Retail Executive

SEP-OCT 2017

Retail Executive is the trusted advisor to top retail executives from the industry’s most profitable retailers. We help retail executives succeed in their job role and grow their business via exclusive, actionable, peer-driven content.

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Fifty percent of companies surveyed that have gone through a margin improvement program found costs "bounced back" after the reduction, and more than 30 per- cent of cost-reduction efforts substantially weakened the company. Recasting the cost structure is not about look- ing where to cut costs; instead, retailers should consider a nontraditional perspective on major cost themes based on the strategy. 3. Embracing organizational agility To be able to thrive in uncertainty, retailers should im- prove the speed of operations and decision making. In the past two years, stock returns of the top U.S. retail innovators outpaced the market by 38 percent. These retailers, who grew up in the age of technology, are 31 percent less likely to get bogged down in the hierarchy, and 17 percent more likely to make quick decisions. THRIVING IN UNCERTAINTY The retail industry's future is evidently in some state of flux. However, retailers can thrive in this uncertainty if they know how to achieve profitable growth by contin- uously adapting to consumer demand. Consumers will likely continue to spend on items, services, and experi- ences, even as their preferences and behaviors change. Online retail aggregation and new digital platforms will continue to offer smaller retailers greater influ- ence without requiring enormous capital investment, upending traditional barriers to entry. Global players will continue to find new channels of influence, even as consumers adopt and use new technologies that affect upstream manufacturing and downstream distribu- tion channels once thought to be the basis for all retail. However, volatility and bifurcation are not the end for retail. Quite the contrary. An ever-evolving market- place may spell opportunity for retailers who are the most-informed, best-prepared and, perhaps most im- portant in a fast-changing, competitive environment, best able to adapt. R In dividing retailers into three cohorts along this val- ue-proposition spectrum, we found that those that have been the most aggressive in targeting a low-price and con- venience proposition have outperformed the retail market with a compound average revenue growth (CAGR) of 6.5 percent over the last three years. Retailers that have suc- cessfully differentiated with unique product, service, and experience offerings also outperformed the competition by achieving CAGR revenue growth of 8.1 percent within this time frame. Conversely, retailers that fit neither of these two categories are "stuck" in the middle and deliv- ered average CAGR revenue growth of just 1.4 percent. To thrive in uncertainty, however, retailers may want to re- write the playbook and focus on three main levers. 1. Rethinking the operating model Retailers should start by understanding that success is driven by the willingness to constantly reexamine and develop the operating model, structure, and supporting tools and technologies. Deloitte's annual research study with MIT Sloan Man- agement Review found that more than two-thirds (68 percent) of surveyed retailers believe they have moved beyond the early stages of digital maturity. Still, less than half (44 percent) believe they are adequately pre- paring for digital transformation. Across the market- place, leading retail executives are simplifying their op- erating structures by making fundamental changes to how they organize and operate with a goal of orienting themselves around the customer. 2. Recasting the cost structure Creating headroom for growth involves retailers taking a fresh look at spending, investing to support the new growth agenda while simplifying the core business model, and diverting resources from areas that do not drive mar- ket differentiation. Rethinking the cost structure to drive profitable growth is more critical than ever before and re- quires a balanced and integrated approach to be effective. THE RETAIL PARADOX: CONSUMER CONFIDENCE HIGH, RETAIL SALES FLAT SOURCE: 1 U.S. Census Bureau, Seasonally-Adjusted Retail and Food Services, ex. Auto; 2 University of Michigan: Consumer Sentiment Index; 1966 Q1=100 15% 10% 5% 0% 100 90 80 70 2012 Q1 Q2 Q4 Q3 Q1 Q2 Q4 Q3 Q1 Q2 Q4 Q3 Q1 Q2 Q4 Q3 Q1 Q2 Q4 Q3 Q1 2016 2015 2014 2013 2017 U.S. Retail Sales 1 Consumer Sentiment Index 2 The Retail Paradox Consumer Confidence U.S. Retail Sales* RETAILEXECUTIVE.COM SEPTEMBER/OCTOBER 2017 27

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