20/20 vision

A prescription optics specialist with visibility deficiencies – a contradiction in terms? Three years ago, with 900-plus stores running on Microsoft Excel spreadsheets, Luxottica Retail couldn’t get a clear view of the real estate aspects of its business – and it was costing the company money. SAP’s Flexible Real Estate Management application fixed the problem, and then some. Nathan Luck reports.

Background
Luxottica Retail’s high-profile complement of brands includes OPSM, Sunglass Hut, Bright Eyes Sunglass Stores, Laubman & Pank and Budget Eyewear. Luxottica Retail leases all of its stores across Australia, New Zealand, Hong Kong, Malaysia and Singapore, with monthly retail payments of over $8.9 million. The company also spends $120,000-$300,000 each on 50 to 100 store fit-outs per annum to achieve its signature design, making the real estate aspect of the business a critical element.

With five brands and around 8500 retail staff, Luxottica Retail was experiencing increasing problems in the complex real estate component of its business, due to data ambiguity and inconsistency as a result of its manuallyoperated systems.

A distinct lack of transparency in critical areas was not only affecting the bottom line, it was leaving the company exposed to external factors that carried hefty financial penalties.

“Trying to analyse and understand our portfolio was extremely frustrating. It was driving everybody absolutely nuts,” says Tony Hess, director of real estate, Luxottica Retail Australia. “There were issues with data integrity – trying to work on so many spreadsheets makes data inconsistency and accuracy a major challenge.”

Considering the number of stores the company had, risks such as a lease expiring before the company realised could prove not only hazardous in terms of losing the space but expensive in terms of wasted time, lost income and the costs associated with relocation. “Luxottica really needed to take control of its growing portfolio in terms of both financial visibility and risk mitigation,” says Adrian Vaughan, senior solution architect at Harms Consulting, the SAP implementation partner Luxottica chose to work on the project. “The company has a very streamlined 12-week process for its fit-outs, but it wasn’t able to manage the financials of those projects in any of its existing systems. The project managers were good at their jobs, but there was minimal visibility of project details.”

Key challenges

The two key areas the business lacked visibility in were management reporting (including project commitments and expenses and rent-free periods), and critical dates (such as rent reviews and rent increases). The business was also encountering difficulties managing its expanding portfolio.

After evaluating a number of property management solutions, Luxottica found SAP’s Flexible Real Estate Management solution matched its existing functionality and offered much better integration to financials than the available alternatives. The company also found concerns over useability could be addressed with a strategy around Portal, SAP NetWeaver Business intelligence and custom Web Dynpro. Finally, the choice made sense as Luxottica already had an existing investment in SAP with its ERP application and NetWeaver Business Warehouse component.

“Beyond visibility, project management was a governance issue, an audit issue,” says Mark Shaw-Taylor, vice president of acquisitions, real estate and vision services,  Luxottica Retail. “There is a host of compliance issues associated with managing the installation of a new store.”

“We had to equal the functionality of the best-of-breed applications out there, and we did,” says Vaughan. “That made SAP Flexible Real Estate Management the obvious choice for Luxottica – given the integration aspects and the opportunity to leverage the core business software.”

Implementation
Courtesy of the ASAP Focus methodology that Harms Consulting applied to the project, which is employed to prepare an organisation’s system, data, and people to successfully run new SAP solutions, Luxottica initiated the project in December 2008 and converted to the new system in April 2009.

Using this methodology also helped Luxottica minimise any apprehensions staff may have had about the new SAP software programs, and illustrated how the solutions would alleviate, not exacerbate, the issue of limited availability of business resources.

The five-month roll-out included the implementation of SAP Flexible Real Estate, Portfolio and Lease Management, Rental Accounting, Procurements for store fit-out projects, Licensee Management using real estate contracts, Reporting in NetWeaver BI 7.0 and NetWeaver Portal integration. The SAP upgrade was integrated with an Oracle database, IBM P595 hardware and an AIX operating system.

Results

As Luxottica’s manual procedures were replaced by automated solutions, the company found its overall business processes improved accordingly. “Previously, when we did our rent payment, there would inevitably be questions from the cost centre managers,” Hess says. “It used to take us weeks to get them answers, but now I can respond within one day.”

The implementation of SAP solutions gave Luxottica a complete view of its portfolio, and a dramatic reduction in time taken to produce reports. It also facilitated simple visibility of critical dates and store fit-out costs, an efficient and accurate monthly rent roll, the ability to accrue rental increases expenses much more accurately, better management of licensees and a reduction in operational risk.

“Every month, someone would have to work with spreadsheets for various financial tasks – for example, to make real estate payments,” Vaughan says. “That’s all changed. The company now uses the SAP software to maintain the lease contracts and manage all financial data.”

The SAP implementation also allowed revision of other processes such as project procurement and management reporting, lease administration and asset capitalisation of fit-out projects. “Having eliminated spreadsheets and manual tasks like data entry, everything flows through exactly as planned – if the contracts are maintained correctly,” Vaughan adds.

“We went live with all 900+ stores in one big bang. We had a rent roll of about $7 million per month, and when we did the first reconciliation after the implementation, we were out less than $100, which was quite remarkable and far better than the results we were getting with our previous manual procedures,” says Hess. “SAP Flexible Real Estate Management has helped us immeasurably. We can now control our rent expenditures and meet our project management requirements for the proper and timely control of fit-out costs.”

Luxottica considers the highlights of the SAP upgrade to be the establishment of a robust real estate system with trusted integrity, accurate, timely and targeted reporting delivered via SAP NetWeaver BI and the ability to address usability issues through Portal-based access, Excel template-based quotation and purchase order uploads, Web Dynpro ABAP Purchase Order Wizards and push reporting (email broadcasting). So how has the SAP implementation translated to tangible results? “The first benefit I noticed was in the reporting area,” Hess says. “I can now produce reports in one hour, versus the four days it previously required. So my efficiency has improved commensurately.”

The company also believes its newfound visibility into real estate-related transactions has given it greater negotiating power with its landlords. “We’ve probably minimised rent increases,” Hess adds. “In the past we would have accepted rent increases of 70-80 per cent, based on the information available to us. Now, with the financial reporting coming out of SAP Flexible Real Estate Management, we can project costs six months out and determine what we can actually afford at each particular site.”

Additionally, with $24 million per annum in capital expenditure, Luxottica believes the ability to monitor supplier performance as well as procurement activities allows it to make smarter decisions and subsequently reduce costs.

In terms of risk management, the company also predicts that eliminating the potential for lapsed leases alone will return the implementation investment in less than a year, while also allowing it to accurately calculate the financial ramifications regarding sites it chooses to vacate.

“We have minimised our risks since we implemented SAP Flexible Real Estate Management, due to our complete understanding of the Luxottica portfolio,” Hess says. He also sees the issue of project managers no longer having to manually collect data for analyses as a major plus. “They now use the solution to ensure they have all the information they need for successful negotiations and tendering of contracts.”

Three years down the track, Luxottica has increased the size of its portfolio by 25 per cent without increasing its head count. The company is experiencing better recovery of funds owed by landlords, better management of costs in all areas and more robust management of construction costs.

As Australia’s first SAP Flexible Real Estate implementation, the project was showcased by Vaughan and Hess at the 2011 SAP Exchange on Real Estate Lifecycle Management in Chicago in April.

Looking forward

What does the future hold for Luxottica Retail? The company is looking to improve real estate-specific budgeting, with data extracted from SAP and manipulated in Excel. It is also looking to explore greater functionality for project expenditure, build a data warehouse of shopping centre information, and integrate real estate information with demographic data.

This article was first published in Inside SAP Winter 2011.

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