It has been quite the roller-coaster year for CFO Frank Lai and his company, Hong Kong-listed China Resources Enterprise (CRE), China’s largest retailer and beermaker.
In April, the Chinese Communist Party announced the removal of Song Lin as chairman of state-owned China Resources (Holdings), CRE’s parent company, because of “suspected violations of discipline and law” – taken to mean as acts of corruption, in the context of President Xi Jinping’s still going-strong anti-corruption drive.
The next month, an agreement to set up a joint venture between CRE and Britain’s Tesco was finalized. CRE’s 3,000 stores in China were combined with Tesco’s 131 hypermarkets and other outlets in a deal that Lai worked on for more than two years.
Then in September, an accounting scandal engulfed Tesco as it emerged that the UK unit had overstated profits for the six months to August by £250 million due, according to the company, to the “accelerated recognition of commercial income and delayed accrual of costs.”
“Our JV is an independent operation in China, it has no effect,” said Lai at the 5th CFO Innovation Hong Kong Forum last month. “I’m sure [the scandal] will be over very soon.”
Cesar Bacani interviewed Lai, CFO Innovation’s CFO of the Year in 2013, on this and other issues. Edited excerpts:
Has there been any impact at all in winning the CFO of the Year award last year?
To win the award is an incredible honor. Our team and myself were thrilled. Last year in particular was something very special for me. My younger brother [NiQ Lai, CFO of Hong Kong Broadband] was also nominated.
We had a family dinner to debate: Should the new model win or should the more vintage model stand out? Luckily, CFO Innovation has proved [financial management] tastes better with age. Hopefully my younger brother will be sitting here in a few years’ time.
Tell us a bit about China Resources Enterprise.
As a group, we are one of the largest state-owned enterprises [in China]. We [at China Resources Enterprise] focus on the consumer retail sector. Our sister companies are in power, in gas, in property and in different kinds of businesses
Out of retail, we run four major pillars. We are the largest retailer now, in China, by business. We have supermarkets, hypermarkets and specialty shops, including the Pacific Coffee chain in Hong Kong.
In beer, we have a joint venture with SABMiller. We are now also the largest brewer in China and our brand, Snow, is now the single largest trading brand in the world. We have annual volumes of 12 million tons. Our brand sales, in volume, are larger than the entire beer consumption in Japan per year.
We also run a beverage business, which is distilled water and pre-packaged tea, coffee and energy drinks in China. The fourth business is, we handle fresh pork imports into Hong Kong. We currently have about 45% market share in Hong Kong.
What do the board and the CEO expect from finance and yourself as CFO?
Basically, when you sit at the finance desk, everything that happens is not initiated by us. Production, sales, marketing, R&D – if you want to be very passive, you can sit at the back and wait until things happen and you can collect the data and record in the books.
On the other hand, you can be super-active and say everything involves us, because nothing happens around the company that does not require financial resources.
The question is whether you are part of the planning process or just part of the recording process.
For our board, they would like the finance team to be an aid to the CEO, to be part of the planning process; [not just] part of the compliance process.
How did you prepare yourself to become an active CFO, as the board wanted?
Very quickly you’ll find, if you’re a traditional CFO, your value depletes quickly. I worked in China for ten years. I can find people who can do financial recording at one-tenth of my cost and they work twice as hard.
So you as CFO have to think of something to add value. You have to uplift the status and recognition of the entire finance department within the group. If you’re only recording, you don’t add much value, anywhere you go. But if you’re part of planning, that’s a different equation.
What exactly does being an active CFO entail?
I used to be with China Resources Microelectronics, so I spent ten years in China, and then the CEO transferred me to Hong Kong in 2009. He asked me: What do you want to do, how do you see this company?
Before 2009, we were classified as a conglomerate, [a structure that was no longer] that popular compared with ten years before. Our share price was being held back by the so-called conglomerate discount.
We [in finance] had to give ideas. I talked to investors, I went on roadshows, I talked to CEOs in other business units. We decided we should dispose of some of our smaller businesses and then use the proceeds in our core business.
We sold our interest in the textile business, which was a HK$1 billion business. We sold our interest in a Calvin Klein franchisee, we sold our interest also in other smaller businesses and used the proceeds to buy more supermarkets, beermakers.
Our revenues have more than doubled now, but we have not yet raised a single rights issue, so we did not dilute any shareholder. And we’re still in a net cash position.
CRE sold its stake in Esprit China for HK$3.88 billion, or more than US$500 million, in 2009.
I still remember it very vividly. I was on a plane on a road show and I was reading the Wall Street Journal. I read that one of the biggest customers [of Esprit in Germany] was under receivership. I believed it may affect us.
So I talked to Esprit, and we quickly came to an agreement that maybe we should either buy the whole of Esprit or they buy our stake. The market has become so competitive. The end result was that we sold our interest in a very amicable way and used the money for something else.
This is what I mean about the finance department can also talk and take the initiative.
You can only do that if you have the capability, you have the expertise, you have the experience, if you are more than an accountant. How do you change that mindset and add to your skill sets in order to do what you did?
I always encourage my team to get away from the office. A lot of finance managers spend ten hours in the office and produce reports that no one reads. Even if [decision-makers] read them, they don’t believe them, because they think it is only academic. So why do it?
It’s better you go to the field, talk to the manager on the job, understand where the numbers are coming from. If you make $10 in profit, understand where the $10 is coming from. Is it sustainable? Or is it just pure luck?
If you lose $5 today, why did you lose that $5? That $5 may become $50 loss. Is it under control?
Whenever my finance team spends time on a report, I always ask: Who is reading it? Do they bring that report to their meetings? Does it help the decision-making?
If that report not doing the job, the function, then don’t do it. You better have lunch with your sales manager. Engage with the rest of the business.
One of your JV partners, Tesco, is in trouble today because they have been dressing up their numbers.
I’m one of the key members of the team that negotiated the joint cooperation with Tesco. We spent two-and-a-half years before the joint venture was finally agreed and signed. This is not a partnership by convenience.
The question I ask is, Can I learn from Tesco in the next five years, ten years, 20 years? The question is a very definite yes.
This is a company we have incredible admiration for, their culture, how they do business. Naturally in any company of this size, there are ups and downs. In China Resources, we have our own fair share of ups and downs.
Our JVs operate on a very simple principle: We try to bring in the best of the industry leader to China, where we complement them with our China know-how. So even as we face world-class competition like Walmart or Costco, I have some core competence which they do not have, which is my China know-how.
Big businesses that come to China in a big way, they would not be profitable immediately. Even for us, we started our supermarket in 2001; we were not profitable until 2007. Our beer business took five years to be profitable.
From my discussions with the Tesco management team, I’m sure given some time, they can turn their stores in China profitable. They have made Korea very profitable, they have made Malaysia very profitable, they have made Thailand very profitable.
Tesco can be profitable [in China]. They have the financial muscle, they have the know-how. They can withstand the loss. But we are not satisfied with just being profitable [in China]. We want to be the true No. 1.
The current scandal in Britain, that has no effect on the JV?
Our JV is an independent operation in China, it has no effect. I’m reading it with concern and interest, naturally, and watching developments. I’m sure [the scandal] will be over very soon.
The China Resources chairman, Song Lin, has been arrested for corruption. How has this affected your business? Are you worried about the future?
This is not a very pleasant question. All I can say is that our previous chairman is a very hardworking person and one we respected a lot in terms of business. His leadership of the whole group brought us to where we are today. We nearly doubled our size in the last five years.
However, the indictment concerns personal behavior, something that truthfully we do not know. It is not fair to comment on. We’re still recovering from losing a leader. We are also waiting for the court case to finish and hopefully we’ll know more.
On the business side, the unfortunate things that happened to our leader have no morale or tangible effect on our business. Things are going on as usual. None of our five listed companies in Hong Kong, the share prices have bounced back after a very short-term effect.
We have a beer JV in Chengdu that just celebrated its 20th anniversary. What makes this JV very special is not only that we grew from zero to No. 1 in China. It is that all through that 20-year period, we have had six chairmen. I’m the fourth CFO. But the JV is still going from strength to strength.
Once a company has a culture, once a company has a team, the damage of one individual or a small group could be very easily recover.
You have a new chairman in Fu Yuning, who came from state-owned ports-to-financial services conglomerate China Merchants Group.
The entire management team is very pleased with the appointment. Our new chairman was educated in the UK and has been in Hong Kong for more than 15 years, so he knows Hong Kong very well. He sits on the board of Li & Fung and serves in some capacity on the Hong Kong Stock Exchange. He is a good leader to help us move forward.
What is your reading of what’s happening in China? Will the anti-corruption drive end soon?
I sweat whenever someone calls me the ‘China expert’ because I don’t think anybody can call themselves a China expert. For the simple reason that things change so much.
What we have to do is, firstly, understand what’s the bases behind the change. To me, the changes are positive. They do create short-term pain, so I do receive less moon cakes.
But I think in the long term this is something very positive. I think it makes business more on equal footing.
What would be the biggest challenge for retail in China in the next five years?
Two years ago I was asked that same question. I said I don’t think the Internet will change our business so much. Today, I would say e-commerce is something that we all need to focus on because the impact is not just on food items. It’s changing the whole consumption pattern.
It has made our investment strategy changed also. This year we cut our investments in hypermarkets and investing a lot more in ecommerce, trying to put us in line with the new trends of consumption patterns.
Will this not affect your Tesco JV?
No. In fact that was one of the key points when we discussed the Tesco partnership. Tesco is one of the very few companies that run a very successful ecommerce in the UK. We were so impressed with their ecommerce that we are now talking to try to replicate in China.
When you say ecommerce, what exactly does that mean? People don’t go to the store anymore? They go online and wait for the goods to be delivered?
I think people still like to go to the store, but they don’t like to go there just out of necessity. They want to enjoy the store.
So if you just want to buy your bread or butter, you order online and have them delivered to your home, or you pick them up on your way home. It gives you more choice.
Nowadays, people work longer hours. So they value their quality time. They’d rather spend two hours reading books or going to the movies rather than lining up in the car park, park the car in the mall, buy something and go home.
So ecommerce provides you that alternative, which is catching on very quickly.
You as a retailer are redesigning your supermarkets to be more appropriate for this kind of consumption patterns?
I think the trend will be more on standard sized supermarkets, with many points so your customer will have the flexibility of picking up goods where they want to, rather than a big box supermarket.
So smaller, but more numerous, outlets to serve as pick up points and designed differently for more attractive browsing, maybe sofas for sitting down, having coffee.