Retail Insider interviewed Antony Karabus, CEO and Farla Efros, President respectively of HRC Retail Advisory on the top priorities for Retailers following the COVID pandemic.
The following is the Q&A interview:
Retail Insider: It seems that COVID-19 had a very different impact on retailers, depending on their sector.
HRC Advisory: Yes, that is correct. Some retailers had their best years ever, including food retail, home improvement, drug, pet, auto parts and outdoor fitness and fitness apparel. Others had been severely challenged, including department stores, specialty apparel, luxury and most stores that were based in enclosed malls.
Retail Insider: Many retailers filed for creditor protection. Can you describe the key causes that led to that situation and whether it turned out to be a good thing for some retailers?
HRC Advisory: While the pandemic was not the primary cause of most retailers that filed for credit protection, it was a major contributor. Many retailers that filed had significant balance sheet/debt challenges and could not manage their debt service when they lost their brick & mortar sales. Others had not transformed their businesses from brick and mortar-dominated to creating strong digital capabilities. In both situations, benefits of creditor protection gave the retailer the runway to transform their businesses and shed their unproductive locations and very high-cost leases. Some of our clients finally had the opportunity to exit leases in malls that were costing them rent of $ 250-300 per square foot, while their sales were well under $ 600 per square foot, effectively resulting in the avoidance of the recurring large annual losses in those stores. For numerous retailers, the transfer of sales from stores to online has been transformative with online sales often increasing from under 20% of total sales to as much as 40-50%. The cannibalization effect further eroded profits due to the high fulfilment, handling and returns cost of online sales.
Retail Insider: That is interesting, how does that impact retailers’ priorities for managing in 2021 and beyond?
HRC Advisory: The absolute top priority for retailers is to strengthen their balance sheets so that they have the runway to successfully operate and transform their businesses to profitably operate and serve their customers. Many well-known, debt-laden retailers that filed for credit protection have emerged from creditor protection with much stronger balance sheets and new shareholders and are now investing in technologies that will enable more effective omni-channel selling to and communication with customers in the way they want to engage. Fortifying liquidity/balance sheets was the single most crucial priority in 2020. It remains important for the numerous retailers that took on more debt during the pandemic.
Retail Insider: Where do retailers go after they have strengthened their balance sheet?
HRC Advisory: The rapid transformation of the customer from a primarily brick and mortar customer to an omni-channel customer has created the need for substantial capital spending to enable digital capabilities, and has also exposed the reality that numerous retailers have very old technology capabilities that need to be modernized. As well, retailers need to invest in their stores to create an improved, modern experience to reflect their brands and investment into the customer. The customer is even more key now, given their willingness to move to digital and their acceptance of digital as an engagement and shopping channel. The balance of power has increasingly shifted to the customer. This will maintain additional pressure on retailers to ensure they effectively and consistently meet customer needs.
Retail Insider: How are retailers going to allocate their capital spending?
HRC Advisory: The Retail CFO is best positioned to ensure capital is directed, allocated and prioritized towards the most important strategic and operational value-drivers to ensure the most important new and improved capabilities receive funding. Additionally, the business cases must be tracked by someone in the CFO’s organization so that the anticipated benefits are produced. To do this, retailers must develop and install a rigorous capital allocation policy to ensure the capital is spent in the right places to get the best payback and the benefits are obtained.
Retail Insider: What other steps do retailers need to take for the future?
HRC Advisory: “First and foremost, retailers need to develop a new business operating model to profitably compete over the next few years.
The business operating model will involve making key decisions around issues such as:
“Is your inventory placed in the right spot? Forecasting is going to be important in terms of how much is going to be online, how much demand is going to be in what stores?”
“Do you have the liquidity/cash flow to sustain your business with sufficient runway as you transition to a more relevant business operating model to profitably serve the omni-channel customer and to reduce risk.
“What should your new store fleet size be, what stores are no longer located in the right places and what decisions need to be made to maintain profitability at a time of seamless integration between stores and digital channels?”
“Which application systems need to be modernized to enable the digital and fulfilment capabilities to effectively serve the omni-channel customer?”
“Who is your customer? Where are they in their lifecycle? How do we best service them?”
“Last but not least, is your supply chain properly configured for the new digital environment?”
“How do you still make acceptable profits given the higher cost of fulfilling online orders?”
Antony Karabus, CEO and Farla Efros, President, HRC Advisory, can be reached at akarabus@hrcadvisory.com and fefros@hrcadvisory.com respectively. Visit HRC Advisory at www.hrcadvisory.com. The HRC Advisory team has been advising retailers on improving profitability and transforming their businesses since 1990 at every stage of the economic cycle.
