STRATEGIC MOVE

STRATEGIC MOVE - Is your company stuck in a cramped, unprofitable site? Relocation may be tempting, but choose badly and it'll cost dearly. Furniture-maker Ercol juggled competing claims for cheap land and staff-retention, while bike manufacturer Raleigh opted to go abroad. Both got it right. Andrew Saunders discovers how.

by ANDREW SAUNDERS
Last Updated: 31 Aug 2010

Is your company stuck in a cramped, unprofitable site? Relocation may be tempting, but choose badly and it'll cost dearly. Furniture-maker Ercol juggled competing claims for cheap land and staff-retention, while bike manufacturer Raleigh opted to go abroad. Both got it right. Andrew Saunders discovers how.

Like moving house, moving your business can be a stressful experience.

Much more than just a question of finding a new place to lay your commercial hat, relocation is a huge strategic challenge: the chance to start again and reassess the whole of your operation.

As well as offering the obvious advantages such as more space, better layout and the chance to design a new working environment, the prospect of moving poses big questions about the nature of the business and where it is going. And increasingly these days, many businesses looking to relocate face another critical decision - to stay in Britain or go abroad?

This was the dilemma facing bosses at up-market wooden furniture manufacturer Ercol when they decided it was time to up sticks three years ago. The old factory in High Wycombe had housed the firm for 80 years - it was where Italian emigre Lucian Ercolani had made his first Windsor chair - but it was no longer up to the job. 'It had been added to piecemeal and was very badly laid out,' says chairman Edward Tadros, Ercolani's grandson. 'Also, the town had spread and we were in the middle of a residential area. We had to move.'

But where to? Ercol sells about pounds 450,000 worth of furniture a week (wholesale) to stores such as John Lewis, Allders and Furniture Village, as well as to large independent retailers and direct to the customer. Competition from Habitat and Ikea has made life at the top of the middle market pretty tough, and the temptation was to copy a host of rival firms - as well as other big UK names like Dyson, Dr Marten's and Hornby - in taking their manufacturing overseas in search of big savings and a huge boost to productivity.

'We did think about shifting our manufacturing operations and becoming in effect a design, procurement and marketing company. Bent wooden furniture is popular in the Czech Republic and Slovenia, and they can do it for a lot less than we can. Or we could have gone to the Far East - retailers are very keen on Chinese furniture because of the mark-up they can add. But that's not what we do. We make furniture.'

Even if your relocation headaches don't include emigration, it's worth asking questions about whether you really need to be based where you are.

Could a better deal be struck in another town or region - particularly if there are grants or favourable loans to be had by businesses moving into the area?

'I clipped a coupon for the Irvine Development Council in Management Today,' says Tadros. 'The guy called me straight away and was in my office with plans for a new factory only a few days later.' It was quite an offer.

'The land was cheap and he said they'd help us build it. But I didn't think we'd persuade many of our staff to move up to Scotland.'

In the end, he decided that the workforce was Ercol's key strategic asset, so in an effort to hang onto them when the company did move late last year, it was down the road rather than the length of the country or across the globe. And to an area that doesn't qualify the company for a single penny of government money. The new Ercol factory is in Princes Risborough, less than 10 miles from its original base.

'Making furniture the way we do it is a very highly skilled job; it's not like operating a press or a plastic moulding machine. We've got fourth and fifth generation furniture-makers at Ercol - it's in their blood, says Tadros. 'I don't think we could find that level of ability anywhere else.'

When you're looking at new premises, it's tempting to go for somewhere much bigger than you need. Be careful, says Paul Winter, head of property strategy consultants Corpra. 'Don't buy spare capacity 'just in case'; you may never use it. Why pay for it?'

At 160,000 sq ft, Ercol's new factory is smaller than the old one, but much better use of space makes it far more productive. Designed by architects Horden, Cherry, Lee - based in London's West End - it's an attractive and enjoyable space in which to work and was nominated for the 2002 Stirling Prize.

Nonetheless, it would have been an expensive white elephant if staff hadn't approved and voted with their feet. 'It was a huge relief when 95% of our employees moved with us - that was why we stayed local after all,' says Tadros.

Sixty per cent of the pounds 10 million cost of the new factory came from the sale of the old site, now worth over pounds 1million an acre for housing. Ercol did alright out of property ownership, but the wisdom of buying a new home for your business outright is questionable, says Winter. 'Why do you need to own a property? SMEs in particular should think twice about locking up all that capital. There are probably far more productive ways of investing it in improving the business.'

Think about flexible short-term leasing arrangements instead. 'Long term leases look cheap but don't work. If you need to get out in five years it could be very costly. Short-term contracts are more expensive upfront but they are flexible and allow you to respond to changing market conditions much more readily.'

Achieving another kind of flexibility was one of the goals that Raleigh Cycles set itself when the company decided last December to put the brakes on 117 years of manufacturing in Britain. It closed its Nottingham factory, the setting for Alan Sillitoe's classic '50s novel Saturday Night and Sunday Morning, with the loss of 280 jobs. In future, all bikes bearing the famous Raleigh crest will be made in Asia (Vietnam, Korea and Bangladesh) on the same production lines as other brands, saving up to 20% on the cost of each machine. 'In 2000, we did a big strategy survey and successfully made the case for staying in the UK,' recalls chairman Philip Darnton.

When the firm looked at the issue again last year, however, the situation had moved on. 'To be honest, the price and the quality offered by the Vietnamese manufacturers left us gasping.'

But the ability to respond to changes in what is now a very seasonal and fashion-conscious market drove the deal for Raleigh. 'Bike ranges change annually, and if you're carrying old stock you have to discount it. With our old factory, lead times on components - which all came from the Far East anyway - were 12 to 13 weeks, and making fewer than 450,000 of one type was uneconomic. But the factory in Vietnam makes 1.5 million bikes a year, it can do very small runs and respond much more quickly.'

It's too soon to tell whether Raleigh and Ercol have made moves that will pay off in the longer term, but whether you get on your bike or stay at home, it's worth putting plenty of thought into the business of how to relocate, where to go and what functions to move. Get it wrong and you can be tied to restrictive contracts and expensive, unsuitable sites.

Get it right and you could find yourself sitting on a pile of much-needed investment capital and facing the happy dilemma of what to spend it on - like Raleigh's Philip Darnton. 'Raleigh is the only global brand in bikes, but while we were manufacturing in the UK we had no money for anything else. Now we've got a golden opportunity to spend some cash on getting the marketing right.'

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