Theranos article<\/a> highlights typical fraud indicators to be aware of. Fraud aside, what should the management team at Patisserie Valerie have considered as part of their cost-cutting measures?<\/p>\nWell, rumour has it that the cost-cutting was so severe that teams stopped using butter in their puff pastry. An \u2018affordable luxury\u2019 caf\u00e9 group selling cakes and pastries that doesn\u2019t use butter in their products seems a little curious. Other stories include broken ovens, unpaid suppliers and a leak in the roof at a key bakery site.<\/p>\n
So, if not butter, what are the ingredients for a successful cost cutting exercise?<\/p>\n
As well as the obvious of trying to skim back on general headcount, here are my suggestions for a better cost-cutting recipe below:<\/p>\n
Strategic internal benchmarking<\/h3>\n
Administrators are excellent in assessing profitable and unprofitable outlets; KPMG came in and within a matter of days closed 71 unprofitable caf\u00e9s.<\/p>\n
If an administrator that has limited experience of the business can come in and within 48 hours make an informed decision about which outlets are profitable and which are not, why did the CFO, who has years of experience at the helm, not drive this decision? Was it ignorance or arrogance that kept these unprofitable caf\u00e9s open?<\/p>\n
Strategic internal benchmarking is absolutely key in driving profitability, growth, or in a declining business assessing where to cut outlets. Chris Marsh should have had an absolute wealth of information at his fingertips to benchmark each caf\u00e9 at every level; revenue per square foot, revenue per available seat hour, EBITDA, labour cost percentage, gross profit and much more, all segmented by caf\u00e9 to benchmark against each other.<\/p>\n
Procurement analytics<\/h3>\n
If you\u2019re spending significant sums with suppliers, you should be all over procurement analytics, and if you\u2019re a manufacturing business where cost of goods sold are a significant proportion of spend you should definitely be all over them.<\/p>\n
McKinsey believes that procurement analytics can help achieve cost savings of 3 to 8%, compared to traditional pricing models. Advanced analytics wrings more value from purchase data which enables better negotiation tactics, supplier management and purchasing strategy.<\/p>\n
Procurement analytics are absolutely affordable to SMEs and pay for themselves many times over, given the value they bring.<\/p>\n
Communicate and consult<\/h3>\n
The most important thing to do during hard times is to communicate. Communicate with your management team, communicate with the board, communicate with suppliers and seek to consult with specialists.<\/p>\n
In the case of Patisserie Valerie, it seems that few of these happened and Chris Marsh buried is head in the sand. For the avoidance of doubt, this does not help!<\/p>\n
HMRC issued what was supposedly a surprise winding up petition for \u00a31.1m. As CFO, Chris Marsh would have been fully aware of this way before he received it \u2013 we all know HMRC are big fans of sending out brown envelopes so the company would have received a lot of communication before the winding up petition.<\/p>\n
Suppliers were left unpaid, while new ones were sought. The wider finance team would have (or should have) been aware of the supplier situation. The fact that suppliers were continually being pushed back and invoices weren\u2019t even accounted for on the finance system must have raised significant suspicion from anyone in the accounts payable function.<\/p>\n
They say, \u201ca problem shared is a problem halved\u201d. Communication should be at the top of any list when the going gets tough and cost-cutting exercises need to be put in place.<\/p>\n
Task force<\/h3>\n
Set up a specific team focused on cutting costs; the emphasis here is on team, because no one person should do this on their own.<\/p>\n
Cutting the costs of butter is a false economy in a business where, literally, the key ingredient for their \u2018affordable luxury\u2019 pastry is butter! The task force team should comprise operations, finance and, given the severity in Patisserie Valerie, the CEO along any other relevant functions to truly identify the best and least impactful areas to cut costs.<\/p>\n
Any good consultant has a 3×3 matrix in his pocket; exploring all costs across the business and bucketing them with impact to customer on one axis and ease of implementation on another with value to the business as the third weighted dimension. This simple exercise incorporating all functions can really highlight the areas which can be cut without affecting the business too much.\u00a0<\/p>\n
Simply looking at the largest costs and switching them for a poor-man\u2019s alternative isn\u2019t always the right answer.<\/p>\n
Corporate governance<\/h3>\n
Ultimately, corporate governance was the area of greatest failure; the weak control environment spanned across Grant Thornton, CEO Paul May, CFO Chris Marsh and the wider finance function and poor oversight from Luke Johnson as executive director. Quite how these parties didn\u2019t have a clue is pretty unbelievable.<\/p>\n
Interestingly, Grant Thornton were Patisserie Valerie\u2019s auditors for 12 years; were they complacent, negligent, ignorant or just too close to the group and CFO to maintain a suitable level of professional scepticism?<\/p>\n
Equally, Paul May and Chris Marsh worked together since 1998; was Paul too close to Chris to challenge him or did he know what was going on?<\/p>\n
And as executive director, did Luke Johnson ask the right questions of his management team, or was his management team the right one? Ultimately, the buck stops with him.<\/p>\n
Good corporate governance should identify that costs need to be cut early on and put a plan in place; the earlier along the corporate demise curve the better and the more options available.<\/p>\n
Procure to Payment (P2P) controls<\/h3>\n
Following on from good corporate governance is specific process controls. Before you can understand where to cut spend, you need certainty of what spend is and what your current supplier liability position is. In Patisserie Valerie, both of these were allegedly out of control with \u00a310m of creditors completely unaccounted for.<\/p>\n
A robust P2P process, enabled by the right technology and clean data, should provide a clear supplier liability position at any point in time (whether through PO accruals, GRNI accruals, three-way matching or accurate invoice processing) and the right information to act on. Certainly, a business of \u00a3100m revenue should have had a strong set of process controls in place.<\/p>\n
The big question in Patisserie Valerie is, did they have the controls in place or was there a complete management override or worse, collusion? Either way, I\u2019m surprised Grant Thornton didn\u2019t pick up on any of this in their audit.<\/p>\n
It\u2019s absolutely vital you have a clear position, strong controls in place and good, clean data to make informed decisions.<\/p>\n
Conclusion<\/h3>\n
While the AIM listed business may have had multiple (reasonably homogenous) businesses operating across 200 sites, Patisserie Valerie really wasn\u2019t a large or complex business in the grand scheme of things.<\/p>\n
The most recent filed results showed group revenue in 2017 was only \u00a3115m with profits of \u00a316m. The group had very little complexity in its structure, product or services and it was selling only in the UK. They made cakes and sold them; pretty basic as a business goes.<\/p>\n
This failure is disappointing on many levels; hugely disappointing that an accountant could potentially have manipulated the books and records to such a degree \u2013 both the motivation and carry it out undetected.<\/p>\n
It\u2019s disappointing the auditors were blind to it; they may not be there to detect fraud but seriously, a material error of this magnitude should have been staring them in the face if the right questions were asked. They even awarded Patisserie Valerie IPO of the year in 2015!<\/p>\n
Thirdly, it\u2019s disappointing that the executive director, Luke Johnson, British entrepreneur, Sunday Times columnist, self-proclaimed \u2018projector\u2019 didn\u2019t have the executive oversight he should have.<\/p>\n
It\u2019s never easy when a business is making a loss or running out of cash but there are a great number of ways to remedy this equation; having the right experience is one of the key ingredients and leveraging just some of the examples I mention above.<\/p>\n
It was too little, too late for the incumbents at the time to change the course of the business through cost-cutting, despite their extreme measures. Chris Marsh was suspended, subsequently resigned, then arrested, bailed and is currently under investigation by the Serious Fraud Office. Paul May also resigned in November 2018 when Stephen Francis was appointed as chief executive,<\/p>\n
For all those wondering, I can put your mind at ease that the new owners (Causeway Capital Partners) have since changed back to real butter.<\/p>\n<\/p><\/div>\n
\u00a0<\/p>\n
\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"
Patisserie Valerie: How to strip out the fat but leave the butter After Patisserie Valerie’s ignominious fall from grace stories began to emerge of relentless cost-cutting as the company desperately tread water, including replacing butter with margarine in pastries. When a business is struggling, cutting costs is a necessity — but\u00a0it can be managed without damaging the business, writes Alastair […]<\/p>\n","protected":false},"author":2,"featured_media":5726,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[25],"tags":[],"_links":{"self":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts\/3747"}],"collection":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/comments?post=3747"}],"version-history":[{"count":0,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts\/3747\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/media\/5726"}],"wp:attachment":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/media?parent=3747"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/categories?post=3747"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/tags?post=3747"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}