Clas Ohlson – Business Transformation

22. September 2008

„Your success is in the BAG”

Members: Krzysztof Sobala, Li Shuguo, Markus Wikstrand, Steven Torres, Vadim Gerstein
 „We advise the Bosses”

Executive summary

• Potential savings (improvements):

• Increase of inventory turnover
• Increase account payables
• Use of leverage
• Relocation of marketing expenditure
• Decrease of staff turnover
• Benefits from strengthening corporate culture
• Directing efforts towards profitable markets

• Performance assumptions:
• 15% growth per annum
• Decreasing operating margin kept above 10% target

2
 „We advise the Bosses”

In order to retain high growth and profitability Clas Ohlson needs to

revise its operational, marketing, financial, HR and expansion strategies

Cutting Maintaining a Establishment Focusing on

operational and growth rate of of corporate profitable and
selling cost are 15% requires culture as a high-potential
necessary to investment way of reducing markets
increase financed by costs of staff
operating leverage turnover and
margin improving
efficiency

Combination of improvements within

areas is required

3
 „We advise the Bosses”

Cost cutting can be achieved by reducing inventory time

Clas Ohlson Jula Teknikmagasinet

Inventory turnover 3.13 times 5.29 times 6.57 times

Inventory (SEKm) 952.6 368.7 73.8

Reasons:

Remedies:

• Inflexible • Bargaining • Efficiency of

product range power relations logistics
Problem areas: with suppliers investment

Source: annual report Clas Ohlson,

Jula & Teknikmagasinet
Improved operating margin
4
 „We advise the Bosses”

Meeting the target of 15% annual sales growth requires aggregate

investment expenditures of SEK2bn* during the 5-year period

th in
grow Decrease b
74% n u e y 19% D
S reve
E
A C
L R
E
E A
S S
I
N
G G
R
O M
A
W R
T G
H I
N

NEW STORE OPENINGS - INVESTMENT REQUIRED

• Constant increase of sales as well as decreasing margin will make the number of necessary stores
grow exponentially (150 in 5 years)

• Increasing investments require more capital that has to be raised either internally or externally

*On the assumption of no currency risk and stable sales in old stores
5
 „We advise the Bosses”

Clas Ohlson needs to increase its financial leverage in order to finance a

quicker expansion and increase the ROE

Bank loans can be used to A major competitor has trade

provide the company with payables / assets ratio of 0.3 while
cheaper capital Clas Ohlson’s merely is 0.1,
possible room for increase

Plenty of room for incurring Doubling the trade payables to

financial debt and providing assets ratio by renegotiating
access to cheap capital make contracts with suppliers, would
further expansion possible increase ROE by 11%.

Source: annual report Clas Ohlson,

Teknikmagasinet & Jula 6
 „We advise the Bosses”

Cuts in marketing expenditure in Norway and Sweden are crucial

120%
In Sweden and Norway, focus on
internal efficiency to capitalize on
resources within sales and marketing. 100%
Process focus
80%
Brand awareness

Keywords: segment, marketing mix, 60%

communication Made purchases
vistors
40%
percentage
In Finland and the UK allocate more
resources to increase market
efficiency. 20%
Customer focus
0%
Sweden Norway Finland
Keywords: method, processes,
procurement, measure

Allocate resources to marketing budgets in Finland and the UK

Source: annual report Clas Ohlson 7
 „We advise the Bosses”

HR related costs should be addressed by focusing on aligning the

corporate culture with the strategy implementation

• Cause of high employment turnover

lies in the internal weakness of
• Staff turnover decrease by 1% will
corporate culture
reduce training hours by 2%*
• Claiming external factors is
ambiguous
• Introducing an efficient eHR system
→ Investigation of reasons for
will reduce administrative expenses
employee leaving
(e.g. through exit interviews)
• UK market needs a different internal
→ Secure needed talent by
cultural setting (avoid Wal-Mart
introducing new compensation and
example in Germany)
motivation models
(e.g. staff discounts)

Cost reduction Increase of efficiency

Employees are Clas Ohlson’s most vital asset

* Compare calculation in the Backup, slide 11 8
 „We advise the Bosses”

Focusing on expansion opportunities in Finland, Norway and the UK

enables Clas Ohlson to grow despite a slump in the Swedish market

• The Finnish and British markets are

the most attractive in terms of
purchasing power

• Good opportunity to succeed in the

British market due to Clas Ohlson’s
cost competitiveness

• Downturn in the Swedish market is a

result of a negative consumption trend
→ relocation of investments is advisable

• Finnish sales still underperforms in

comparison to Norwegian. However
growth opportunities exist
→ better store locations for smaller
stores are crucial

• Strong performance in Norway

maintained due to huge purchasing
power and favourable consumption
trends; reduction in marketing costs
(in favour of Finland) is recommended
Source: Clas Ohlson 07/08 , 07/06 and 06/05 annual reports
*,** - compare with backup slide 12
9
BACKUP

„Your success is in the BAG”

 „We advise the Bosses”

Calculation of staff turnover reduction potential

03/04 04/05 05/06 06/ 07 07/08 08/09E

Number of employees 1767 2030 2342 2645 2974 3420

Training hours 33983 39970 49370 53750 69630 68402
Staff turnover 4,6% 3,7% 6,1% 6,6% 9,0% 8,0%
Number of stores 38 48 59 71 86 106
Employee increase 15% 15% 13% 12% 15%
Training hours per emloyee 19 20 21 20 23 22

Training hours increase 18% 24% 9% 30% -2%

11
 „We advise the Bosses”

Market potential evaluation

As of 2008 Sweden Norway Finland UK

No. of our stores 45 29 12
No. of our stores on the market (incl. Us) 200 309 87 917
Population 9200000 4700000 5300000 61000000
GDP per capita 36900 45500 34800 37300
Market potential 46000 15210 60920 66521
Market potential (PPP weigted) 1697 692 2120 2481
49 31 16 96
No. of stores opened 7 5 3 15
no. Of months of operations 35 29 20 84
No. Of months benefited from the previous period 68 16 0
Total number of months 103 45 20 168
Sales 0807 2585,9 1716,8 358,9 4661,6
Sales 0706 2345,4 1458,2 297,6 4101,2
Sales increase 240,5 258,6 61,3 560,4
Sales increase (new stores) 206,1428571 221,6571429 52,54285714 480,3428571
Sales increase per store 34,35714286 51,72 20,43 32,02
Sales per month in SEKm 2,001386963 4,925714286 2,627142857 2,859183673

12
 „We advise the Bosses”

Use of financial leverage and growth simulation

Leverage Interest bearing liabilities to assets

Clas Ohlson 32% 0%
Jula 62% 0%
Teknikmagasinet 49% 12,40%

growth rate 15%

cost of new store 13000000

Financial year 2007/2008 2008/2009f 2009/2010f 2010/2011f 2011/2012f 2012/2013f Total

Net sales 4 661,60 5360,84 6164,966 7089,7109 8153,16754 9376,14267

Sales per store opened 32,02285714 32,02285714 32,02285714 32,02285714 32,02285714 32,02285714

Stores to be open 15 22 25 29 33 38 150

Investment requirement 195 000 000 283 863 490 326 443 014 375 409 466 431 720 886 496 479 019 1 913 915 875

13