- 51 FTSE100 businesses undertaking major restructuring programmes
- Cost of restructuring at retailers jumped four-fold in just the last year
- Exceptional costs at £7.9bn – coronavirus may push up costs this year
20 April 2020, London – The FTSE100 spent £8.2bn* on restructuring their businesses last year, up 30% from £6.3bn it cost them the year before, says The Chartered Institute of Management Accountants (CIMA), the world’s largest body of management accountants.
The research, Exceptional costs, exceptional challenges – the CFO’s art of driving business resilience among FTSE100 companies, shows that restructuring (e.g. demergers, asset sales, branch closures or large-scale redundancy programmes) still represents a major cost for FTSE100 businesses, even though the global economy has been going through a long period of relatively benign conditions.
Yet with machine learning, artificial intelligence and automation spreading at breakneck speed, businesses seem to be putting greater emphasis on embracing innovation, mitigating new external risks and absorbing shocks to prepare for the future.
51 FTSE100 businesses reported to their shareholders that they were undertaking major restructuring programmes last year, up from 49 in 2017/18. Average annual restructuring costs per company also increased to £161m last year, up from £128m, over the same period
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Andrew Harding, FCMA, CGMA, Chief Executive – Management Accounting, says: “The cost of restructuring at the UK’s top businesses even in a good year runs into the billions – and continues to rise.”
“Resilience is key. Businesses are having to adapt to a range of tough new challenges in the form of rise of ecommerce, the shift to sustainable business models and growing regulatory scrutiny. We will see this being accentuated by the impact of coronavirus and Brexit. Effectively embracing innovation and adapting to change is critical to surviving and achieving long-term growth.”
“The level of restructuring being undertaken shows that companies are having to work harder, implement new ways of working and innovative technology to stay competitive. Their ability to be agile and adapt to external and internal changes will make or break organisations in the 2020s.”
CIMA says the growth in costs last year has been driven by more restructuring in under pressure sectors, such as retail, aerospace, oil and gas – see graph below.
Retailers saw the cost of restructuring rise the fastest last year, at four-fold to £1.2bn, up from just £220m the year before. The acceleration in digitalisation and the shift to ecommerce have been key drivers of restructuring costs at these businesses.
Consumer demand for around-the-clock availability and faster delivery times is forcing businesses to overhaul their processes and operating models, with substantial organisational changes as a result. These changes include reducing the size of store estates and adapting to growing sales volumes online.
One retailer explained in their annual report that restructuring costs recognised last year related to: “…transformational changes to the group’s in-store operating model, responding to changing customer shopping habits and reducing costs throughout the store estate**.”
Costs within the oil and gas sector relate to long term programmes to lower cost bases in response to the sharp fall oil prices in 2014. Reducing net carbon emissions is one of the challenges facing these businesses that may trigger a wave of restructuring.
FTSE100 pharmaceuticals businesses recorded highest costs
CIMA says the research shows FTSE100 pharmaceuticals businesses recorded the highest restructuring costs last year at £1.4bn, followed by banks at £1.3bn.
Pharmaceuticals businesses are continuing their long-term restructuring programmes in order keep costs contained, as some of their key drugs go “off patent” and competitors enter the market. Meanwhile banks are restructuring to keep pace with new market entrants, such as fintech companies, and in response to regulatory reforms.
CIMA says CFOs play an important role in managing the costs of restructuring programmes. Most businesses restructure in order to maintain profit margins at sustainable levels, with some going through multiple programmes within the same business cycle.
Andrew Harding, Chief Executive – Management Accounting adds: “Restructuring costs are still a major consideration for CFOs across the UK’s top businesses.”
“Understanding and managing trends in restructuring costs falls to a large degree on CFOs and their finance teams. They are increasingly being called upon to help guide decision-making at the top level, looking across the business and beyond just financial data.
“The role of the CFO is changing – it no longer just involves just feeding information and dealing with all things financial, but being stewards and instilling resilience into the business. Today’s CFOs and their finance teams proactively lead digital business transformation, manage risk and drive strategic decision making.”
FTSE100 recorded £7.9bn in exceptional costs last year
The research by CIMA also found that FTSE100 businesses recorded £7.9bn in exceptional costs last year, matching the level seen the year before.
CIMA says for a cost to be exceptional, it must be material and something that occurs infrequently. Looking at exceptional costs can act as a seismometer to assess the risks and emerging issues for the business models and operating sectors of FTSE100 businesses.
Coronavirus has become a major risk facing businesses, with many already reporting that it could affect earnings. For example, Diageo recently announced it is expecting profits to be as much as £200m lower this year due to reduced sales in Asian markets. The impact of coronavirus is likely to cause an increase exceptional costs recorded by businesses this year.
Exceptional restructuring costs are the largest category of exceptional costs at £2.1bn last year, up from £1.4bn the year before. Companies that undertake emergency restructurings are likely to record any associated costs as exceptional whilst long term restructuring programmes will not be.
The second largest category was exceptional costs related to operational incidents/crises (e.g. mining accident, product recalls) at £1.8bn, up from £494m, followed by M&A integration costs at £581m, down from £922m.
The most frequently recorded exceptional cost last year was restructuring (26), followed by employee pensions related costs (reported by 24 of the FTSE100) and M&A integration costs (14 companies).
Employee pensions related costs principally arose due to a High Court*** ruling last year which requires companies to equalise pension benefits provided to male and female workers.
Read the full report here.
Notes to the text
*As reported in latest annual reports published
**Sainsbury’s Annual Report and Financial Statements 2019
***In a landmark decision delivered on 26 October 2018, the High Court ruled that pension scheme trustees are under a duty to equalise benefits for men and women in respect of Guaranteed Minimum Pensions (GMPs)