6one5 Retail Consulting Group's Bill Rooney looks at life after COVID-19.
Sussan Group is following the lead of Premier Investments in paying rent as a percentage of revenue.
This goes a long way to helping restore profitability until store traffic returns to near normal; in our view around October 2020, although we are estimating traffic will be 80% of 2019 traffic.
Ask your landlords for their forecasts of shopping mall traffic as a starting point for your own rent negotiations.
They will tell you that it is impossible to forecast - well, this, Premier and Sussan Group should be the starting point for discussing reductions as a result of COVID-19 uncertainty.
Retail Renewal: The next way to optimise your business
New Retail is another way of describing retail digital transformation.
Legacy retailers who resist the change are no different from their counterparts in the newspaper/magazine, advertising, travel, taxi, telephone, TV/Cable, music, hotel, postal industries who defended the old ways.
These players are quickly overtaken or replaced by more agile digital competitors and retailers prepared to change and through this process develop agility.
All COVID-19 has done is accelerate the process.
Renewal starts with a new retail digital and business strategy designed to take substantial costs out of the business to reinvest in the future state.
Whatever we say about the role of traditional retail and how it can survive and thrive in a post-digital world, so much comes down to fixed costs.
Retailers must remember that staffing levels and budgets so often owe much more to the way that inflated revenues once made them affordable, rather than what is actually required.
Let me give you some examples of excessive costs.
Case Study 1: A retailer that recently went into administration was weighted down by excessive head office wage costs supporting the equivalent of 300 employees. This was based on our estimate from their financial statements. Best practice in the industry for a similar revenue is around 90 head office staff. The goal should have been based on best practices to move to 200 then 150 head office staff thus saving between $10m and $15m and saving the business.
Case study 2: A retailer with approximately 80 stores employed eight IT staff to manage their on-premise financial systems, hardware, and software. A cloud-based ERP system would require maybe two staff a saving of approx. $500,000 on wages.
In Case Study 1, do not expect your retail executives to benchmark HQ costs and reduce staff by up to 50%.
In Case Study 2, do not expect your IT Department to recommend a cloud based system. This never happens in my experience unless you benchmark.
Benchmarking together with zero-based budgeting is a starting point to cutting substantial costs out of a traditional retail business.
However, many retailers are reluctant to deploy this technique for many reasons.
These include benchmarking being seen as a criticism of existing practices, being asked why have you not fixed this in the past, job risk, fear of failure and so on.
This is why a whole of business retail strategy is an effective way of implementing change as everyone agrees upfront with the strategy, the outcomes, and the implementation plan thus sharing around the responsibility and accountability.
Five Ways To Cut Costs and Grow Now
Start with these cost cutting and growth areas:
1. Margin Management: There are substantial savings in managing margins using analytics to minimize discounts, reduce overbuying, manage stock.
2. Recruitment, training and HR function: A key area for digitization to save costs and improve productivity for human capital.
3. IT Function - for most retailers a cloud-based ERP and eCommerce system will provide the best results from a cost and customer outcome perspective.
4. Rental negotiations based on paying a % of sales and also a focus on rationalization of your store portfolio
5. Sales Growth via deploying best in class category management and developing a retail sales culture with a customer-facing team member.
Even the largest of retailers are challenged by a combination of COVID-19 and the digitization of all aspects of retail.
The solution is to develop a whole of business retail strategy that is based on using analytics, innovation to create differentiation and a great customer experience.
This involves risk and it exposes the organization and individuals job security.
No one said it will be easy.