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Canadian Tire Centralizes Business Units

September 20, 2010

By Tom Ryan

Canadian Tire has laid off some of its top management in a move to shift from its longtime structure of five "separate but interrelated businesses" toward a "one company" approach. The retail conglomerate said the former "silo perspective" caused unnecessary duplication and bloated costs while also hampering efforts to push sales across the organization.

"Essentially, we have put experienced and talented individuals in key roles across the organization, we have reorganized to much more effectively live up to our commitment to allow every customer to feel they are dealing with one company rather than a series of loosely integrated business units," chief executive officer Stephen Wetmore said on a conference call. "Looking forward, we need a structure focused on motivating customers to spend more across our unified business, to do so more often and to build a support infrastructure that delivers a superior customer experience."

The company, with about 1,300 stores and gas stations across Canada, operates five units: Canadian Tire retail, Mark's Work Wearhouse, financial services, petroleum and PartSource specialty automotive stores.  But it sees its six principal business categories as: living, fixing, playing, automotive, apparel, and financial services.

Mike Arnett, president of Canadian Tire, will be put in charge of the first three groups. Automotive will be led by Glenn Butt, who was named executive vice president customer experience and automotive. Paul Wilson remains president of Mark's and Dean McCann remains president of financial services. Three other top execs will leave the company.

Separate information technology, finance and other organization structures were also in place for each division under the silo structure.

"While this structure led to a focus on individual business performance, it significantly increased our operating costs and led to an unfocused approach on our customer," said Mr. Wetmore.

A pretax charge of about $15 million Canadian will be taken in the third quarter to cut less than one percent of Canadian Tire's workforce of more than 58,000.

Discussion Questions: What are the pros and cons of retailers going to a more centralized organization? Does it make sense for Canadian Tire?

FINANCIALS:     [TSE:CTC.A]

Discussion Questions:

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Overall, have centralization efforts been positive or negative for large retail organizations?

Comments:

Having helped with about a dozen acquisitions from the IT perspective, it was always painful to watch the business organization repeat the same mistakes. I imagine the same risks exist when consolidating operations.

Everyone understands the economies of scale to be achieved by sharing support services and leveling the management hierarchy. The challenge is that while operating efficiencies can be achieved without impacting the consumer; changes to assortment, pricing, and promotion all have a significant impact. The merchandising side of various divisions or acquired companies may be completely different. This difference extends all the way back to suppliers, who may offer one cost sheet to a Hi-Lo division and a different one to an EDLP. Combining these operations creates both a political and a business challenge as the combined entity tries to make sense of the different cost sheets and allocating discounts. Merchandisers often find it difficult to simultaneous juggle different philosophies.

IT has made it easier to combine support services. Most of the time this will be an advantage for the retailer but when it comes to merchandising, I still believe it is too difficult to manage multiple approaches. Merchandisers should have clear objectives built around the overall goal of the banner and measured against them. The retailer should expect the best possible EDLP cost from suppliers and build internal controls to allocate accruals for Hi-Lo banners.

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Bill Bittner, Principal, BWH Consulting

The pros are a reduction of costs, taking down political silos, and taking advantage of synergies. The con is a reduced focus on each business unit.

In Canadian Tire's case, the plan seems like a good one and should add to its enlarging footprint a reduction of operating costs and duplication of costs with a renewed focus on each. If Canadian Tire can put a plan and process in place to insure clear focus on each operating unit, this plan should be a tremendous success for them. They should also take advantage of cross marketing, cross distribution and many other areas that in breaking down barriers, operations will improve.

Susan Rider, President, Rider and Associates, LLC

Canadian Tire's customer experience issues have less to do with centralized organizational structure and a lot more to do with the unbridled power of their franchisees.

I don't think this move to centralize has as much to do with the consumer experience as it does with good old efficiency and cost reduction. Until very recently, Canadian Tire was a juggernaut that could seemingly do no wrong. They enjoyed unheard of market share, incredible growth and rapid expansion.

I suspect given their success, internal growth may have gone somewhat awry. With the landscape becoming a little less rosy in Canada, I imagine they see it as time to tighten up and reduce redundancy. Good idea--if that's what this is all about. Bad idea if it means becoming less sensitive to regional product and service needs.

Doug Stephens, President, Retail Prophet

This seems like a long overdue move for a company that has a reputation as being an excellent operator. I would suspect in addition to eliminating duplications in IT and HR, it will take the time to eliminate the bottom 10% ala Jack Welch to weed out "C" players and reward "A" players. If they are able to achieve this while streamlining costs and creating new operational efficiencies, the company will emerge much, much stronger. In this economy every company should be scrutinizing operating costs.

John Lofstock, Editor-in-Chief, Convenience Store Decisions

I am in agreement with earlier comments, especially Susan's about the efficiencies and focus. Centralizing the operations will lead to better direction in each market. It will reduce the attention given by having the C-suite looking at more than one market and making decisions affecting all. Yes, costs will be reduced because there will be less duplication of administrative costs alone. Management will have a difficult road to follow as they work through the transition.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

This should be an important step forward for Canadian Tire. Over time, they have managed to grow and continually find the right assortment for loyal customers, despite strong competition from DIY and discount centers.

However, it is definitely time to step up and centralize their business operations. Supply chain/inventory management has to benefit--too many out of stocks, pricing discrepancies, and assortment issues--great selections in some categories like small appliances and seasonal, but not so great in other core areas. With the right IT partner, this could really impact the shopper experience, and the bottom line.

Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

Separate is not equal. Businesses have long recognized that the strengths in combining their operations, rather than operating as distinct, separate units, far outweigh any costs. The key here is to manage the organization with minimal drag on costs, while maximizing the benefits of centralized consolidation of all business units. Canadian Tire has clearly recognized this and is taking the right move to consolidate, in order to maximize their operations.

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Kai Clarke, President, Kowa Optimed, Inc.

On the other hand, consolidation reduces accountability for specific internal, unique business units. Instead, responsibilities are blurred as the various businesses are melded into an amorphous goo. Underperformance and inefficiency get buried and eventually hidden from scrutiny. That's why silos made sense in the first place.

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M. Jericho Banks PhD, President, CEO, Forensic Marketing LLC

This is a great move from Canadian Tire and provides tremendous opportunity in the areas of customer service and cost reduction via consolidation.

CT can now spread their legacy into chains like Marks. Imagine using Canadian tire currency (their loyalty program) across all store segments. there is also an enormous potential in exploring cross-segment promotion campaigns.

I completely agree with earlier statements on IT consolidation. At the same time, each store chain will be able to maintain their independent identity as merchandising functions will still be controlled by each separate chain. The potential for cost savings spreads across all functions including IT, customer service, procurement, etc.

Amit Negi, Consultant, EDS

I find the ebb and flow of centralized vs. decentralized interesting to follow. It's normal for most companies to go back and forth in response to internal and external challenges and opportunities.

Canadian Tire is interesting to watch because they compete with low-price giants like Walmart from south of the border. Theoretically it would be beneficial to be more "local" than their foreign competitor, leading to a decentralized approach on maximizing revenues by tweaking the assortment in each local market. But this can often get out of control and lead to internal battles and suboptimal supply chain efficiencies.

Canadian customers are tight with their wallets and hard to please. Canadian Tire in its current state is not what one would call a world class retailer. Whatever moves they make are most likely warranted.

'jlmcnamara'

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