Can testing resiliency now help retailers plan for a potential next?

By Joshua Chernoff

EY-Parthenon Americas Managing Director

Transformation leader in retail. Consumer-driven thought leader. Teacher and mentor.

9 minute read 28 Aug 2020

COVID-19 and the resulting economic uncertainty have scrambled consumer demand, supply and buying habits. Here’s what to do now and beyond.

In brief

  • Make some tough decisions about what you expect your business to look like, analyzing consumer segments and factoring in fresh consumer research.
  • Digital transformation across functions must be a priority, because it will best position you in e-commerce while driving positive change after the pandemic.
  • New mechanisms are required to either create or pressure-test your forecasting methodology and reorient it to be outside-in.

Before COVID-19, large sections of traditional retail were on the edge of profitability, as margins continued to erode, and consumers continued to move away from brick-and-mortar retail. After six months of life under pandemic conditions, the trends responsible for the sector’s challenges are accelerating — because what people buy and how they buy it are fundamentally changing.

According to the EY Future Consumer Index, 50% of respondents are purchasing only the essentials, and 53% say the pandemic has led them to re-evaluate their values and how they look at life. Even specific categories have felt an impact, for example, 60% say they are spending less on clothing and accessories. The economic uncertainty resulting from COVID-19 has further reshaped consumer spending, along with continued concern around health and safety.

COVID-19

53%

of consumers in an EY survey say the pandemic has led them to re-evaluate their values.

To make matters more challenging, if there’s an opportunity to avoid shopping at brick-and-mortar stores, people will take it up. This presents challenges for retailers whose products are difficult or expensive to ship or whose size prevents them from transforming their digital strategy as quickly as consumers needs demand.

Less spending overall. Different demand patterns. Increasing reliance on online channels. These trends create a perfect storm for most retailers in achieving enterprise resiliency, and those that were undercapitalized are facing store closures and layoffs — or even bankruptcy. How do you make sure you’re not among them, and that you can leverage the crisis as an opportunity to strengthen your business? Here’s how — in the now, next and beyond.

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Chapter 1

Now: Cash is king — but that’s only the beginning

What people buy and how have changed, requiring retailers to strengthen e-commerce, simplify operations and optimize store portfolios.

Focusing on cash is your immediate concern, as raising additional debt is not a long-term solution. Make some tough decisions about what you expect your business to look like, analyzing consumer segments and factoring in fresh consumer research. Perhaps that means divesting a business line or abandoning a venture whose promise still hasn’t been fulfilled. Review and assess supplier and vendor contracts and business costs and leverage government incentives while evaluating tax implications.

With an enhanced liquidity position, you have a longer runway to implement a new strategy, involving:

1. Enhance digital capabilities to drive e-commerce profitability

As important as e-commerce was before the pandemic, it is even more so now. Making a more profitable business demands a relentless focus on efficiency that can be complicated by changing shopping preference. Can consumers buy products online and pick them up or return them at your store? While this is quickly becoming consumer preference, it present inventory challenges across your store footprint.

Cost-effective digital transformation across functions should therefore be a priority for retailers, because it will best position you in e-commerce while driving positive change for the role of your stores after the pandemic. Making changes now will not only better position you for the current consumer landscape but it will also create agility for future uncertainty.

  • You can drive greater automation and digitalization of supply chain and operations to fill the manpower gap and free up working capital. Greater online logistics and delivery investments can help relieve some of the burdens of inefficiencies in getting your product from one place to another, making the economics of last-mile delivery work.
  • Advanced analytics helps you understand how consumers are buying products differently, informing where you should invest strategically.
  • Precision marketing caters to those changing consumer demands while driving customer engagement virtually. 

Making changes now will not only better position you for the current consumer landscape but it will also create agility for future uncertainty.

2. Make the hard decisions in terms of footprint

To compensate for the channel shift to online, which traditionally has squeezed margins, retailers need to simplify their store operations and optimize their store portfolio. Obviously, you can look at stores that were less profitable before the pandemic, but you also need to account for what’s going on around them. For instance, is the store in an outdoor mall where one of the main tenants has closed? That spot will be dark for a while: in a recessionary environment, demand for real estate is minimal.

Review your real estate leases and review the accounting impacts. But also understand that you could lose money by vacating a location, even if it’s underperforming, because of its place in your regional operations or e-commerce system. Perhaps that real estate is better served for warehousing. Storefronts may be converted into “dark stores” to serve as fulfillment centers rather than consumer-facing venues. Advanced analytics that considers a store place in your entire ecosystem can help you prune the least-effective assets.

3. Reorient your store operating models

The current environment has only intensified the divergence between shopping and buying. For your core footprint, health and safety concerns will force new models, and experiential retail will need to be unwound or re-envisioned. Right now, and potentially beyond the pandemic, the buying experience is more of an essential or need-based experience. Traditional brick-and-mortar must recognize this and pivot - avoiding in-store try-ons and checkout lines, those areas where a virus could easily spread.

All this has implications for your operations and how you engage with consumers. Consider:

  • What technologies are you using to enable contactless payment?
  • What do consumers need to know that they would originally learn from an in-store representative, and are they able to easily retrieve that information through their mobile device?
  • What labor do you still need in-stores, and should some staffers instead be allocated toward e-commerce or in-store pickup channels?
  • How can your promotions and incentives that may typically be presented at the cash register translate to the online world?

Stores still need to offer something unique to their consumers, and that’s perhaps truer now than ever before.

Retailers need a new approach to buying and inventory management. To efficiently compete with e-commerce players, in-store retailers might consider the digitization of supply chains to promote greater visibility into how much product is moving and where — a challenge for any company with a broad footprint.

At its core, though, stores still need to offer something unique to their consumers, and that’s perhaps truer now than ever before. Too often, retailers have moved away from different and personalized product mixes and instead relying on the usual fare from brand names.

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Chapter 2

Next and beyond: Building enterprise resiliency

Midterm forecasting, supply base reviews, cybersecurity and tax/finance optimization should also be on your radar for operating effectively.

Over the longer term, retailers need to identify better ways of working and build resiliency for the next crisis, to be able to mitigate risks to the extent possible and gain the time and flexibility to respond to challenges without falling into a panic. Such activities include:

1. Change and challenge your midterm forecasting

Many retailers base their business plan on achieving incremental growth from the prior year and then working backward from the targets. That planning mechanism has been dramatically disrupted, and rethinking what you’re going to sell 6 to 12 months from now – something that’s nearly impossible to do at this point - has large implications on supply chains.

On the demand side, new mechanisms are required to either create or pressure-test your forecasting methodology and reorient it to be outside-in, combining macro factor with very granular household or ZIP-code-level financial and consumption data, perhaps from your loyalty program. Planning will require adjustments to accommodate a richer mix of omnichannel fulfillment, promotions and seasonal merchandise.

On the supply side, you need superior visibility and control along your value chain. COVID-19 has been unique in that it’s impacted both consumption and production. You can’t take for granted that your vendors have the capacity even if you’re able to meet the demand in the stores. The more control you have over your end-to-end supply chain, the easier it is to see whether you will have production disruption before it happens. Supplier diversification — in Asia, Africa or South America, depending on the industry — is also worth exploring.

2. Perform a strategic review of your supply base

Understand where you can squeeze out additional value. Are there vendors you can negotiate with? Some vendors will cut you off because they can afford to, while others don’t want any of their customers to go under. Additionally, focus on goods not for resale and be ruthless about taking a zero-based budgeting approach to those costs.

3. Optimize tax and finance functions

As supply chains are disrupted, companies have to manage tax considerations such as transfer pricing, indirect tax, customs duties and hence optimize their tax profile. Similarly, as your business changes and your strategies evolve, you must monitor changing compliance requirements and assess the impact of changes in duty rates and classifications for products.

Tax software provided as a service — in which a company subscribes to technologies and tools instead of buying them outright and later needing to upgrade them and train in-house staff — offers a way to drive optimization and automate key tax activities. Such tools can also enable ways to delegate centralized data collection, tax account reconciliations, tax payment requests and tax journal entry posting for approval. This can be the first step to outsourcing direct and indirect tax functions and those that handle transfer pricing and non-tax accounting, without a loss in quality.

The public doesn’t understand restructuring vs. going out of business.

4. Strengthen and broaden your online defenses

Naturally, cybersecurity is on the minds of most companies today, but in an era of contactless payments and great reliance on online channels, the concerns go far beyond malware, for example. Continually think about cybersecurity within the context of how your business is evolving and how your protections must evolve alongside it. This is a workforce issue as well, so be sure to conduct regular security, privacy and awareness trainings.

Also, how does your organization respond to potentially damaging digital misinformation and the rapid spread through social media, particularly if it has filed for bankruptcy? This can be the kiss of death: the public doesn’t understand restructuring vs. going out of business. Monitor what’s being said through social media listening tools and use social influencers and other means to manage the message. In tandem, consider educating employees about how to answer customer questions so they’re not adding to the problem.

Addressing the needs of today and the world of tomorrow

When approached thoughtfully, COVID-19, while certainly a challenge, can also be an enormous opportunity. One in which retail executives can truly refashion the company for the future, even if it was built for the past. Returning to the pre-pandemic days is impossible, and today’s “new normal” won’t be new or even normal for long. Recognize that the world is changing and strive for agility, flexibility and resiliency, guided by consumer behaviors and preferences. 

Summary

Most retailers are facing a perfect storm, and to leverage the crisis as an opportunity to strengthen your business, they should double down on e-commerce, review their brick-and-mortar footprints and reimagine forecasting — to be equipped not just for today but tomorrow as well.

About this article

By Joshua Chernoff

EY-Parthenon Americas Managing Director

Transformation leader in retail. Consumer-driven thought leader. Teacher and mentor.