Michael Hitchcock - Ottakar's
Thursday, 4th October 2007 by RealFD.net
In his first 18 months at Ottakar's, Michael Hitchcock had an MBO deal derailed by HMV's bid for the group. But that was just the beginning.
It’s not often we're greeted by a wildly grinning finance director when we arrive to do a day-in-the-life profile. Wary trepidation is the more usual response. But Michael Hitchcock has good reason to look cheerful. After more than six months of uncertainty, the Competition Commission has formally cleared the way for a bidder to step in for Ottakar’s. And in a couple of weeks’ time, that’s exactly what Waterstone’s parent company HMV will do.
But Hitchcock hasn’t quite turned that page yet. Right now, he’s just high on possibilities.
“A lot of people have been waiting for the commission to clear the bid,” says Hitchcock. “But today’s result was expected. I think only on one occasion has there been a change between the commission’s interim statement and the final announcement. So to the extent that there was a door shut or ajar, it’s now fully open. And now any potential bidders can come back – or new ones can come in. Will that happen? It’s a possibility...” So with the press release taking pride of place on his desk, Hitchcock settles down to what promises to be a rather memorable day.
9AM Hitchcock’s PA, Ria Dunster, comes in to talk schedules. It’s a housekeeping meeting, with a lot of emphasis on the operational side of the business (the dull stuff, at least compared to the earlier news). Example? A director’s company car contract needs to be terminated. So Hitchcock and Dunster discuss the best ways to get rid of the vehicle without incurring a higher termination fee.
It’s pretty low-level stuff, but Hitchcock is at pains to instil a higher awareness of the pennies in the hope his staff’s actions will look after the pounds. “It goes back to the yoghurt pot principle,” he says, rather cryptically. Yoghurt pot? “When you buy a yoghurt, what do you do when you take off the top? You can either throw it away, spoon off the contents or lick it clean. It’s been shown that two per cent of the contents of the pot stick to the lid. So if you throw it away, you’re chucking two per cent away. If you spoon it, you get about one per cent back. But if you lick it, you get the lot. So I keep saying to people, ‘keep licking, don’t feel ashamed of licking’.”
Apparently Ria’s taken the mantra to heart. Since Hitchcock arrived as FD in February last year, she’s managed to save the company nearly £400,000. Pretty impressive, and it explains why this FD is so effusive in praise of his team. They’ve all been through a tough time since last summer, when the upheavals began.
“The uncertainty around the company was a large part of why quite a few people left,” says Hitchcock. “I’ve managed to make sure we’re now keeping key people, but others lower down have gone. I lost the whole of my cash and banking team, the whole payroll team. But the people I’ve got surrounding me at close quarters make up for it.”
Among the quick wins Ria has brought about is the closure of redundant phone lines going into stores. She identified quite a number of them and Ottakar’s bottom line is healthier to the tune of around £70,000 as a result. Lick that lid...
10AM It’s time for the weekly team meeting. Hitchcock gathers his staff together every Friday for a catch-up on the week’s activities and to flag up any unresolved or tricky issues. Interestingly, only one of the team is male. Any particular reason for that? “It’s because first, we simply hire the best people for the job; and second, women do things in a softer, more diligent manner,” says the FD. “It’s no surprise to me that Alan Sugar picked two women as his finalists in The Apprentice. There are now more nations around the world putting women in as presidents and prime ministers than ever before. That’s because they’re not as confrontational, but they’re no less competent or diligent. They do things in a softer way, and people respond well to that.”
Today all the talk is about “the announcement”. The FD’s already spoken to his managing director James Heneage this morning. All seems well, and Hitchcock reassures his team that nothing has changed. The way has simply been cleared for a bidder – whoever that may be.
Then it’s on to the round-table session where the finance team report on what they’ve been up to. They also take a look at the coming weeks. Like most retailers, seasonality is an issue. In early summer people stock up on their beach reading, which makes this the second most important period for booksellers. (The first, naturally, is the build-up to Christmas.) Hitchcock wants to make sure they get their ducks in a row. “From a purely selfish perspective, we hope England get knocked out of the World Cup early, as it’ll help sales,” he says. And once the sun comes out, sales go down as people don’t go into the stores as much. So the FD needs to get the stock system primed for a bumpy few weeks.
The meeting’s in full flow when Hitchcock’s mobile goes off. It’s a reporter from Finance Week wanting a comment on the day’s announcement. The FD takes it in stride, but gives very little away. Does he enjoy the outward-facing part of the job? “Well, you can tell where this guy is coming from: he wants a headline that says ‘50 finance staff to go at Ottakar’s,” says Hitchcock. “But what does that do? It serves absolutely no purpose at all. Some of the staff read that publication. So it would just create turmoil, really.” The hack is deflected nicely with very little given away.
The team finish up the meeting. They decide to look into rolling out more Costa Coffee concessions in the stores – all part of enhancing the book-buying experience. It’s something Hitchcock comes back to several times throughout the day – enticing people into bookshops to buy.
11AM The FD takes ten minutes to make an important call. This morning’s announcement has alerted the analysts, one of whom has issued a report on the possible implications of the CC’s verdict. Among other comments, the analyst has made some statements that are rather derogatory about the company. Suffice it to say, the FD’s not happy.
He calls the analyst and the two thrash through the issues. After ten minutes, Hitchcock feels he’s got his point across. “The analyst said some things this morning that I’ve got an issue with and I won’t let it go,” he explains later. “There are three points: one, Ottakar’s isn’t making any money. But it is making money – though not as much as it was, admittedly. Two, morale is low. That’s fundamentally wrong, no way. And three, that we have high levels of debt. Well, it’s not low, but we manage. He goes on to say that we’re desperate to sell, and we’re in no position to argue with potential buyers. It’s just wrong.”
So how does the FD keep his cool in such a pressurised atmosphere? “Rather than stewing on it, I try to have a different approach,” he says. “I can pick the phone up to the analyst and talk to him straight and tell him I don’t agree with his comments. He doesn’t hold that against me. If I bump into him at a social next week I’d have a glass of wine and a chat with him.”
Having set the record straight (in a very polite manner), Hitchcock checks the share price, which is going a little haywire after the morning’s news. It’s up 17p (about five per cent). “The problem is that we are quite an illiquid stock,” Hitchcock explains. “We traded 24,844 shares this morning and the share price has gone up that much. It shows you can get some quite violent fluctuations on very little trading activity. That’s one of the issues of being a small cap company.” (Ottakar’s is currently worth about £65m.)
11.45AM Management accountant Theresa Christman pops in to talk through Ottakars’ latest commercial audit. “It’s one of the things I instigated when I came into the business,” says Hitchcock. “Commercial audit is a fancy way of comparing stores to understand how and why one store’s payroll or rent as a percentage of sales is higher or lower. We planned to do it annually, then half-yearly and quarterly – but if we were clever, we could do it on a rolling 12-month basis, just to see the movement.” With such a lot of seasonality in the book trade, only a year-in-view analysis will really generate that “lick the yoghurt lid” data.
Most retailers have sizeable fixed operational costs. “And there aren’t many areas where you can take that cost down,” he says. “But I think we’ve got to the point now where the fixed overhead is at the lowest level it can be for each store. Now, everything we build on top is all based on variable overhead, like temporary staff. But we need to be realistic. We’ve done the audit once, it was excellent, we learned a lot and now we need to move forward with it. And, of course, you can’t suddenly change everything overnight. If it’s staff-related, for example, you’ve got to let the natural migration of staff evolve and maybe get to optimal numbers by not replacing every leaver.”
Christman briefs the FD on how the next commercial audit is looking – and they discuss what needs to be prioritised. The two talk through the key issues and which stores will need more attention than others.
12.30PM Time for a spot of lunch so we head over the road to M&S to grab a sandwich. The Ottakar’s store below head office is pretty quiet, mainly thanks to the gorgeous weather in south London. The FD is obviously proud of the shop, and takes us on a mini-tour. Indeed it’s tough to get him to focus on the business aspects once he spots the three-for-two offers. Ottakar’s has a slightly haphazard, second hand-ish feel, a throwback to when bookshops had dusty, chaotic stacks of books everywhere. I ask the FD whether this is intentional – there’s a lot of talk in the industry about how valuable Ottakar’s is as a “real” bookshop on the high street.
“It’s all about the customer feeling comfortable,” he says. “Staggeringly, more than half of the population don’t buy books. And research shows that one of the main reasons people don’t go into bookshops is that they feel ‘unworthy’. People see some bookshops, for example, as a gentleman’s library – a reading room.”
How do you alter those perceptions? “What we offer is a much more relaxed place, where kids can get the books off the shelf without being told off, mums can come in and have a coffee and so on. It’s a nicer retail environment.”
Bookselling, like so many other retail sectors, has been hit by two juggernauts recently: supermarkets and the internet. While Asda can massively discount the latest Harry Potter or Andy McNab, bookshops like Ottakar’s can’t, at least not to the same extent. It’s tough, Hitchcock admits. “The internet and the supermarkets will never compete on service or environment, but they can on price,” he says. “For specialist bookshops to compete on that level and at that price, they need scale.”
Which, perhaps, is where Waterstone’s comes in. Now that supermarkets are so dominant in the mass market, and you can buy anything ever published on the internet, the high street arguably needs one credible bookselling mega-brand to compete. Our FD chooses his words carefully. “The economics of book retail is all about scale – you need scale to compete, there’s no two ways about it,” he says.
For a company of Ottakar’s size, that means advertising and marketing have to be smarter, too. “We’ve got to be clever in that area,” says Hitchcock. “We do a lot of event sponsorship, supporting literary festivals and reading-related events. And really the only cost to us for that kind of stuff is our people’s time. We don’t do national press or TV or radio – it’s about word of mouth and operating locally.”
1.15PM Risk manager Prue Avis arrives to walk the FD through the risk register. There are numerous risks inherent to the business and, as FD, Hitchcock needs to be on top of them all. “When I came into the business last year, it was a very nice business,” he says. “But it lacked those big-company disciplines – not through anyone’s fault, it just happened as the business grew rapidly.
“So I wanted Prue to help with the risk management, both in the stores and head office. We’ve now created a risk register. It’s like the pop charts – we keep an eye on the highest riser each week and any new entries. The executive management meets every fortnight. Every other meeting, Prue comes along with the register, so they know what the risks are and how they’re moving.”
High up in this week’s chart is fraud. It’s not a major issue for Ottakar’s, but it needs to be monitored and mitigated. As the FD says, any decent-sized retailer will always be at risk from light fingers, so the finance team have set up a whistle-blowing hotline for staff with any suspicions.
The meeting is briefly interrupted by a call from the secretary of one of Ottakar’s non-execs. They want to schedule a conference call later in the afternoon about the next steps following the commissions announcement. Hitchcock agrees to a 5pm call, and cracks on with his day.
2PM The next meeting brings Chris Hockley to the FD’s office. He’s the acting head of IT. (He’s also, incidentally, a former colleague of Hitchcock’s from his days in Russia, where they both sold vodka to the Russians for Grand Met. Talk about selling snow to the Eskimos...)
The uncertainty over whether the company would be bought has led to several key projects being put on ice until the situation was resolved. You get the feeling the FD has had enough of hanging around and wants to get the ball rolling again. The main IT issue is a new stock control system. Surprisingly, for a company of its size, Ottakar’s doesn’t have one unified stock ordering and management system. At present, publishers have to deliver to over 140 separate stores, a situation that’s doing little for the bottom line or the business’s ability to respond to sales fluctuations. It’s something the FD has pinpointed as crucial to the ongoing health of the business.
“We’d been developing a stock system but we stopped development last September when HMV first tabled a bid,” he says. “The thinking behind that was there was little point in committing the next tranche of cash on a system that would have been binned had HMV taken us over. I wasn’t prepared to commit £500,000 just to see it disappear. But now we’ve got to drive it forward because we can’t hang around.”
Hockley’s been doing some research into what system would suit the business best. Getting stock management off Ottakar’s hands completely is probably the best result. “We’re booksellers, not stock-keepers,” says the FD.
It’s an area where Hitchcock once again feels Ottakar’s could benefit from a combination with a bigger bookseller. “To my mind, what Ottakar’s has at the front end – that softer customer proposition – HMV could learn from. And what HMV has at the back end, we could benefit from,” he says. “There’s a very powerful combination to be had. When we were talking to private equity funds [during last year’s abortive MBO bid], I said that we didn’t want to wrap the company in ‘big company’ discipline. We want to swaddle it so it can still move. And I think we’ve done that.”
3PM Financial accounting manager Ian Taylor and purchase ledger manager Pam Lamb come in to talk cash. The FD wants to make sure they are paying suppliers in the correct way – not too early and not too late. Keeping major publishers sweet while maintaining business discipline is crucial. “One of the other things we’ve been talking about is getting stock out,” Hitchcock says. “There was too much stock in the business. Now we’ve got working capital down to a level where we can operate comfortably within our banking covenants. The rule is: at the end of the month, when we come to pay suppliers, we’re not paying them too much. That way we’ve got more cash in the bank. So we look down the supplier list and check how much are we due to pay these guys, and if we need to pay now or if we can wait ten days.”
Throughout the uncertainty created by the HMV bid, publishers had continually expressed their support for the harassed Ottakar’s management team. That didn’t, however, extend to offering preferential terms, so Hitchcock’s had his work cut out to keep delivering solid results during the last eight months.
He’s obviously one for consensus building, but that also requires a strong element of leadership. Does he see himself as a future chief exec? “That’s my objective,” he says frankly. “It seems like there are more CEOs who have been FD than not these days. And I certainly have a passion to lead. I don’t want to appear arrogant, but I like to think that when I stand up to speak, people listen, and that I say things in such a way that people understand – and that people see me as Michael, not just ‘the finance director’.”
But retail’s a tricky business – mistakes are punished mercilessly by the stock market and by customers. Is that the kind of bear-pit Hitchcock wants to enter as a CEO without “front line” experience? “Well, I freely admit that you’ve got to earn your stripes,” he says. “You can’t just walk into a top role. Look at Messrs Green and Rose – they’ve lived retail and they’ve got the right to stand up there and say, ‘I’m a good retailer’. I’m nowhere near that – I’m a beginner, frankly. But I’m trying to earn recognition in the industry.”
4.15PM Investor relations forms a significant chunk of this FD’s remit. The HMV saga, which has merely entered another new chapter today, has put Ottakar’s firmly in the news. Most national papers and other news agencies, as well as the book trade publications, are following the story. Even some high-profile writers such as Northern Lights author Philip Pullman have come out and condemned the potential merger as “killing off independent bookselling”. That gives you some idea of the esteem and affection in which Ottakar’s is held. So taking the pulse isn’t limited to the City. “I do like the City connections and all that entails,” says the FD. “But equally I like the business on the ground. Working above a shop, you get to see both. I can be at the coalface downstairs and then over to the City talking to investors, all in the space of an hour. And I always go downstairs at lunchtime. You can sneakily listen to customers and get a sense of what they really think.”
5PM It’s time for the FD to join the hastily arranged board conference call with his fellow directors. It’s all a bit sensitive so I decide to leave him to it. The next few months are sure to provide the FD with more excitement and uncertainty, something he’s become accustomed to over the last year and a half in this job. But doesn’t the prospect of sleepless nights and media pressure fill him with dread?
“I’d love to do it again, it’s a drug,” he says. “Look at the guys working in private equity – they do these deals week in, week out, and you see the adrenaline rush they get. You can’t measure that rush. It’s like you’re injected with it. I had it for a while with the MBO and when you come off the drug, you think ‘I want more of this’. You’ve got to be careful though, because there’s only so much you can do before you crash and burn.”
It’s hard to imagine anything less than success for this FD. He’s definitely one to keep an eye on.
