From Cash Registers to Cash flow

How do you convert cash registers to cash flow? Simply put, that's the question at the core of working capital management in CPG retailing. It's a business that usually deals in cash receipts at the point of purchase, with a relatively large and ever-shifting inventory on the front end. These make for a unique set of challenges in building cash flow.

It's a challenge with a lot at stake. Strong capital management gives companies the quickest, cheapest and most versatile form of capital: cash reserves. Top industry players are using strong net cash balances for purposes like paying off debt and expanding.

Whole Foods has increased its cash balance from $2.7 billion in fiscal 2011 to $3.4 billion in fiscal 2013. In its annual report, the company says, "We plan to use cash flow primarily for capital investments, to improve our current debt coverage ratios, to pay cash dividends and to repurchase stock."

Publix, which showed a cash balance of $2.6 billion in fiscal 2013, says in its annual report, "The primary use of net cash in investing activities for 2012 was funding capital expenditures and net increases in investment securities....These expenditures were incurred in connection with the opening of 31 new supermarkets (including 12 replacement supermarkets) and remodeling 113 supermarkets."

What makes capital management even more important is that for many retailers, it's one of the few options (or the only one) for raising enough money to grow, says Eric Vroonland, principal in strategy and operations practice at Deloitte.

"In retail specifically, I would say one of the challenges relative to working capital management–and this is especially true over the last five years or so–is the fact that the retail market in general is sort of a zero-growth business right now if you look at traditional brick and mortar," Vroonland says. "And so as a result, what has come about from a working capital and cash management perspective is really how to improve inventory integrity and productivity of your square footage."

"The retail market in general is sort of a zero-growth business right now if you look at traditional brick and mortar."




Because most retail sales are cash, retailers tend to have maximum liquidity in their revenue. That also means, however, that improving receivables–a basic step to shoring up cash flow–isn't usually an option, since the concept of "receivables" is almost nonexistent. (It becomes more of an issue in drugstores that have to deal with Medicaid and other government reimbursements, which can lag for weeks or months.)

Inventory is the most obvious place for saving money. Keeping inventory to a minimum, while still maintaining adequate stocks, is one of the trickiest aspects of retail operations.

The key, Vroonland says, is rigorous review of all product assortments and measurement against defined thresholds: "A regular cadence of line reviews to add or delete items from your assortment," he says. "For certain categories, retailers may have a rule that for every new SKU they add, one needs to be eliminated."

Ideally, this kind of review would be built into the retailer's automatic ordering process. "You would hope that your inventory system marks this, but you would want to understand where your inventory is age-wise, and essentially be able to mark it out of stock if the merchant hasn't been able to clear it," Vroonland says.

The challenge is to trim inventory while keeping out-of-stocks to a minimum, says John Greener, managing director for retail consumer practice at PwC.

"If you can optimize your in-stocks and minimize the inventory investment to achieve those in-stocks, you have a better financial equation because you're reducing your working capital, but you're still driving sales," Greener says.


The key is to avoid, as much as possible, out-of-stocks in vital categories.

"In the grocery trade, there are certain categories where you just can't ever be out of stock," Greener says. "Grocery is one of those shopping trips that is, generally speaking, a chore, and the last thing you want to do is have Mom come to the store and not find her eggs and her milk and certain [other] items that she buys for her kids."

"In the grocery trade, there are certain categories where you just can't ever be out of stock."



Shaving inventory and maintaining adequate stocks are two goals that are, if not mutually contradictory, at least in tension.

"There might be a mindset in the organization that everyone wants to be at 100 percent in stock all the time, with all the products," says Keith Jelinek, director in global retail practice at AlixPartners. "It sounds good, but it's not realistic."

To be done right, inventory reduction has to be fine-tuned down to the SKU level and single percentage points, if not fractions. Between 95 and 98 percent in-stock across the board is the norm for grocers and other high-volume CPG retailers. Once you get into the high nineties, the amount of stock you need to carry to avoid out-of-stocks increases exponentially with each percentage point, Jelinek says. That's why it's important to try to save on the SKUs where out-of-stocks would be less harmful, either because they're marginal items like maraschino cherries or they're commodities like dried beans where consumers are more willing to switch brands if needed.


The cash nature of most retail sales gives retailers an inherent advantage in capital management: they can delay payment for goods they've already sold. The average grocer turns over inventory at least 26 times a year, but usually doesn't have to pay until 30 days, Greener says.

"Most retailers are actually making money by getting cash in, through selling the product faster than they have to pay vendors for it and negotiating terms," he says. "Especially if you're dedicating physical space to a completely new, innovative [product] they're bringing in. You're going to have that as a negotiating point with vendors....You're selling that product in two weeks, but you're not having to pay for it until 30 days."

Negotiating that kind of time lag is easier for some products than for others. One important factor is the supply chain. In this context, it can be helpful, Jelinek says, to consider the particular needs of four classes of products: non-food, nonperishable food, perishable food and private-label items.

The last is important because many retailers buy private label products from a third-party manufacturer. Because of this, "private label has some fairly significant implications to working capital and the supply chain," Jelinek says. Manufacturers and distributors of national brands often are willing and able to make relatively small, frequent shipments, but a private label manufacturer often won't do so. Requiring large shipments over longer periods means that retailers buying private label goods have to tie up capital longer to get them.

Different stores often need to carry different levels of inventory, even within the same chain. "Based on demographics for the stores and where your stores are actually located and the customers they serve, it's very seldom that the same assortment of product is necessary for every store," Jelinek says. "If you have a product line that typically carries 50 SKUs, there are some stores where it might make more sense because they might be more urban, and people might buy more of a smaller size of an item, where maybe you only carry 30 of the SKUs instead of the whole 50 [in the] line....If you manage it correctly and really map out your store demographics for the customers against the assortment, you can eliminate SKUs and not lose any sales and free up more working capital."


Retailers sometimes make arrangements with CPG suppliers, for various reasons, that have a direct impact on cash flow. One of the most common is direct store delivery (DSD). Many items with relatively short shelf lives, like fresh bread and fried snacks, get delivered by DSD because it's the fastest way to get them into the stores. Other nonperishable items like soft drinks get delivered by DSD simply because it's more convenient for the retailer to receive them that way, in large part because the delivery person takes responsibility for stocking the shelves. This form of category management may relieve store personnel of stocking duties, but it puts inventory control in the hands of the supplier.

"The challenge with [DSD] is the overstocking of inventory, because you're taking ownership of the inventory at the point where it hits your shelves," Deloitte's Vroonland says. "So if Frito-Lay is putting chips on your shelf, then there may be excess inventory, versus what you would potentially need." Another arrangement that has more potential benefit for retailers is pay-on-scan, whereby the goods supplier isn't paid until the retailer actually sells the item. It presents a clear advantage in terms of stretching out payments. "You've already basically sold the item at the point where you own it," Vroonland says. "CPG companies been more reluctant to go down that path, I think for obvious reasons." Pay-on-scan probably won't make much of an impact on most retailer's payment schedules in the long term, but they should be alert to the possibility for such arrangements on individual products.


Since inventory control is a big key to cash flow, technology that allows tighter control is an important emerging tool. Jelinek identifies three broad areas of technology that he says have great potential in this area.

Software that allows demographic "clustering" of individual stores can help keep them supplied with products that are important to customers in that shopping area. Pricing systems can use historical sales data to set everyday low prices at a profitable level and to time and set parameters from promotions for maximum advantage. Replenishment systems have grown in sophistication to where they can detect seasonal and other sales cycles for individual products.

Replenishment systems can also be fine-tuned, even when they're a module in a larger enterprise resource planning system, Greener says. Software from PwC can help fine-tune existing replenishment software by suggesting tweaks to the replacement algorithm down to the individual SKU level.

"Fine-tuning those replenishment systems allows retailers to get their inventory where they want it and bring their inventory down," Greener says.

For a low-margin business like CPG retailing, especially in tough economic times, optimizing cash flow will always be an important potential source of capital.

"One of the things we have seen since the downturn in 2009 is that you see the balance sheet and you see cash flow becoming more and more important in CFO's and in companies' minds," says Tim Gross, a senior manager in Deloitte's strategy and operations practice. "It increases your financial flexibility because you're able to self-fund projects and promotions or things you have been wanting to do and not had the cash to do. It enables you to make investments in your future."