Horses for courses
Written by Deborah Ritchie
As headlines remind us again and again, brand reputation can be lost in a flash, as a result of a corporate gaffe or other reputationally risky incident. The last few years have seen the banks taking most of the flack when it comes to negative press and lost consumer confidence, but the retail sector is proving to be increasingly successful at jostling for position of public enemy number one.
Modern threats to the traditional High Street retailers, online outfits and multi-channel retailers include an array of compliance, financial, strategic and operational risks. And it is this last that is the topic of much conversation this month, as the horsemeat adulteration scandal gallops its way through businesses and supply chains, upsetting customers and investors across a geography that began in the UK, spread to Europe, and, within a very short time, extends as far as South America.
Indeed, the complex, global nature of the supply chain makes it one of the greatest concerns for the retail sector today, so much so that some companies choose to reverse some cost saving procedures to attain more control over potential supply chain disruptions. Further, recent Black Swan events have highlighted the vulnerability to disruptions of companies in both the developed world and in emerging markets.
Trevor Partridge, a business continuity and risk management specialist, explains: “The operational risks associated with information, communications and technology and supply chain tend to be the ones that give business continuity managers in the retail sector the biggest headache. However, the greatest risk facing business continuity management in retail today is one of complacency.”
As the founder and former chairman of the Retailers Business Association, Partridge has long been active in enabling retailers to meet in a forum environment sharing good practices. “Business areas within an organisation that are perceived to be a cost cow are therefore more likely to be subjected to the financial knife,” he suggests. “Given this climate, it is essential for business continuity management to stand firm and challenge any cuts vigorously. Where business continuity management line management, who in many cases are retailers oblivious to risks, remain unchallenged, then business continuity management in retail is likely to become primarily an incident management-centric process.”
Following a raft of generally downbeat reports and a number of High Street names – including HMV, Jessops and Blockbuster – going into administration early this year, ONS figures cite household goods, including electrical appliances, furniture, hardware, music and video, as showing the sharpest month-on-month drop with a decline of 3% – the biggest fall since January 2010. And with like for like sales in the sector expected to remain unimpressive in the immediate future, the sector looks set on the path of tough times, and no time for business continuity to take a back seat.
Partridge has over 30 years’ experience working for a top 100 FTSE company in the retail sector, and believes that dealing with commercial impacts is everything to do with business continuity management, regardless of the buzz words, especially when things tend to go wrong. “The perception is that commercial risks are predominantly dealt with at senior and board level. Market share, customer service and product quality control are all words that are less likely to be mentioned in the corridors of business continuity management world. Let’s not be fooled by this misconception,” he warns. “I was forever encouraging colleagues in the buying groups to consider risks that could impact on their bottom line. These included civil disturbances associated with farming methods, supplier’s security arrangements for their raw materials to avoid contamination and business continuity management strategies for any culpable suppliers.”
At the time, if these incidents were not managed and dealt with effectively, through good joint, operational incident management procedures, then the reputation of the business would have been seriously affected. “This is clearly illustrated by the impact several businesses are experiencing at this juncture in relation to the horse meat scandal and I’m sure there will be several more that are exposed before this issue runs its course,” he adds.
From the volcanic ash cloud through to the fall out from Fukushima and now the emerging horsemeat scandal, it is clear to see why there is so much talk on dependencies in the global supply chain, and in the retail sector much more so.
“The retail sector has a much more diverse supply chain than in any other sector,” explains Will Brown, UK head of business resilience at KPMG. “This comes down to issues with logistics and handling. If you take a fashion retailer, for example, which will have thousands of containers all around the world at any given time, they rely their goods being moved within a finite window, and major risks start to manifest themselves quickly when they don’t. This is obviously exacerbated in FMCG.”
Add to that the uncertain economic conditions, and attaining resilience is particularly tough. “Whether you are selling broccoli or equities, is that with a really hard market the emphasis on ROI today is really something else,” Brown explains.
Moreover, Brown sees the sector spending less time and money on crisis management, business continuity and recovery, and even less, if at all, on testing, which is now largely managed in-house. People no longer have the time or the budget or the inclination to do things that are not directly impacting the bottom line. In this regard, organisations are starting to scrutinise spend very carefully and prioritise as required, putting even further pressure on the components of their individual supply chain to demonstrate continuity and resilience capability. “Dependency on suppliers is increasing as a result, because it becomes an issue of assurity,” he adds.
Where the retail sector differs from banking or financial services is that in the main, retail do not have defined regulations which will largely dictate a certain level of resilience. So just how resilient can processes be?
“The approach needs to be appropriate and fit for purpose. It does not need to be ‘leading edge’ per se.”
Who does Brown think should own continuity and resilience, then? Controversial as it may sound, he believes that can be anyone. “It does not matter, as long as someone does. As long as the individual has enough weight in the organisation, it really does not matter. We have clients where it sits with the CIO, CRO COO and CFO, but having suitable seniority is key to ensuring it’s taken seriously by the organisation.”
Peter Morris, business continuity coordinator at Debenhams, adds that while continuity is a business requirement, the fact that retailers are not legislated for business continuity is what can sometimes make it a difficult sell. “That’s a tough challenge,” he says.
“It can be really hard to get the board to understand that, even where there is a direct impact to the bottom line, business continuity can add value. It is important that business continuity professionals in the sector pick up on that.”
At the trendier end of the retail sector, the nature of supply chain risk can vary immensely. Debenhams’ Morris speaks of how during one of its regular investigations elements of the department store’s supply chain risk were observed to converge, rather than fanning outward, as one might expect the traditional supply chain network to. With that, you don’t get the domino effect that gets wider and wider; rather it starts to point back in inwards, and can end up with a pocket of weak links all converging to one primary supplier, where components such as say, zips, buttons or fabric dye, for instance – come from a single supplier.
Looking ahead, this retailer is set to factor in the emerging risk of power discontinuity. “As any business we need to keep our costs down and ensure a continuous supply where we need it. We need to mitigate the future risk of power cuts that will result from the time lapse in the creation and development of gas fields and power stations,” he says, adding that they also expect this to impact on transportation and logistics.
With the development in the UK of out of town shopping centres and the subsequent demise of the High Street, retailers are turning more and more to on line sales for growth. These days, many retailers’ multi-channel offering accounts for a large percentage of their annual turnover,” Partridge says. “Therefore, the resilience of this end-to-end operation, which includes ICT and supply chain, must be robust in order to continue to deliver to the customer at the right time, and to the right place. Otherwise, as several retailers experienced last Christmas, market share could be lost, with untold financial impacts.”
Steve Mellish, director of Mellish Risk and Resilience, and former head of business continuity at Sainsbury’s believes that through effective engagement with your tier one suppliers on the subject of risk and business continuity it could potentially create a ripple effect. “if you are asking your suppliers about how they maintain service and provide assurance on the products or services they supply to you, why would you not also encourage them to do the same with their tier 1 suppliers? This could go a long way to establishing trust and accountability”. All retailers will have their own technical services departments that run checks on suppliers, and this should help achieve that goal.
“You need the right balance of bureaucracy but also business trust is critical, as otherwise you wind up with customers left wondering. And when I say customers, I also mean tier one suppliers.”
Mellish is in no doubt that as a result of the emerging horsemeat adulteration scandal, that the existing systems and processes will be reviewed. “I am sure there will be some significant change,” he says.
“It is still early days, but my understanding is that they have not checked for horse meat products in processed food for 10 years, so is there perhaps something more the Food Standards Agency (FSA) could be doing in terms of food product safety? How good are communications and information sharing between international agencies?” he wonders.
Well, the British Retail Consortium (BRC) has issued a statement on its website about the failure to prevent horsemeat from entering the supply chain.
“The large number of tests on products has shown this is not a widespread breakdown of the system and is probably due to deliberate fraud but we operate on a zero tolerance basis and are determined to both identify affected product and ensure it doesn’t happen again,” its reads. “We routinely test for a number of issues to ensure food safety. We also routinely test for the % contents (sic) of meat in products but as horsemeat is not sold in our products would not routinely test for it. We do change testing regimes regularly based on intelligence from both the food industry and FSA to prevent contamination but there was no indication that horsemeat was an issue. One of our key issues for review on this incident will be how we improve intelligence, particularly at a European level.”
The BRC site does also make reference to the need for greater levels of collaboration between relevant agencies: “The best testing is always intelligence led to identify issues and test for them so we will encourage Food Standards Agency to take a lead with other Member States in improving the exchange of intelligence across Europe,” it reads.
Meanwhile, the FSA is investigating, in conjunction with other government departments, local authorities and the food industry, how some beef products on sale in the UK came to contain horse meat. While over 99 per cent of tests contained no horse DNA at or above the level of one per cent, the issue that it has, is the problem.”
The FSA’s main focus at this point is on gross contamination of beef products with the substitution of horse meat, where there is more than 1% horse DNA detected in a product. The FSA believes that “such levels of horse DNA indicate either gross negligence or deliberate substitution of one meat for another”.
Here, it is the element of trust that has been lost. A quick survey among your colleagues and friends will show you that fewer are concerned with the issue of eating horsemeat; more so with the fact that thought they were eating something else. And if any food contains an ingredient that has not been declared, does that rule out the possibility of another rogue ingredient? Bute, even?
Well, to date no tests on samples containing horse DNA have found the veterinary medicine bute, or phenylbutazone, but it is a fair point for consumers to raise. Eric Smith is an international consultant, researcher and trainer with extensive qualifications and experience in food safety, meat technology and science, and environmental health. He is acknowledged as a trouble shooter and solution finder in food related crisis situations, and has regular assignments with meat processors, food importers and government and statutory agencies. Smith worked with international government officials during the BSE crisis in 1996. Now head of food safety at crisis management consultancy red24, Smith explains that horses have long been slaughtered in the UK for human consumption, undergoing the same procedures as other cattle. “The UK exports most of its horsemeat to Belgium and France, as it has done for many years, it’s a normal procedure. Every organ, every carcass is inspected to make sure it’s fit for human consumption.”
“The issue at the moment is not one of contamination, but substitution. That makes it an adulteration problem, and then you have a problem because the product is not of the nature that the consumer expects, so you are breaking the statute.”
Indeed, Section 14 of the Food Safety Act indeed states that it is an offense to sell food that’s not of the nature described, and where there is anything less than 100 per cent watertight supply chain management, there is product recall.
“People are very conscious about recalls. No one wants one, because it means loss of sales. But, fortunately in food safety, you are bound by a statute, and in many cases, some of these retailers are recalling without having insurance cover.
“There are more product recalls today due to allergens than ever before,” Smith explains “And that’s due to the supply chain.”
And with the advent of social media, bad news travels fast. The increasingly seamless spread of information through social networking platforms makes it so easy, so where a problem may once have been locally contained, it is now much easier for that complaint to become viral.
“Within an hour, the entire globe knows about it. It’s an issue that no longer surprises us. Sooner or later, when the supply chain fails, people suffer from a recall. We try to minimise the risk but people are very conscious now, so that’s not always possible,” Smith says.
And it is common knowledge that product recall policies only kick in if proof of possible harm to health can be established, so, in the case of the horsemeat adulteration story, manufacturers need to be careful because they may not be covered.
This has not stemmed the uptake of cover, however. Large number of recalls has in turn promoted many UK businesses to take out more cover. Figures from law firm Reynolds Porter Chamberlain (RPC) show that food recalls alone doubled in 2012. Meanwhile faulty electrical goods drive rise in consumer goods recalls.
RPC says that 2012 was a year when product recalls showed how dramatically they can impact a company’s fortunes. Chinese-made products account for a rapidly rising proportion of UK recalls of dangerous or faulty goods.
RPC says that Chinese made products accounted for 78 per cent of all UK non-food consumer goods recalls in 2012, up from 54 per cent in 2011. It explains that the rising proportion of recalls involving Chinese-made goods may be fuelled by increased consumer demand for low priced products made in China as the weak UK economy squeezes disposable incomes.
Jason Bright, a partner at RPC, comments: “Significant classes of products manufactured in China still do not undergo the same rigorous testing as European-made products. Combine this with China’s ever growing share of manufactured goods and you can see why there has been such a dramatic rise in product recalls over the last five years. Last year China faced both rapid wage inflation and slower economic growth, which has squeezed manufacturers’ margins and put pressure on them to cut corners in a bid to boost profitability. Despite the best efforts of the Chinese government that has led to too many examples of faulty goods and more product recalls.”
“The complex supply chains for Chinese-made products to reach UK consumers mean that if a batch of goods is faulty, the problem may not be noticed until it is too late and a recall is needed. Importers are supposed to conduct quality checks of the product, but it can be difficult to spot flaws when the business is not involved in the manufacturing process.”
The number of UK product recalls dipped slightly from 291 in 2011 to 260 in 2012, but is still higher than in 2009 (205) and 2010 (229).
Notable examples included Manganese Bronze (the maker of London’s black cabs) entering administration after recalling 400 of its fleet following a problem with the taxis’ Chinese made steering boxes and Britvic’s shares plummeting 13 per cent after the recall of its Fruit Shoot drink in the summer. Earlier in the year, BMW recalled almost 30,000 of its Minis in the UK due to a fault with its electric water pump.
According to RPC, the high number of recalls is leading more businesses to buy product recall insurance to safeguard against the costs of a product recall, which can be very high.
Stuart White, a product liability partner at RPC, explains: “A growing number of businesses are making the decision to buy standalone product recall insurance to cover the costs associated with a recall. The advantage is that this covers the costs for the business of taking immediate steps, before any consumer suffers.”
“Much negative publicity has been directed at big brand-name companies who have allegedly put their customers at risk by delaying recalls. Because of this, other corporates are very wary of putting their reputation in jeopardy by delaying a recall.”
A number of products – 13 at time of writing – have been recalled as part of horsemeat scandal. It is still too soon to tell, however, what the cost of this latest incident, and who the real losers will be. It is almost easier to identify the winners at this stage, and that looks like the local retailers, with their managed supply chains and the enviable level of trust – so hard to gain; so easy to lose – that comes along with it.