When Richard Pennycook joined Morrisons, a £14.5 billion UK supermarket chain, as group finance director in October 2005, its problems were well known. A year before, the company paid £3 billion for Safeway, a larger rival, and bungled the integration. A string of subsequent profit warnings led to Pennycook joining the board to help straighten the enlarged group out.
Pennycook had pedigree. In the past he, helped lead turnarounds as finance chief at fashion group Laura Ashley, motorway service station company Welcome Break and drinks company HP Bulmer.
Now, he has helped yet another company out of trouble—after cost cuts and an overhaul of the Morrisons brand, the chain’s profits are rising and cash is being handed back to shareholders. As other finance chiefs prepare for their first experience of a turnaround, Pennycook offers his thoughts on how to handle the process and whether rescuing a business can make you a better CFO.
After working on several turnarounds, is there a specific process that you run through when you join a distressed company?
I think all experienced turnaround people probably go through somewhat similar processes. I see turnarounds as having three phases—phase one, stabilise; phase two, optimise; phase three, grow.
Phase one, as you go through the door, is that you have an unstable situation that you have to get stable. The checklist I use covers eight Cs.
Knowing where it is and where it’s going is something you need to have absolutely at the forefront of your mind. I think since the beginnings of the credit crunch it’s something that has come into focus for businesses—it hadn’t been enough in recent years and companies have woken up fast to the fact that liquidity is fundamental. But it was ever thus in a turnaround situation.
If it’s a reasonable economic environment—which is to say it’s a company that has got into trouble despite a backdrop that’s OK—does the business understand its customers well enough, how their attitudes have changed towards the business and how their needs have changed?
Very often in a turnaround, a business has lost control. Can you the trust the numbers and what they’re telling you? You have to grip that and get it back under control as a matter of urgency.
It’s important that the turnaround team displays confidence that they know what they’re doing and communicate that effectively to stakeholders, colleagues in the business and financiers. If the heads go down and the people you’re dealing with detect that this team doesn’t have confidence in executing a turnaround, then that morale issue can become a real big problem.
Almost inevitably you’ve got to get costs out of the business.
Is your base business concept fit for purpose? I suppose that’s particularly relevant today—the world has changed, so you may have been set on a particular course that is now no longer appropriate. In turn, that links to customers. A customer’s attitude to life three or four months ago might not be a useful indicator to what’s happening now. If I look at our business, which is now doing well, we’re increasing the frequency of our market research because attitudes are now changing so quickly.
Most businesses have been through a period where life’s been pretty good. There’s a generation of management that has grown up in a growth environment. The culture of the organisation is going to have to shift to deal with the new circumstances. If your top team are still flying around the world first class, that’s not going to send the right message in terms of some of the things you’re going to want to do in the business.
A business that’s weakened or destabilised is just going to find that every Monday morning there’s another crisis. If you haven’t allowed bandwidth to deal with that, whether it’s management capacity or headroom on your covenants or an additional facility, then you’re stuffed, basically. There’s a natural human desire to think that the worst is over. In a turnaround it usually isn’t.
Do the goal posts change along the way? How do you know when the turnaround is finished?
It’s a continuum. When you’re in the peak of distress then there are lots of fires blazing, the adrenaline is running, you have to move very fast in order to get the business stable and to get the turnaround happening. Then you move through to slightly calmer waters and as you get the optimisation plan kicking in, the world becomes a little bit calmer. But I don’t think there’s a point at which you wake up one morning and say it’s done.
There are probably two distinctions that I would make in terms of turnaround: financial and operational. The financial side in turnaround terms is very often about restructuring the finances of the business and the balance sheet to be appropriate to the revised circumstances and the new strategy. You can define that clearly at the point where you sign off your refinancing documents, if that’s what you have to do.
The operational turnaround, which is then executing the new plan, is longer term and morphs then into normal business as you go through it.
Can you use the skills you develop in turnarounds in non-turnaround posts?
[A turnaround is a] great experience for people. What we’re going through now is a situation where a generation of managers who haven’t been through real financial stress before are going to come out the other side and have the benefit of that for the rest of their careers. There’s a generation of management coming through that are going to get grounded again in some of the basics like cash and cost constraints.
In terms of applying that to normal business, turnaround situations drive a pace that is actually very healthy. When the fires are blazing you get things done, which in a more stable environment can sometimes feel as though it takes too long.
How tough is a CFO’s first turnaround?
I suspect most turnaround people would tell you that the first one is inadvertent. You’re in a situation were it happens, so you get sucked into it. That can be very stressful. I’m very glad Morrisons wasn’t my first turnaround experience because I would probably have cocked it up. But by the time you’ve done a few I suppose you’ve got a tool kit that you feel works.