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.