MFI, profit, customers, business, cash, assets, borrowing, finance, stores, design, furniture, market, sales, successful, stock.
Successful organisations are able to compete in tough environments.
This case study examines how in 1999 MFI, the leading furniture retailer in the UK, recognised the need to make key changes in order to develop a successful competitive strategy.
In the past, MFI's success was based around high quality products at affordable prices, with a reasonable level of service. However, in today's market place that is not enough: it does not differentiate MFI sufficiently from its competitors.
Howden Joinery is another important part of MFI. It supplies kitchens to the building trade and is the first choice for small builders and contractors.
Howden Joinery has recognised that its customer (the local builder) has different requirements to a member of the public buying through its retail store network i.e. the stock needs to be there to take away from Howden Joinery depots 'vs' delivery to customers' homes.
In 1999 MFI had completed the refurbishment of most of its stores into the Homeworks format. The purpose behind this investment was to generate high levels of sales growth. However, the refurbished stores were not delivering the increased sales growth that was expected. As a result, in the period prior to 1999 MFI experienced a considerable net outflow of cash, and this had to be financed by borrowing.
In business, 'gearing' refers to the proportion of finance that a business has raised from borrowing from external sources compared with that raised internally from operations or shareholders.
The main advantage is that the business taking out the lease no longer ties up its money capital in fixed assets, and can ensure that the funds that are released work more productively in generating ongoing wealth.
Growing the business involves generating profits through the turnover (value of sales) being substantially greater than the cost of sales (costs that go into achieving business turnover).
To change the shape and feel of its stores, MFI worked with a design partner (Conran Design Group) that had the closest understanding of MFI customers.
As a result of carefully reading this case study, students should be able to:
- know that successful organisations have sound, decisive management and good financial control
- understand that interest is the cost of borrowing money
- know that high gearing involves large interest repayments
- identify the importance of customer focus in securing high turnover and profits
- explain how MFI's sale and leaseback programme reduced its gearing
- identify key aspects of good asset management
- explain how MFI has used profits and internally generated cash to fund its growth at home and abroad.