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Ivo Business Solutions

Spend on Trend? Bringing Cost Control Back into Fashion

05 September 2016 08:00

UNDER EMBARGO UNTIL 07 September 2016 08:00


As fashion retailers are busy keeping up with the evolution of e-commerce, the growth of omni-channel and overall market volatility, climbing costs often go unnoticed. Tightened budgets are requiring internal procurement teams to achieve more with less and when it comes to overall cost management and strategic thinking, indirect spend is often left on the backburner.

Is this a significant oversight by retailers trying to optimise their profitability?

Ivo conducted a review of indirect spend across leading UK fashion retailers to understand how this compared to their overall sales revenue, as well as how this spend is broken down across their businesses.

In this study, a number of uniquely different retailers were selected, each with a store base ranging from 100 to 500, varying sizes of workforce and with a strong omni-channel presence. With each retailer differing in size and operations, variances in spend were inevitable, however there remained strong similarities in spend patterns.

In brief, the retailers assessed were closely aligned, with on average 19% of revenue being used to cover indirect costs. Additionally, results showed that the highest categories of spend were logistics at 24%, property fit-out and fittings at 12%, IT at 10%, store operations at 9% and marketing at 8%.

The Research Process

The indirect spend of each retailer was first evaluated to understand the level of sales revenue required to cover indirect costs.

Sales across the retailers amounted to more than £1.69b with indirect running costs totalling £322m – approximately 19% of sales, highlighting both the significance and opportunity it presents.

The subsequent stage of the study involved assessing twelve months of accounts payable data for each retailer. In acknowledging that individual retailers have unique supplier relationships and their own internal classification method, a standardised system to categorise each supplier across the retailers was established.

Each area of spend was then classified manually according to the supplier’s relationship with the retailer. To ensure a consistent definition of indirect costs, any spend relating to property rent or purchases, salary, fabric and other garment costs were excluded from the analysis. Ultimately, twelve key spend categories were established. Out of these twelve categories, the highest areas of spend, in descending order, were logistics, property fit-out and fittings, IT, store operations and marketing.

In the following section, Ivo shares some of the trends impacting the five highest areas of spend, along with our experience of opportunities to control costs and maximise resources.

Trends and Opportunities in the Highest Spend Categories

1. Logistics

The recently published ‘Global Powers of Retailing 2016’ report by Deloitte states online sales as a primary driver for growth in the retail industry, expanding by 20% amongst companies surveyed. With this continued online boom, retailers are forced to offer more competitive delivery costs in order to satisfy increasingly savvy customers. Click and collect is one approach being adopted to maintain margins within business-to-consumer (B2C) deliveries; with sales through this method predicted to double by 2021 according to research by Verdict Retail and British Land. However, will this be enough to keep down costs?

Fortunately, along with the rising demand for B2C deliveries, retailers are seeing growing investment, a drive for improved customer service and a battle for market share across the delivery providers. This is generating ample opportunity to improve the quality of the customer offer and reduce cost per parcel through competitive tender.

In addition to these final mile improvements, there is still scope to address more traditional logistics costs. Our experience shows most retailers have optimised their UK distribution, however international road and sea freight rates continue to provide significant savings for a number of our clients.

2. Property Fit-out and Fittings

Despite the growth of e-commerce, 89% of UK online sales are still linked to the ‘halo effect’ of an existing store, according to Verdict Retail and British Land. Maintaining a consistent experience across every shopping channel is clearly fundamental to driving sales, leading to heavy investment in cutting edge design, equipment and facilities. The popularity of mobile payments also creates the need for investment in more advanced equipment in stores.

Keeping up with such trends is a must to maintain brand image and sales, but can retailers afford the investment? Ivo have helped generate savings within fit-out projects to ensure retailers can get the required look at the right price.

Ivo has found that spend traditionally considered part of the property function, is often the last area that comes under the jurisdiction of the procurement team. However, we have found that this area is suited to the rigours of a well-managed procurement process and is responsive to competitive tender. Ivo have detailed white papers covering the pitfalls and benefits of competitively sourcing fixtures and fit-out, these can be found on our website.

3. Information Technology

The importance of developing a digital strategy strengthens as retailers face the pressure for seamless omni-channel operations. Where platforms such as social media are being harnessed as a means to reach consumers, investment in on-demand and mobile technology becomes increasingly fundamental. The growth of analytical technology also means retailers can not only enhance the functionality of their business, but also unlock insight into their customer base. Furthermore, retailers are opting for systems that allow data to be unified across different channels in order to paint a clearer picture of their customer’s shopping habits.

Software to enable digital strategy has grown in sophistication as the market matures and retailer’s budgets increase. Tendering these areas requires a careful balance of finding the best fit for the current business needs, a supplier with a strong development road map and ensuring value for money. Digital teams will need to play a strong role in the tender process but a high degree of supplier competition ensures good value can still be achieved.

4. Store Operations

Over recent years the high street has had a changing face, store closure rates have been high with only coffee shops bucking the trend. However, in 2016 closure rates appear to have slowed and more and more e-tailers are starting to establish a physical presence, according to the ‘Global Powers of Retailing 2016’ report.

Store operational costs are well established and have long been a favourite focus of retail cost reduction exercises. The key to successfully tendering in this area is to understand the underlying costs and suppliers. Certain areas, such as guarding or cleaning, are driven by labour rates and are heavily influenced by the national living wage. Once you have established a fair agency margin, focus moves to ensuring service-level agreements are monitored and adhered to. On the other hand, capital expenditure in technology areas such as security systems or heating, ventilation and air-conditioning still offers good competition, as do the maintenance contracts on these areas, so ensure adequate resource is focussed here.

5. Marketing

As more retailers are harnessing big data to better understand their audience, personalised marketing techniques are being used to more effectively target consumers. Especially as e-commerce grows, marketing campaigns are also becoming digitalised. As consumers are increasingly susceptive to opinions on social media, retailers face pressure to uphold a positive brand image across a multitude of platforms.

The conflict between marketing’s ‘invest to grow’ approach and procurement’s ‘best value’ can often be difficult to manage. The key here is the relationship between the marketer and procurement manager. If you ensure the team work closely together to get specifications right, whether you are investing in point of sale or customer email marketing services, high savings can be achieved, often with marketing’s preferred suppliers.


It is understandable that the focus of fashion retailers is on strengthening online sales and developing omni-channel propositions, amongst balancing other demands. However, the potential benefits to be gained from correctly controlling indirect spend should not be overlooked, as it can ultimately free up capital to be redirected into areas considered core to the business, improving growth, margin and ultimately bottom line performance.

The Ivo Effect

Ivo works in partnership with retailers to help them understand their costs, manage their suppliers and negotiate improved contracts that meet their unique business requirements. Through generating savings, Ivo helps free up capital for retailers to focus on strategic improvements or increase profitability. If you would like to know more about any of the topics covered in this article, please get in touch.

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About Ivo Business Solutions

Ivo Business Solutions works with business leaders to achieve significant improvement and change. This includes strategic and operational improvement – with an emphasis on action.

We provide focused, commercial and data-driven insight to answer difficult questions, identify savings and revenue growth.

Established in February 2003 – Ivo’s credentials come from running cost reduction and procurement programmes for nationally recognised organisations, particularly within the retail sector.

Our approach…

- We take a whole business view of opportunity and risk.
- Have commercial drive and the passion of a business owner.
- And apply curiosity, focus… and deep data analytics.

Business owners, CEOs, and private equity firms hire us because we don’t take anything at face value, accept filtered information or averages – we are trusted to do a great job.

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