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Profile: Richard Pennycook, Morrisons’ FD

It has been four years since Richard Pennycook was interviewed by
Accountancy Age’s sister publication, Financial Director. The
last time, he mused over how much he enjoyed ‘the calmer, real world’ of a
non-turnaround job as group finance director of breakdown recovery firm RAC,
after almost a decade of continuously heading up turnaround teams.

Less than 12 months later, he was orchestrating the £1.25bn takeover of RAC
by Aviva. Six months later, he joined Bradford-based grocer William Morrison
Supermarkets, walking away from RAC having secured an offer price from Aviva
that represented a 62% increase in the value of its shares in the two years he
ran its finances.

He was supposed to take time out after that to go on holiday with his wife
and two children. But this is evidently a man with a storm-chasing gene:
besides, in his view, two years in a firm that wasn’t on the brink was a
holiday.

‘When I joined RAC, I’d been in three big turnarounds, which was fairly
exhausting. So it was good to operate in a normal business. Aviva came along and
bought RAC. Then I got the call about Morrisons. And it was irresistible.’

By that Christmas, his family had moved from London to York, a 45-minute
commute from Bradford, and Pennycook was taking on what turned out to be one of
the UK’s toughest turnaround gigs: saving a £4.3bn (turnover 2003) grocer from
being strangled by the perilously misjudged takeover of an £8.6bn (turnover for
the same period) rival ­ supermarket chain Safeway, in every sense bigger and
more sophisticated than Morrisons.

It was clear that founder Sir Ken Morrison underestimated the integration
task and that his board was not ready. By the time Pennycook joined in autumn
2005, Morrisons had issued five profit warnings in 11 months, having seen
pre-tax profits slump to £61.5m from £332.2m the previous year. The company had
breached its banking covenants and flung £513.6m at an integration that
Pennycook says was simply ‘failed’.

Under closer City scrutiny, the company didn’t come up to scratch on
corporate governance issues either, and only appointed its first ever
non-executives, Next chairman David Jones and Persimmon chairman Duncan
Davidson, the year before Pennycook joined. Added to that was Morrisons’ new
customer base in southern England, who, until recently, turned up their noses at
the Yorkshire-honed, family-founded brand of super-cheap foods and its ‘market
street’ concept.

Luckily for Morrisons, Pennycook’s reputation was founded on rescue missions
at a handful of well-known British retail outfits. Prior to joining RAC, he
spent a year at Hereford cider group HP Bulmer on its turnaround team. Before
that he led restructurings at Welcome Break and Laura Ashley.

His first group FD’s position, at pub retailer JD Wetherspoon, was a crucial
introduction to the FTSE-250 world and its challenges; his achievements were an
early indicator of his skill in raising the value of companies. On leaving the
company, its shares had swelled in value from £4.62 to £16.50 ­ a 257%
difference. ‘If I hadn’t had those three turnaround experiences before arriving
at Morrisons, I wouldn’t have known where to start,’ he says.

Curiously, Pennycook’s experience with family-led companies dominated his CV
before arriving at Morrisons, and he thinks these have been largely positive
places to work. ‘You get someone at the top with a clear vision and an
understanding to the nth degree of what they want to achieve. So what you had in
2004 at Morrisons was a business that had been growing successfully for 40
years, with the best return on sales, and the best return on capital in European
growth rate. [But it wasn’t] geared up to make a massive acquisition.’

Four years on, Morrisons’ last annual results were its first set of strongly
positive numbers since before the Safeway acquisition ­ and Sir Ken’s last
results before retiring ­ revealing 2007 turnover up 6% to £13bn, pre-tax
profits almost doubled to £612m and net debt slashed to £543m from £772m
year-on-year.

This is all very exciting stuff, but Morrisons is now in phase two of a
three-phase recovery; namely, the optimisation phase, finishing systems
integration, completing distribution planning and, as Pennycook says, ‘getting
motoring again’. Will the easing of pressure equate to boredom for the perennial
storm-chaser?

Not quite. ‘You do reach that point [where you can say that the business is
turned around]. Trying to stabilise something that is out of control is the bit
that is always very high energy, but the timing starts to stretch out as
different parts of the programme go at different paces, and we’re now focused on
distribution, systems and supply chain ­ stuff that won’t get done until
2010-11,’ he says.

‘RAC was a chunky FD’s job, but compared with the pace and intensity of a
turnaround it’s different. I love turnarounds, I love retail. But I don’t think
we are ever satisfied and UK grocery retailing is brutally competitive. We’ve
got to keep delivering.’

Pennycook predicts the company will spend about £1bn on furthering its
optimisation plan in the next 12 months.

But what has helped him carve out a niche as a four-times corporate
turnaround champion hasn’t been a talent for deference or falling in with
consensus. An unblinking attitude to tackling big, complicated problems and
leading change emanates from him. You could call it the confidence of
experience.

‘To be good in turnarounds, which are by definition tough situations, you
need a certain degree of experience. Most turnaround people will say that their
first turnaround happened by accident ­ they were in a business that got itself
into difficulty and they stepped up to fix it. One of the fundamental lessons
when you arrive in a turnaround situation is that you won’t have enough good
people, so you have to bring some in. I got some very good people in here very
quickly. If I hadn’t, I’d have failed.’

He brings up his first turnaround job, Laura Ashley ­ a potent mix of
long-term financial straits and failure to respond to a changing market
exacerbated by squabbling between the Ashley family and its financiers.

‘I took a huge emotional burden on there. I was young and learned a lot, but
it was very painful and it shouldn’t be that way. When I arrived, we reported a
loss of £313m, were in breach of our banking covenants and faced a constituency
that wanted to say, “Let’s understand what went wrong. Let’s go back to the
original business case with this merger and find out why it has gone off the
rails.” But when you’re in survival mode, you have to say, “Sorry, that’s for
another day.” What we’re about here is moving forward, and that’s where you have
to take the emotion out of it. It’s much more difficult for incumbent
management, who perhaps have been part of the problem, to have that
dispassionate relationship.’

There’s a great quote in a previous press interview in which Pennycook says
that, when the kids start calling the builder Daddy, it’s time to take a break.
He never did take that holiday.

This is an abridged version of an article that first appeared in the June
issue of Financial Director magazine

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