Steinhoff: Lack of Synergies

It's particularly interesting that in the last 10 years, they started to buy so many retailers. Obviously, hindsight is a wonderful thing. Were there any real synergies or scale effects when you're buying so many different retailers from a sourcing and procurement standpoint of the raw materials, given the infrastructure they had?

That’s a good question and outwardly the answer would look like ‘yes’, but the reality was ‘no’. What was an interesting approach that they had as a result of the acquisitions was, as I mentioned earlier, they were buying businesses that were available and those businesses were available for a reason, of course. They weren’t trading that well and they were relatively cheap. But, what Steinhoff were not was a turnaround organisation, they didn’t have the skills and the capability in order to take those businesses and really make them grow - I’m talking primarily the retail ones.

So the management just left them alone? Left them as a standard identity?

Yes and no. What they did, in terms of the control element, was put in finance directors or CFOs who were closely aligned with the South African business. These were either people who had worked within Steinhoff in South Africa or were very well known to the South African operation. So the CFOs and finance directors who went into all of those retail organisations then took control of the business alongside an indigenous CEO, somebody who knew the operation in the countries that they were trading in. They really ran it as, if you like, a two handed operation. It’s not unusual for CFOs to be heavily involved in running a business, but it’s particularly true in the Steinhoff case that, certainly in my experience, the CFOs were almost as dominant as the CEOs. They largely ran the balance sheets of those companies. But what they did leave to the CEOs was the direction of the business. And this is the paradox of their supposed vertical integration strategy, in that no retail business was required to buy from the manufacturing operation. They were all stand-alone profit centres and as such, were able to trade and buy as easily from third parties as they could from within the organisation. And because the manufacturing side of the operation was typically - there were some exceptions - a profit centre as well, they were, of course, selling with a margin.

So they were stand-alone P&L’s?

Yes, all stand-alone P&Ls controlled by the CFO. These were the parts of the business where they weren't that profitable and a lot of them weren't that profitable, they weren’t when they bought them, and they certainly weren't trading profitably. Many of them were cash generative, but that cash generation was largely siphoned off and was taken into a big pot in South Africa. So the CEOs of those organisations didn't really see the cash side of the business, they saw the trading P&L, clearly the essence is all costs and whatever. There were some cross-subsidies taking place. So if you take the UK as an example, the marketing costs of all of the UK operations were paid for centrally in South Africa. So marketing costs were taken off balance sheets in South Africa. As you can imagine, the furniture and bedding industry, particularly in the UK is very promotion-led with a straight line correlation between marketing and sales.