Warehouse woes - Superdry’s operations hit the finances

At the recent BUSS3 workshops we considered how a seemingly insignificant change in operations could have a potentially significant effect on the financial performance of a retail business if that change went wrong. We used the example of retailer Superdry to help make the point. And now the full cost suffered by Superdry as a result of their warehouse problems has been disclosed in the latest financial results from its parent company Supergroup.

This BBC article explains the overall impact of the disruption caused when Superdry changed its warehousing and distribution systems.

The problem was first disclosed On 5 October 2011 when shareholders were informed about “specific short-term systems and operational issues at the Group’s UK distribution centre”. The new warehouse system had resulted in stores not receiving the full range of sizes for the Superdry product range which, as a result, led to lower-than-expected revenues. Given that high street retailers like Superdry have high fixed costs, the lost margin on these sales would directly affected the bottom line profit. The effect on full-year profits is estimated at £8.8million.

At the time of the announcement in October 2011, investment analysts were less than impressed with Superdry management. This quote from the Lex column in the FT summed the feeling up well:

“The episode appears to be another case of a company prioritising sales growth over the less sexy mechanics that turn revenue into profit. Last year, the number of its UK stores grew by almost half while international stores doubled. Meanwhile, stock levels varied. Revenues grew about 70 per cent last year, but inventories rose 150 per cent.”

A classic case study of how rapid expansion can lead to operation issues. And a great example for students to use to help illustrate the connections between functional strategies and financial performance.