Scott Davis, Partner, Corporate Advisory and Restructuring Services Marti Kopacz, National Managing Partner, Corporate Advisory and Restructuring Services Grant Thornton LLP April 2009 www.grantthornton.com
The holidays are long since over, but for many retailers they were over before they ever began. Few retailers fared well at the end of 2008, with economic news from the sector as bleak as or bleaker than anticipated. Holiday sales fell 2.2 percent, the biggest decline in decades. Overall December sales dropped 1.7 percent and November sales dropped 2.7 percent, according to the International Council of Shopping Centers.i Many retailers reported double-digit percentage sales declines.
Falling sales hit all regions of the country and nearly all sectors of retail, from low to high-end, challenging most retailers and pushing many to the brink of failure. A number are contemplating or have declared bankruptcies and announced significant reductions. Those shutting operations entirely include Linens n’ Things, Steve & Barry’s, Mervynsii and Circuit City, while many other chains are closing large percentages of their stores. Retailers including Ann Taylor, Office Depot, Starbucks and Home Depot are closing substantial numbers of stores.iii In fact, retailers are expected to close 73,000 stores in the first half of 2009.iv
Unfortunately, the harsh light of a downturn often illuminates and exacerbates existing internal problems, such as less than optimal strategy or execution. In contrast, during times of easy credit, free-spending consumers can help even some marginal operations profit. Challenging economic times test the mettle of retailers, but they also present real opportunities for companies with foresight and discipline. Retailers that position themselves effectively will not only survive now, but also will thrive when the economy rebounds.
Where’s retail going?
Although the past year highlights the high-risk nature of the industry, it also offers a chance for companies to fine-tune their businesses in order to take advantage of new opportunities. Grant Thornton has identified five such trends transforming the retail industry and offers tips for capitalizing on these areas of increased profitability.
E-centricity: Buyers choose clicks over bricks
Buyers may not be buying much, but online sales have suffered less and, in certain categories, grown more than in-store sales. Online retailers consistently outperformed brick-and-mortar stores in 2008 holiday sales.
Among the few winners in the 2008 holiday season were Zappos.com and Amazon.com, showing the growing power of online retailing. Zappos.com’s November and December 2008 sales rose 127 percent over the previous year.v Online sellers generally outperformed brick-and-mortar stores, according to a study by comScore, which compared e-commerce data to overall (online and offline) consumer spending data published by MasterCard Advisors’ SpendingPulse for 2008 and 2007 holiday seasons. Online sales outperformed overall spending in several product categories in 2008:
Sales of apparel and accessories each increased four percent online. Apparel declined 19 percent overall, while accessories declined 21 percent.
Consumer electronics declined just five percent online.
Jewelry and watches declined 24 percent online, while luxury goods (including jewelry and watches) declined 34 percent overall.vi
Online shopping via the Web will continue to grow over the next decade. One need only observe how airline ticketing has evolved online — and its corresponding effect on travel agents — to envision how dramatic the transformation is likely to be. Brick and mortar isn’t going away, but these results suggest that traditional retailers need to extend their brands into the digital arena. At the same time, retailers must be cognizant of the ramifications of a greater online presence, such as its impact on physical store sales and locations, real estate, logistics and costs.
Retailers must consider what will work for their stores and products. Successful retailers will demand a rigorous analysis of sales trends, customer demographics, product line, profitability and store profitability. Do the retailers’ target customers shop online in general? Do they purchase online? Is the operation losing sales to online competitors? Does the retailer offer something tangible or intangible in stores that cannot be replicated online? Will increased online sales improve overall sales or merely cannibalize its brick-and-mortar stores? Lastly, will the right online infrastructure investments capture customer attention and sales and provide an adequate return on investment?
Private-label strategy: Private labels gain ground against name brands
Private-label brands are growing in popularity in today’s economy, particularly among price-conscious consumers. The shift to private-label brands, like any product-driven strategy, requires an understanding of the potential for the retailer, as well as the risks. Two of the factors influencing private-label acceptance among buyers are product price and complexity:
Price consciousness: Price-conscious consumers traditionally prefer private-label brands. Current economic conditions are likely driving private-label sales up, but when the recession ends, will customers stay with a private label or move back to name brands?
Product complexity: Much of the interest in private label has come from the grocery sector, which tends to offer more commoditized products than the retail industry. Retailers need to consider whether less-commoditized products, typically combining complexity and brand equity as key value attributes, are suitable for private label treatment.
Data from the Nielsen Company shows rapid growth for private label — nine percent of consumer packaged goods products, but suggests that this growth is driven by rising commodity and food prices, not by consumers abandoning national brands. Nielsen’s director of industry insights, Tom Pirovano comments, “Higher prices in commodity categories like eggs, milk and cheese are driving private-label dollars, not consumers deserting traditional brands.”vii In addition, retailers must recognize the carrying and other costs associated with private label business when committing to this strategy.
Sustainability: Going green brings in the green
Consumers are increasingly focused on the environmental impacts of their consumption. Reduce, reuse, recycle – the three Rs of the green/sustainability movement – continue to influence customer behavior. Environmentally sensitive goods and practices win a growing share of customer dollars.
Although it is difficult to separate the effects of environmental consciousness from the general economic slowdown, consumers’ focus on reusing and recycling cannot be ignored. Purchasing environmentally sensitive goods is, for many consumers, no longer an afterthought but a way of life. Retailers need to both be green and sell green products if they plan to cash in on this trend.
Not surprisingly, sustainability is a growing area of investment among Fortune 500 companies. Eight in 10 of the 65 Fortune 500 corporate sustainability executives plan to maintain or increase their budgets in 2009 despite the economic downturn.viii Retailers are demonstrating their commitment to the sustainability movement in a number of ways:
In 2007, Home Depot committed to invest $100 million over the next decade to build more than 100,000 affordable green homes and plant three million trees through its Home Depot Foundation.ix
J.C. Penney is building a Fairview, Texas store that will use 41 percent less energy and 20 percent less water than similar sized stores.x
Whole Foods Market became the first Fortune 500 company to buy wind-generated power to cover all purchased electricity used throughout its U.S. operations.xi
Customer loyalty: Growing investment in key customers
Even when sales are stagnant or declining, there is growing recognition that enhancing affinity among retailers’ best customers can produce long-term benefits, particularly since 20 percent of customers typically account for 80 percent of sales. Many retailers are investing their marketing, promotion, and discount dollars with their most loyal customers, putting as much emphasis on affinity as on generating traffic. In fact, many retailers may have fared better during the holiday season than they realize if they consider their ability to leave positive impressions with key customers as a performance indicator.
Many brick-and-mortar retailers are sending cards and e-mails inviting loyal customers in for special shopping experiences such as wine tastings or fashion shows. Online retailers continue to foster loyalty for returning customers by offering discounts or upgrades to faster shipping methods. Last year, Starbucks offered reward-program members extras such as free coffee refills and two free hours of in-store wireless internet access, while Old Navy offered each reward-program member $10 off a purchase of $50 when he or she makes a purchase during his or her birthday month.xii
Customer loyalty programs need to be thoroughly analyzed, using statistical and other analytical techniques to calculate true returns. These same tools should be applied to gift-card usage, often a component of loyalty programs. This is especially critical after a down holiday season: Were consumers wary of buying gift cards amid major store closings and liquidations? Were redemption rates higher than past years as cash-strapped consumers made sure to use the cards they received? In addition, proper gift card accounting to ensure adherence to US GAAP and tax regulations is critical for retailers.
Cost and productivity management: Improving processes lowers costs and enhances customer satisfaction
There is vast potential for retailers to improve their business processes, cut costs and increase efficiency in both customer-facing and back-end processes. Anyone who has waited in a long checkout line while clerks simultaneously answer phones, perform price checks and ring up orders will agree that process improvement is desperately needed in retail. While customer-facing processes offer obvious examples, a myriad of back-end processes can also improve productivity with more efficient approaches.
Lean thinking is one approach that is becoming increasingly common. This involves an intense focus on perfectly satisfying customer demand, while improving productivity and lowering costs by eliminating various forms of waste, e.g., too much inventory, unused time and resources, damaged products, long waits for shipments, etc. A growing number of retailers, such as U.K. grocery and merchandise chain Tesco and Spanish fashion chain Zara, are adopting lean concepts.
There are many other opportunities to improve bottom-line performance:
Improve staff efficiency via standardized work: Standardized work reduces unnecessary steps and errors among the workforce and ensures common best practices by establishing a benchmark for performance. Standardized work and job instruction sheets establish order and repeatability for mundane tasks, so that staff are free to be more creative in customer care and store improvements.
Strengthen inventory management: Improving inventory management can provide three benefits simultaneously: minimizing stock-outs, increasing profitability and improving cash flow. Making inventories leaner can improve cash flow from in-store stocks through distribution centers, and all the way back through the supply chain to suppliers.
Excessive amounts of inventory don’t ensure that retailers carry what customers want. Instead, oversupply often hinders retailers’ abilities to see and analyze what’s available and how it’s moving.
To get started, retailers must gain a deeper understanding of which products are truly profitable, how their inventories move, how they vary in popularity by SKU, and how supplier capabilities and customer demands affect their inventory volumes. This analysis enables retailers to establish minimum and maximum inventory levels, replenishment points, appropriate safety stock buffers, and delivery schedules. Although right-sizing inventory can be challenging, especially in stores with high numbers of SKUs, it can put retailers in sync with customer demand, while reducing costs associated with deep discounts on unsalable merchandise.
Manage bricks-and-mortar: In order to maximize the value of their brands, retailers must understand store-by-store profitability and decide which stores should be supported or closed. Also, retailers will want to use the current market conditions to negotiate better lease terms with landlords.
Create a culture and strategy focused on improvement: This is an area where many retailers fall short. An effective culture begins by committed leadership identifying and communicating key corporate objectives, and then translating those objectives into division, store, department and employee goals. For example, if a retailer’s primary objective is improved profitability, how is that translated into concrete goals for a warehouse worker, store clerk or janitor? This cascading of strategy and objectives occurs alongside management processes to check performance against these goals, adjusting and improving as they go.
Act now to maximize opportunities
The time is now for retailers to re-examine their strategies and position their companies effectively both to ride out the economic downturn and maximize profitability when the economy rebounds. A number of highly successful retailers, such as Zappos.com and Amazon, have identified and exploited these timely opportunities. So too can other retailers that are savvy and forward-looking.
Certainly, managing the challenges and opportunities facing retailers can seem overwhelming in a downturn, especially considering the many other issues retailers face each day. But after every recession, the winners that emerge during the recovery are those companies that invest the time, effort and resources to position themselves effectively for the future. With many competitors already moving forward, smart retailers cannot afford to wait.
i Stephanie Rosenbloom, “After weak holiday sales, retailers prepare for even worse,” The New York Times, Jan. 9, 2009. ii Mae Anderson, “Steve & Barry’s to begin liquidating stores,”AOL Money & Finance and Associated Press, Nov. 20 2008. iii Heather Burke, “Holiday sales drop to force bankruptcies, closings,” Bloomberg, Dec. 29, 2009. iv Barbara Farfan, “2009 retail store closings: Complete list of retailers going out of business, About.com, Feb. 12, 2009. v “Zappos CEO Tom Hsieh: Customer focus key to record sales during retail slump,” Knowledge@W.P. Carey, Jan. 14, 2009. vi “Despite weak season, online spending trends outperform brick-and-mortar across several key retail categories,” comScore, Jan. 2, 2009. vii “Higher Unit Prices, Not Volume, Behind Rapid Growth of U.S. Private Label Sales,” The Nielsen Company, June 4, 2008. viii “Fortune 500’s Green spending up as economy slides,” Sustainable Life Media, Nov. 26, 2008. ix Environmental milestones, The Home Depot x Susan Reda, “Sustainability emerges as a critical business issue,” Stores, December 2008. xi D. Gale Fleenor, “Whole Foods uses green tickets to purchase wind energy,” Stores, December 2008. xii Kelli B. Grant, “Deal of the day: Retailers expand customer-loyalty programs,” SmartMoney, March 31, 2008.