Overcoming forecast uncertainty and volatility at Innocent Drinks
May 31, 2011 7:11:00 AM
James Davenport [JD], Finance Director at Innocent Drinks discusses the challenges today's FD's face in light of increasingly volatile markets and procurement's role in alleviating some of that volatility.
CG: Today we’re talking to James Davenport, Finance Director at Innocent Drinks. Thanks for joining me today James, can you tell me a little bit about your role at Innocent Drinks.
JD: Pleasure. I’m the Finance Director here. I’ve been here now for eight years and quite simply, I’m responsible for the finances of the business.
CG: Short and to the point – Great. A recent Bloomberg report stated that the soft drink industry had been hurt by people reverting to natural, healthier drinks such as Innocent smoothies. Can you tell me a little bit more about the food and beverage industry as you see it, in light of changes in consumer buying behaviour?
JD: Sure, long term consumer trends are for better quality foods, better tasting foods, food with a good provenance and food which has variety. I think that all plays to what we do.
There’s no doubt, however, that over the last two years the amount of disposable income that people have had has shrunk, and this has had an impact upon shopping habits. That’s a challenge companies that operate at the premium end have had to work through, and in particular they have had to demonstrate value to the consumer.
CG: Are you finding, given what you have just said, that you’re getting more business as people are steering away from the soda and soda carbonates?
JD: Interestingly over the last few months within the soft drink market, energy drinks have actually overtaken carbonates, which is quite a big change in the market. The chilled juice segment of the soft drinks market (in which we operate), is actually quite a small share of that market in total however it is growing rapidly (about 10% last year). Our focus is to continue to develop new products and marketing campaigns to reach out to consumers and hopefully encourage them to buy our drinks.
CG: Sure. There’s no chance of an Innocent energy drink then?
JD: No, it’s a potential opportunity but we’d have to find a natural and nutritional way of doing it. There are fruits which have properties which will help support your energy needs during the day, but it’s quite a difficult thing to create a drink without any of the other non-natural ingredients.
However keep your fingers crossed that we can find a natural solution.
CG: I will watch this space closely. Coming back to the consumer trend towards healthier beverage options, this has had a major impact on the overall beverage market, which is probably why in 2010, Coca Cola bought a majority share within Innocent Drinks - is that correct?
JD: Yes. In 2008 we started fundraising and completed in mid-2009. As a business we had grown revenue to £100m on an capital base of £250k and we saw the opportunity to grow further, particularly into Europe. Coca Cola also wanted to develop their proposition in Europe in healthier drinks and so we were a natural fit for each other
Coca Cola took an 18 percent share of the business through an investment of capital. Last year there was a further transfer of shares between shareholders - the main transfer was actually from the original business angel who had invested that £250,000 back in 1999.
So yes, they do now have a majority share, however control remains with the original founders – one of the unique elements of how this deal works
CG: So how does that relationship work then with Coca Cola - What are your key relationships with Coca Cola?
JD: We have a number of different relationships with Coca Cola. On a quarterly basis the CEO for this part of Europe pops down and we talk him through the performance of the business. We then discuss what we’re thinking of doing and what his ideas are.
I have a good relationship with the CFO of this part of Europe - we meet once a month and have a chat about progress.
I have to say I’ve been genuinely delighted by how supportive Coca Cola have been and how helpful they are. They’ve got loads of great insights on consumers, developments in the soft drinks market, and new innovations. They are there to help us with as we need it but if we want to do our thing, then we just do our thing.
CG: Given Coca Cola’s interest in Innocent, do their objectives filter down through to you or do still maintain your own set of independent objectives?
JD: Coca Cola have got a long term strategic objective to try and become number one in juice in the world. They are already number one in the USA, South America and Asia. However I think in Europe they were trailing behind in about third or fourth position. We also want to be number one in Europe and so our objectives are naturally complementary.
CG: What are the objectives for the finance team at Innocent Drinks?
JD: I categorise them into five different things;
- Financial stewardship (which is the nuts and bolts of what a finance team does)
- Cash management (which is similar to what the treasury does)
- Delivering numbers (which is really understanding what financial position and performance we’ve had to-date along with what we expect to do with the remainder of the year)
- Having a more valuable P&L (so actually helping to enhance the quality of decision making)
- All round systems and processes (which again is the nuts and bolts of what the finance team are involved with)
CG: Fine. Innocent Drinks is quite a small organisation and I gather communication flow is easily achieved. How do you communicate the objectives to the rest of the organisation, and are they all aligned to these objectives?
JD: From a company perspective, there’s a number of objectives around the business trajectory which consists of; how consumers view the brand; how many of them buy an innocent product; and then financial metrics around revenue, gross margin, and profitability. Each one of these objectives has a number of projects directly associated with it so there’s a clear line of sight as to what each team in the business needs to work on.
For people’s own individual objectives, whatever they do is aligned against one of these top level objectives with a clear line of sight. Whether it’s collecting cash, or doing supply chain stuff, they can see how what they do fits with what the organisation wants to achieve.
From an internal communication perspective, this is something the company spends quite a lot of time on. There’s a number of things we do which works quite well:
- On a monthly basis the whole company gets together and we give the company an update on what performance has been like. We talk about our objectives and how we’re delivering against those.
- We also don’t have any teams sitting together - the members of a team are separated and spread out across the business and this encourages cross-functional discussion. For example I sit opposite the head of IT, behind me I’ve got my supply chain director, next to him is a product developer, so it’s an interesting mix of people sitting amongst each other. I don’t have any finance people sitting within 20 metres of me. Which is probably just as good for them as it is for me.
We have found there is a great benefit of talking frequently to the team and being open with progress and challenges that we face as a business. As a consequence employee engagement has really improved and people really buy into what we’re trying to achieve.
CG: This sounds like a great approach. You said your supply chain director sits next to you, how closely do you work with procurement and supply chain - and on what level (direct and indirect)?
JD: Our supply chain is very interesting. We spend a lot of money buying fruit, we then spend more transforming it into smoothies and then spend some more packaging it and delivering it to our retailers. So our supply chain pretty much covers everything from the field to the shelf.
Our Supply Chain Director has a large amount of supply chain experience from a number of different organisations and has got a lot of expertise in what he does, including the procurement function.
When he started he developed a procurement team who were responsible for all those direct spends. I’ve got someone in my finance team who works with the supply chain team to look at what their forward buys are and to understand the whole procurement piece - they won’t question whether it’s the right price or not because they don’t have the expertise to do that but they will understand the nature of the buy and the financial consequences.
In terms of indirect spend, this year, one of the guys from the procurement team on directs is now taking the processes that they’d developed for directs and is tailoring it to indirects.
CG: That’s an interesting way of looking at the indirect purchasing model, do you find that there are similarities between the two?
JD: Well you’ve got your standard procurement models whether they are seven steps or six steps or three steps that can be applied to most purchases.
Our supply chain team uses the seven step model and a lot of it is relevant to what we do for the indirects. What you tend to find is that you tailor it to the nature of the spend you have. So if we are going to do a massive advertising campaign, we may go right through the step sevens however if we are buying staples we would scale that down.
CG: Do your marketers go straight to your indirect procurement guy and say ‘this is the project plan, what do you think is best?
JD: The approach that we’re taking with this is that the procurement guy is there to support the team, not to lead the procurement process itself.
As an organisation we strongly believe in accountability for the functional heads. They are the decision makers and they are accountable for the decisions they take. We help and support them as much as possible: whether we think are they making a good decision or whether that decision could be improved, but ultimately it is their call.
CG: Fine, and outside of marketing, what area of the business are you looking at reducing your indirect spend?
JD: We have only just started focusing on our indirects and what we are doing at the moment is health checks in the different areas of the business to see what level of support they could benefit from.
The procurement guy has spent some time with the consumer marketing team (think adverts), and with the customer marketing team (think consumer touch points in a retailer)
Moving on from there he spent time with the IT team and with what we call the environment team (the team who organise the office).
He hasn’t spent much time with the HR team yet, he’ll get to them eventually but it’s not a large amount of spend there so we are not prioritising it at the moment.
CG: Okay, do you have a breakdown of how big direct verses indirect spend is?
JD: The indirect spend that he is going to be supporting this year is about £48m. The directs would be approximately £110m.
CG: Okay, fine. Now obviously he’s quite new and the supply chain team has been in place for quite a while, when they bring the numbers to your table, do you ever challenge the numbers you are being presented?
JD: If we focus on directs first of all, we have contract positions with a number of the suppliers who transform the fruit into smoothies. We get involved in supporting the contract variables to understand the financial consequences. We have five different co-packers who produce our smoothies, so there’s a good deal of competition.
When it comes to buying the fruit, it gets more complicated. You may think fruit is a very simple commodity to purchase, but actually it’s not because we have quite a lot of bespoke ingredients in our product. Also the price of the fruit is based on what the market price is - if the price goes too high, you may need to reformulate your product so you’re not using as much of that expensive ingredient and that impacts the quantity required
CG: And are you finding that now with commodity prices rising, especially fruit and food, you are revising your formula as we speak?
JD: The biggest impact has been currency. About 60 percent of the cost price of our products are denominated in euro’s and dollars and so when the pound crashed in 2008 and 2009, it had a much bigger impact on the cost price than anything else.
CG: Okay fine. If we could step back for a moment - in your opinion, what does procurement mean? It’s a very broad term I know but if you could define procurement, how would you define it?
JD: For me it’s about getting best value from the suppliers that you deal with. That value may come from getting more for the same (or less), it may come from a reduction in risk, or it may come from improvements in service and quality.
CG: Do you think your procurement team is the embodiment of what you have just said?
JD: I think within the supply chain they are doing a great job however we’ve only just started on indirects. Overall, it’s not about the procurement team doing a great job, it’s about the business doing a great job. I think by the end of this year as we review where different parts of the business are, what their doing, how effective their being in their buying, we’ll have a much better sense of how easy (or difficult) it’s going to be to embed best practice.
All we want do as a business is buy fruit, squash it, and sell it to people, it’s really simple. So, if we can do that in a cheaper, or a more efficient, or a less risky way then that’s a great thing, and actually it means the team are doing their jobs better than before, which is a good place to be.
CG: What do you think the ideal role of procurement is then?
JD: I think it’s important for us to have a strong procurement team when working with directs, given the volume of spend we have. With indirects I think it’s more about developing and embedding a process so that people in business are going to be able to buy more efficiently. I believe in personal accountability and responsibility so, helping people do their job better is really the key thing.
CG: Finally, would you like to see finance and procurement working closer together?
JD: I have no doubt that with the embedding of the improved process for indirect spend within the organisation we’ll get better value than we currently do now.
The big challenge for FD’s at the moment is the high degree of uncertainty and volatility in future forecasts. If you have volatility both in revenue and costs, it is difficult to manage. If you can take some of that volatility out of the cost side, because you have a better understanding of what spend is actually going to be incurred, then that’s a better place to be as it enables you to focus on the revenue side. I think this is where procurement’s importance will be felt over the next 12 months and onwards.