The gatekeeper of Esprit Holdings

Group financial controller, Kenneth Cheuk, talks about the success of Esprit’s slim organisational structure.

Esprit might be listed in Hong Kong and have an outlet in every shopping mall and high street in the city, but it is by no means a local company. Kenneth Cheuk, the company’s group financial controller and senior vice-president of group finance, explains how it is genuinely an international company.

Please describe Esprit Holdings and your role in the company.
The original founders of Esprit, the Tompkins couple, were from the US, but over the years came different shareholders from different regions, mainly from the US, Europe and Asia-Pacific. In the 1990s, Michael Ying, a majority shareholder acquired the remaining shares of the European operations and Esprit ultimately became a united family. From a corporate angle, because Esprit is listed on the Hong Kong Exchange (HKEx), many people will regard Hong Kong as the home of Esprit, but actually our shareholders are evenly distributed across the US, Europe and Asia-Pacific.

More than 80% of our business comes from Europe and so our global business headquarters are located in Germany. And then of course being listed on the HKEx, our global financial headquarters are located here.

I first joined Esprit in 2004 as head of finance for Asia but my tenure only lasted for one year. I rejoined Esprit in 2007. As group financial controller and senior vice president of group finance, I am primarily responsible for the group’s statutory and financial reporting as well as the group treasury function.

You have 14,000 staff in more than 20 countries. How are your treasury operations coordinated and what solutions do you use?
On an operational level we have a finance team in each country that is responsible for the country’s business. We then have a finance team located in the regional headquarters that are responsible for all the countries within the region. Every team uses the same financial package provided by German enterprise software provider, SAP, so all the operations are homogenised. On a corporate level, which is the focus of the global financial headquarters in Hong Kong, we deal with reporting, regulators and our own shareholders. Here we use a consolidation package, also provided by SAP.

Improving liquidity and taking care of operational requirements and expectations are the roles of the group treasury. The group treasury manages the treasury policies and guidelines and ensures that the finance teams in each region act in accordance to them. In order to improve our liquidity position, and at the same time optimise our flexibility to satisfy operational requirements, we use a multi-tier liquidity management solution provided by two banks, HSBC and Deutsche Bank. Through this solution we have a clear view of our cash position across all levels. Any surplus cash, after taking care of our operational requirements, is accumulated and centralised into one or two locations. This maximises readily deployable cash to facilitate our expansion projects and to respond quickly to business opportunities.

We partner with HSBC and Deutsche Bank through their internet banking portals primarily, but also work closely with many local banks to support local operations.

Our finance team here at the Hong Kong headquarters consists of eight people on the statutory finance side and three people on the group treasury side. Esprit has a very slim organisational structure, but our tight-knit team is capable of handling all challenges related to corporate governance, changes to international finance and reporting standards, and listing rules and regulations, which have been more frequent in recent years.

What is the most important decision you have had to make?
I would say the most important decision I have had to make is to implement the multi-tier liquidity management solution from HSBC and Deutsche Bank. It is definitely a great challenge to implement a new solution in a company with such a large treasury function and wide geographical coverage globally, especially when we are trying to make changes to many practices that have been in use for more than 20 years.

Timing was also an issue as we were introducing the liquidity management solution during the financial crisis. Unsurprisingly the proposed implementation of the new solution was met with strong resistance. This was not only because it involved every tier of the company, but it also required the collaboration of many of staff. As our staff were used to surplus cash locally, it was very difficult to convince them of a solution where they just had sufficient cash at hand for operational needs. I am proud that we have successfully delivered this best-in-class solution, which the whole company has been using since 2009.

The number of your retail stores declined in 2006 and 2007, and your turnover reached a peak in the year of the global financial crisis. Can you explain what happened during this period?
Esprit used to own the Red Earth cosmetic products brand, which has recently been sold back to its original founder. In 2007 we began shutting down Red Earth retail stores because our core business is in the apparel sector. Today we only distribute Red Earth products in China as we are no longer the owners of the brand.

Although we have been consistently performing very well at the retail level, the decrease in overall turnover during and post-crisis is because of the decline in our wholesale business. In the year leading up to 2009, our wholesale business accounted for more than 50% of our total turnover, while in the year leading up to 2010 it accounted for 46%. This decrease was due to wholesale customers still remaining cautious and conservative when placing orders. In fact, some of our wholesale customers did not survive the turbulent financial crisis and became insolvent.

What plans does Esprit have for the next five years?
At the moment more than 80% of our business is from Europe and around 16% is from Asia. We are looking to grow our retail business in mainland China. We currently operate in 169 cities in China, with more than 900 points of sales, either through retail outlets or our franchisees. We are aiming to expand our presence to more than 400 cities in the next five years and at least double our annual turnover from China.

Hong Kong, Malaysia, Singapore and Taiwan will continue to be important and profitable markets for us but we will focus on important locations in China, notably the tier-one cities of Beijing, Shanghai, Guangzhou, Dalian, Chengdu and Chongqing. We have points of sale in almost every department store and shopping mall in those cities, but as they expand, so will we.

 

This story was first published in the Cash Management supplement of the November 2010 issue of FinanceAsia magazine.

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