improvements.
What is the typical landing cost of a product you're familiar with and then we can run through the margin from there?
You’ve got all sorts of other different costs involved from promotional cost through your shipping, how you're handling the product. You've got other impacts along. Take a pair of jeans, a pair of denim jeans and you're selling those for let's say £30. You've probably got an FOB price from China of around say, £8. I won't try and convert it into US dollars. You've got about an £8, in Bangladesh, you're probably paying about £5.50, you then have got other costs associated in terms of duty. It's very hard to over the telephone actually give you all the breakdown of costs but you'll have to understand your duty costs, your shipping costs, you've got a significant cost price reduction, but then there's a cost of doing business out of Bangladesh and Debenhams they opened an office in Bangladesh to be able to do that. If you're going to deal direct with these factories, you'll need someone on the ground actually doing business. That needs to be incorporated into the margin calculation.
Let's just say the £30 pair of jeans, from Bangladesh you'll probably get the products on the ground in the UK at probably £10, probably a bit higher.
Maybe much higher to fair, the margins are high 60s low 70s on a landed basis. It's a significant margin but as I'm pained to say there are a lot of other great additional hidden costs. Of course, the problem you've got is you're starting to work into commodity product and it's basic, you're not working with a huge amount of additional add-ons in product detail and the fabric is quite basic and you're taking things out of a product. That's one of the challenges that retailers use as your driving down cost, you are going to either Bangladesh or Cambodia or other very value orientated sources. Your product is being compromised all the time and that's part of the problem, then you're competing with value players and there's no difference in the products and that's actually the wrong way to go because.in the end Debenhams or House of Fraser or Marks & Spencer’s will never compete with Primark in terms of volumes. When you start to source from those places it’s the volume play rather than a quality play.
So as the business was owned by PE and run for cash, days payables extended to 120 days, a change in the supply base, the product assortment actually shifted to a more basic and lower priced products. Is that across all categories?
Yes, absolutely. Yes, it is, something like home products when you are working on those kinds of payment terms, you're even more restricted. I'll give you the example of Vietnam which is one of the better places to source home products from, if you're working on those payment terms you can't because they work on LCs so letter of credit. When you're working on FOBs 120 days, those sources are closed off to you completely. You're very restricted on the places that you can actually source product from. I don't know whether you heard of landed agents like Li & Fung, they’re one of the biggest sourcing companies and one of their real issues with dealing with Debenhams was many of the most innovative and creative sources were closed off because your 120 days is just so penal that you can’t source.
Over time you had a decline in added value on product, and a department store that's what they're about, they're about adding something different to the product, they're not commodity-driven businesses. Whilst Bangladesh has a role to play, there's far too much focus on that because in the end, we gave you an initial improvement on cost, but in the end what you're finding is actually you were compromising on product.
What is the split in large vs smaller suppliers for Debenhams?
No, they're larger, they're typically larger businesses.