Capex Spending Grows More Complex
E-commerce infrastructure and cybersecurity initiatives. HVAC equipment upgrades and energy management systems. These days, retail CFOs must allocate capital expenditures to an ever-growing list of components — not all visible to the public but critical to corporate health. And while the role of the retail CFO has broadened considerably in recent years, becoming more strategic and more integral to business decision-making, capex spending remains a top item on their agenda.
“The CFO’s role in prioritizing investments, in what gets done, is still there. I’m seeing others, such as the COO and chief merchant, also taking a seat at the table, but the CFO is absolutely still running the play,” said Jill Puleri, senior VP and general manager, Oracle Retail.
A veteran industry supplier added that in today’s business climate, finance teams have been given more responsibility to understand the spending of their respective firms in all areas.
“It may seem like added scrutiny, but it’s really finance needing more information in order to understand the need for spending and how it affects the business plan of the company,” said Bob Almond, chairman of the board, Nest, a national facility services company, based in Gloucester, New Jersey.
For Jim Gorman, senior strategic account manager, Benjamin Moore & Co., Montvale, New Jersey, the CFO is an “absolute necessary advocate” for major rollout and renovation projects.
“We are seeing more involvement from procurement, which reports up to the CFO,” he added. “Procurement is more personally involved at meetings, with a focus on trying to understand the investments and ROI, which is a good thing. We want them at the table because we want the CFO to support our parts of projects.”
Indeed, suppliers across the board agree there is definitely an increased emphasis on a better return on investment in today’s competitive environment.
Gorman recalled a “store of the future” project that one of his retail customers was developing. When it was brought to the company’s CFO, he asked one question: ‘What’s the ROI?’
“No one had an answer,” Gorman said. “The CFO told them to come back when they figured it out, and the project was halted.”
Almond added that his company does not allow its sales team to make presentations unless a properly positioned finance representative attends the meeting. Having finance and purchasing involved is invaluable. Both are looking for proper business practices.
“The merit of the project must stand on its own,” Almond said. “It must be a business plan, not a dog and pony show. Clients (retailers) want to hear how you help the bottom line of the organization. They want proper value for the money spent, which doesn’t necessarily mean low costs. You need to be prepared to talk strategies for the future.”
COMPLEX: There’s no getting round that fact that this is a time of increasing complexity for finance chiefs. Confronted with regulatory changes, bottom-line pressures, international expansion, cyber threats, fluctuating exchange rates, and an array of disruptive technologies playing out online and in the store, these executives are charged with making investment decisions in a time of rapid change in the retail industry. They are also involved in determining the balance of online and offline retail assets.
“There is an ever-increasing set of factors impacting the CFO’s relationship with overall capital investments and return on investment across retail,” said Adam Pressman, a partner in the retail and strategic IT practices of global strategy and management consulting firm A.T. Kearney. “The CFO’s role in strategic business decision- making increasingly is in determining the rebalancing of the store portfolio and fulfillment network in a way that most effectively meets customer needs.”
As retailers grapple with changes to their portfolio, they need to determine to what degree they should reinvest in their remaining stores and e-commerce capabilities.
“The key is to understand the desired objectives of those investments and seek tangible results, and the retail CFO will play a central role in driving this,” Pressman said.
But even as CFOs must allocate ever more resources to cyberselling and various allied expenses, the overall bottom line hasn’t increased in a highly competitive and constantly changing environment.
“It’s increasingly a challenge for a CFO,” said Chris Donnelly, retail industry strategy lead for global consultancy Accenture Strategy. “The overall level of capital expenditures hasn’t changed. Now the CFO is struggling with new areas to invest it in.”
A growing share is being invested in areas related to technology (a broad area to be sure), according to BDO USA’s 2015 survey of retail CFOs. The business areas in which the respondents said they planned to invest the most capital in 2015 were IT systems and technology, followed by e-commerce and the mobile channel, advertising and marketing.
“It really boils down to the fact that people are doing everything on their phones,” said Jennifer Di Giovanni, audit partner-retail consumer products practice of BDO, Los Angeles. “If your IT infrastructure is not in place, that could be a loss in revenue.”
This is not just a financial reporting function, Di Giovanni noted. Information technology, cybersecurity and whether to invest in physical equipment or cloud-based services have become yet another area that the CFO must become an expert in, rather than delegating to others, observers say.
“CFOs really can’t leave it to the IT department,” given that a lack of proper infrastructure can affect revenues, Di Giovanni said, and this is particularly true given that technology is a merchandising technique used to engage the customer.
But the CFO’s knowledge must extend beyond what is selling where. The oversight of security, previously considered an IT concern with little direct involvement from the C-suite, has shifted dramatically and rapidly.
With more sales and more expenditures being allocated to e-commerce, cybersecurity costs also are a growing sum and matter of direct oversight. More than half (56%) of the retail CFOs responding to the BDO survey said they had increased their cybersecurity spending in the last 12 months.
“The CFO needs to be looking at the books and balance sheet, but also compliance,” added Ted Levine, global sector leader, consumer products and retail for Capgemini, a global consultancy. “Every day, you see someone else who has been compromised.”
Damages to retailers that fail to secure their data extend beyond dollars and cents, as was noted in Deloitte’s CFO Insights report, “Cybersecurity: Five Essential Truths.”
“While the average cost of a data breach may be well documented, the long-term effects on corporate reputation and brand significantly add to the toll. In particular, breaches of customer data can lead to a breakdown in trust that could inevitably hurt the top line... ,” the report stated.
CLOUD: Other IT-related capital expenditure decisions for the CFO loom in the future, including those related to the industry’s increasing