Strategic Capabilities of Debenhams UK - Essay Example

Analysis of Debenhams, Financial Performance and Strategic Capabilities Institution Name Literature Review Retailers currently are in a tight competition looking for every customer dollar in the market. The current economic conditions in the world have made it harder for customers to spend their money especially on secondary wants. Therefore, most of the retail enterprises have closed down due to less experience in the market (Cuthbertson, 2012, p.138). According to Dunne et al (2010), financial performance of every enterprise is normally customer driven. “The larger the number of customers, the stronger the capital structure of the business.” As a result, a number of retail businesses in UK have worked hard to meet customers’ demand in the market by setting out their unique visual strategies that strengthen customer connections. As pointed by As far as every other business concentrates on customer products satisfaction, it should also clinch on social responsibility as one of the strategic capabilities in the global society (Croxford et al, 2005, p. 54). Workers in the institution access freedom of association therefore they can join any of the unions so that their interest are protected by these unions. Apparently, institution’s policies that allow freedom of association of workers do not hinder parallel development at any point. However, this freedom allows recognition of workers in the company by the national statues and practices in different countries. Highlighting on operational activities, Debenhams are exceptional in terms of product range, there is a decent progress in market share especially with menswear and kids wear, the business has created about 800 opportunities in United Kingdom and there is a progression in multi-channel operations worldwide (Annual Report and Accounts, 2012). The business has a unique multi-brand and multi-category product offers that it makes it to have a competitive advantage over the other competitors in the market. This is one of the strategic capabilities that have enhanced radical expansion of operations within the business department stores and franchise stores as well. Also in 2010, the company launched iPhone application that would allow customers to access products and do their shopping online. Introduction Debenhams is a business enterprise in Britain that operates in a layout of departmental store. The main stores are situated in United Kingdom, Ireland and Denmark while other franchise stores are located in various countries in which it operates. The business was founded in the year 1778 but its impact in the market was seen in 1985 when the enterprise obtained Browns of Chester, not long before when it was listed in the London Stock Exchange Market. From that time, the business continued to enlarge its operations not only within Europe but also across the globe. Currently, the business delivers its products to 66 countries globally. At a glance, Debenhams is the leading department store group with 167 stores in United Kingdom, Denmark and Ireland, 68 worldwide franchise stores in 23 nations with 29, 000 employees. The Cross Transaction Value in the year 2010 was £2.56 billion (9.6%) recording revenue of £2.12 billion (10.7%) and profit before tax of £151 million (20.6%). At the end of 2010 financial year, the earning per share was 7.5% (Accounts Report, 2010). Though an increase in the market value in the year 2010 was associated with price function rather than market growth, it had a significant change in the capital structure. Over the last decade, there has been a terrific growth in terms its products, stores, market strategies as well as facilities and infrastructure. The plain reason for this improvement as stated by Accounts Report (2007) is to focus on satisfying diverse customers' needs in the market. Apart from offering women’s, men’s and kid’s wear including shoes and toys, the business also provide variety of home-based products like furniture and electrical. Besides, style advice, cosmetics, product design and wedding services are some of the new products brought into the market by the business. Debenhams continues to style the nations by re-branding its products as well as expanding international operations by offering online services to its customers. Chairman’s message in Accounts Report (2012) showed that Debenhams was to use £150 million capital budget to refurbish existing stores in 66 countries. The plan was to take 18 months and the main objective was to fit the chains in the market so that the customers were to enjoy hassle-free and modernize shopping experience in the market. Strategic Capabilities of Debenhams According to Dutta (2002, p. 61), ‘mining’ value from a product in the market by pricing has been regarded as uncomplicated. This is quite decisive for executives of an enterprise that handles thousands of products in a competitive market since customers at one point, will have to dictate how hard it is to change prices. Talking of strategic capabilities, Saint-Onge (2000) stated that a shift in customer first choices and market drift brings in a need for acquirement of capabilities to respond to these changes. This is what Debenhams has been doing over the past decade in maintaining its competitive advantage in the market. Debenhams has been having a unique hierarchy of advancement of its competitive advantage which has eventually led to development and sustenance of these capabilities. The enterprise has (strengths); Strong financial foundation (Financial Capital), it is administered by employees with great abilities, experience and skills (adequate human capital) and equipped with the resent technological resources (Structural Capital). Geographical location and its unique brand portfolio also strongly contribute to the strengths of the enterprise. Debenhams exclusively have its own brands which are designed at diverse stores different from those of competitors (Report on Debenhams’ Customer Success Story, 2000). Technology Change Management that has led to enterprise architecture and easy market research management platform has largely contributed to these capabilities especially in managing initiatives. The strongholds stated above have achieved variety of benefits to the business. Some of these benefits include; Simple integration with new subscribers (customers) in the market, A comprehensive support of enterprise brand architecture that enhance sustainability and upgrade of existing services, and Knowledge transfer of staff which has led to effective engagement in project management especially in building new stores and franchises in various regions of the world. Sharp (2010) defended own-brand strategy of Debenhams on the basis of growing opportunities in E-retailing and key business initiatives by pointing out that modest sales (online) raises retailers efforts. It has made up about 81% of the strategic target which shifted the store margin higher compared to other competitors in the market. Therefore, customers are able to get variety of products at affordable prices since the products in the store are centrally available as well as driven by ease of access and retrieval. Apart from pricing of products, Debenhams has a coherent strategy for development that is based on four elements (Annual Report and Account, 2010, p. 8); Product Strategy, Spaces expansion, Multi-channel development, and Balance Sheet/Financial management In product strategy, the business ensures that there is availability of right product for customers at the right time. Though the store has existed in past 200 years, 148 department stores perhaps do not meet the current demand in the global market. The report shows that due to strong returns by existing and new stores, Debenhams believes to increase store portfolio (space and content expansion) especially in United Kingdom and Ireland since they have realized a gap in the market. Unlike other department stores in the market, Debenhams Multi-channel development has radically grown. Online marketing have influenced more that 50% of the target market. This adds an advantage as well since the strategy is likely to increase access points of the store with improvement of content. Consequently, online video facility that was launched later in the same year (2010) has maintained consistency of messaging across all stores. Templeman, Chief Executive Debenhams stated that capital structure of the business is the main priority (Annual Report, 2010). Before the commencement of financial year 2010, business capital took a higher drift of £300 million due to issuing of 404 million new shares. Consequently, there was a strong cash generation in the same year that amounted to £212.3 million. Perhaps this movement remains to be an element that closes the gaps in the market and build a competitive advantage as well. The four basic elements of strategic capabilities of Debenhams have built a strong competitive advantage and have led to radical enlargement of the business. However, the challenge is still on the desire to develop internal team in order to provide self sufficiency which would minimize reliance on external suppliers. Also, the business has limited approaches for process modeling during product architectural. Otherwise, the emergence of new technology will foster some of the business initiatives in the design programs (Glue Reply, www.gluereply.eu.). Consolidated Balance Sheet As at 1st Sep 2012 1st Sep 2012 £m 3rd Sep 2011 £m Total non-current assets 1,631.70 1,594.60 Total current assets 459.5 423.6 Net current Liabilities 267.5 292 Non-current liabilities 703.2 643 Net assets 661 659.6 Shareholders' equity Share capital 0.1 0.1 Share premium account 682.9 682.9 Merge reserve 1,200.90 1,200.90 Reverse acquisition reserve -1,199.90 -1,199.90 Hedging reserves -2.6 -6.2 Other reserves -10.5 -3.1 Retained earnings -9.9 -15.1 Total equity 661 659.6 Table (a) Financial Review (Capital Structure) The above consolidated balance sheet describes Debenhams’ debt-equity relationship between 3rd September 2011 and 1st September 2012. In analyzing the performance, we shall consider if there is; 1) Optical debt and equity association, 2) Indicators of performance and 3) Analytic debt and equity considerations. According to Martin and Baker (2011, p. 5), the strength of the business is normally evaluated by use of capital sufficiency, assets performance in the company and the image of the capital structure. Perhaps these elements explain the future direction of the company as far as debt and equity are concerned. a) Sales, Margins and Profits Looking on the above consolidated balance sheet, the value of ownership in Debenhams by the end of financial year 2011 was £659.6 million while the value of ownership at the end of financial year 2010 was £661.0 million. The business reported an increase in GTV of 2.6% in the year 2012 (Debenhams Annual Report, 2012, p.6). Apparently, the increase was the positive effect posted by multi-channel marketing as well as modernization of stores in various countries. The report shows that the gross profit (i.e profit before tax and revenue) significantly grew by 4.2% in the financial year 2012. The reason is that there was reduced interest charge from the bank and in that case the net debt reduced as well. Also the rise in share sells contributed to profit growth in the business. Gross Transactional Value (GTV) of £2,679.3 million as at 3rd September 2011 reflected an increase of 4.5% of the profit margin compared to the previous year. As at 1st September 2012, GTV of Debenhams was £2,708 million. Though there was an economic impact on the customers due to winter weather between November and December, the company recorded at least a significant increase of 1.07% on GTV. The basic earnings per share for 2012 financial year were 9.8 pence while in 2011 were 9.1 pence. b) Debt-Equity Association Debt-to-Equity ratio of Debenhams stood at 827% in the year 2008 (Debenhams Annual Report, 2008). Actually, this is not the picture at the moment since the ration has reduced to 62.5% (Annual Report and Accounts, 2012). This has made the capital structure (Balance Sheet) be much stronger compared to four years down the line. Also, to add on the portfolio, the shares have been in an excellent pace in 2012 shifting from 59p to the current value of 107p. Actually, these are the indicators of performance in the company. As a result, the stable capital structure of the company has made easy the implementation of four pillars of strategy that were set in 2011. The question is, ‘Will the strategy succeed? The company has unique brand equity, has an extensive base of customers in the market in terms of age and demographics, it has differentiated products which have emerged as the leading in the market as well as multi-channel operations. These are actually the drivers of future prospects for growth in the company which will entirely change the outlook of Debenhams not only in United Kingdom but also across the global market. In terms of economic reality, the strong capital structure of the company will in fact deliver more benefits both to the customers and shareholders compared to other competitors in the market. Operating review of Debenhams NB: Financial year of Debenhams usually contains 53 weeks. Debenhams also applies like-for-like sales to analyze the performance of the business as per every financial year. a) Market Share As reflected by the competences (strategic capabilities) above in the market, Debenhams continues to increase its market share. The introduction of cosmetics and health products has strengthened its market share as well and it has increased basic points by 130 units. On the other hand, menswear and women’s wear casual wear value share in the market have increased by 10 and 20 points respectively over the past 52 weeks of financial year 2012. b) Online Online sales/multi-channel enterprise operation has conveyed an exceptional sales growth over the last 52 weeks of 2012 financial year. The outlook of international online as reflected by the Annual Report 2012 in the year 2013 is to anticipate sales of over £100 million. Looking at the online performance in the previous year (2011), online GTV (Gross Transaction Value) improved by 73% and its shares in the market was £180.4 million. Apart from focusing on iPhone technology, the business also expect to develop a specific website installed with diverse languages. This will monitor the performance of all stores globally as well as easing access of customers worldwide. c) Store Modernization Eighteen stores were modernized during the first half of 2012 financial year. The modernization valued £32 million and the company is expecting good returns on sales and market share as well. The company also plans to modernize the remaining 45 core stores in two phases; modernizing 20 stores in the first half of financial year 2013 and the remaining 25 stores in the second half of the same financial year. Share Price Performance over the last Four years Grand date 1st may 2012 1st Nov 2011 23rd May 2011 24th Nov 2009 Number of Shares under award 391,978 5,137,864 191,250 1,755,784 Expected terms 3 3 3 3 Share price at grant 84 64 72 83.3 Exercise price - - - - Risk free rate 0% 0% 0% 2.30% Expected volatility 40% 40% N/A 70% Expected dividend yield 3.50% 7.40% 5% 0% Fair value of award 75 59 62 83.3 From the table above, the positive trend in share price at grant is noteworthy to the future performance of the business in the market. As for dividends, the business has as low as 2.8% payout ratio which is seemingly a sensible path to growth in the market. Debenhams is likely to outperform its competitors in the market over the next twelve months both in terms of share performance as well as the number of customers in the market. Though economic conditions in the market (continuing inflation) perhaps may limit customer spending, the company is very optimistic of its maturity. Economic recession is likely to affect weaker retailers especially those with large debts and low profit margins. There are three retailing basics that Debenhams should take care of in order to sustain good performance of its shares in the market. These basics help the share performance during the critical economic situations (Martin et al, 2012). They include: 1. Equating price with the products considering customers’ earning situations. Debenhams have unique price development therefore price comparison with the customers will be easy. This will be one of the drivers of share performance maintenance and the business is ought to put the initiative into a threshold for it to be successful in the coming twelve months. 2. Balancing operational cost and supply chain is very essential as well. At the moment, the global demand of Debenhams’ products is quite high. Therefore, the business should work closer to suppliers as well as manufactures in order to harmonize cost of the supply chain. The main aim of the harmonization is to minimize the anticipated marginal risks that are likely to occur. 3. Regardless of depending on new stores and franchises, cost of maintaining them perhaps will counteract profitability of the business and share performance in the market will eventually be affected. The business at this point should develop an optimum access of these stores in order to offer its customers what they need at the right time. Most of all, building a strong marketing communication (provision of regular products update) as a retailer will favor you when the clienteles decide to spend. I recommend Debenhams’ share to be a sell proposition. There are plenty of reasons for this but the main ones are; 1) GTV has been in a great momentum over the last four years standing at £2.7 billion in 2012. This has reflected a positive increase of 2.5% compared to the previous financial year. 2) Focusing on the key facts of 2012, Debenhams has GTV of £2.7 billion, gross of £158.3m and dividend per share of 3.3p. These facts have initiated four pillars of strategy that will sustain anticipated future of the business. Therefore, selling its shares will not be a big threat. Strong financial proceeds from new stores also mark as a security for the business in the stock market. In conclusion, Debenhams’ like-for-like performed exceptionally in the year 2012. There was a growth of 1.6% that made the business outperform all the other clothing enterprises in United Kingdom. Careful management of the enterprise has been in form during 2012 financial year and has recorded a historic change by initiating the four pillars in the strategy. Multi-channel services have remained to be a terrific driver of sales in the market and the business has optimally used it to improve customers’ perceptions of brand. Unique brand portfolio is the main strength of the business. However, the main weakness is that the company finds hard to control cost and profit margins when driving sales. Share performance on the other side projects towards optimal point making Debenhams a leading retail business in the United Kingdom. Reference Agrawal, N. M., & Smith, S. A. (2009). Retail supply chain management quantitative models and empirical studies. New York: Springer. Baker, H. K., & Martin, G. S. (2011). 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Amsterdam: Elsevier Butterworth-Heinemann. Saint-Onge, H. (2000). Strategic Capabilities: Shaping Human Resource Management within the knowledge-Driven Enterprise. www.knowinc.com/saint-onge/library/strategic.htm. Sharp (2010). Debenhams defends own-bought strategy. http://www.drapersonline.com/news/multiples-news/debenhams-defends-own-bought-strategy/5012184.article Read More