April 2015
Retail
Consulting
The new age
of retail: Keys
to success
Retail: Trends and threats
It’s clear that the Canadian retail landscape is shifting. More and more, successful businesses
are embracing online channels and new methods of benchmarking. The e-commerce platform
is now a necessity from the consumer’s perspective; and e-commerce sales continue to grow
and compliment store sales, and vice versa. One trend, however, that is of concern to Canadian
retailers is the rapid increase of foreign giants aggressively seeking more market share. It’s no
secret that retail behemoths from the US and overseas like H&M, Forever 21, Victoria’s Secret
and Zara are continuing to significantly attract Canadian consumers. What’s yet to be seen is
the impact newcomers will have on the scene when they arrive, namely: Nordstrom, Saks
and Uniqlo.
Aside from the foreign-factor making for shaky ground, even those facets that are normally
reliable are beginning to transform. Reports indicate that the 2014 Christmas season went
relatively well in terms of sales, but produced disappointing gross margins: Black Friday was
followed by a sales lull, competitive promotions resulted in margin erosion, and overall cash
flow was tight. On top of that, the old faithful regional mall that was once seen as the
superstructure of the suburbs is now fading and has given way to standalone power centres
and shopping outlets.
What can a retailer do to overcome these obstacles?
Brand management
There is a strong need for brand fortification in order to remain competitive in the current retail
market. Recognizing the influence of your “brand” and allowing it to evolve helps build staying
power and lifelong, loyal customers.
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In 2015, it’s important to be distinct, visible, and if nothing else, resolve to be resilient. Brands
that don’t shift their strategies when necessary tend to get stuck in their ways – and like
Darwinism, those that don’t adapt will ultimately face extinction. Target and Sears in Canada
are two examples of titans that fell prey to not strengthening and repurposing their brand to fit
within market and consumer demands – whether it be a failure to launch, as was the case of
Target Canada, or the slow decline over time that befell Sears. In this changing landscape, those
that can analyze their brand objectively and adapt where necessary, will grow – along with their
customer base.
E-commerce
Same-store sales growth this year is predicted to be flat, or minimal, at best, while rising labor
and occupancy costs in stores and head offices present a growing threat. To counteract these
forces, successful retailers are beginning to focus on e-commerce, and adopting an omnichannel approach to retailing - a ‘firing on all cylinders’ method to outshine competitors and
stay relevant and accessible to the public.
It’s important to ensure a seamless and unified shopping experience when
implementing your online strategy. Why? Because e-commerce is now a
market worth over $1.2 trillion, globally.
• SALES: 36% of in-store sales are impacted by digital
Recent survey
results indicate:
• TRAFFIC: 84% of people use digital before or during a store visit
• CONVERSION: 40% higher conversion rate
• ORDER SIZE: 22% spend more using digital
• LOYALTY: 75% said social channels influence loyalty
These two retail channels (online and store sales) don’t have to be exclusive, or rival each other,
as is the case with “showrooming” vs. “webrooming.” With the advent of online stores, savvy
(or some may call them devious!) shoppers partake in ‘showrooming’ – they visit a store or
showroom, try something on, then go home and shop for it online to compare and find the best
prices on different sites. Conversely, with ‘webrooming’ consumers browse online for the best
price, then go to the retail store to make the purchase in person.
Initially these trends sent alarm bells through the retail industry as it was seen as a threat to
the status quo. However, there is a shift emerging to counterbalance this as retailers are
becoming more aware, and are now trying to take advantage of the trend. Traditional onlineonly stores like Frank & Oak are even opening up bricks and mortar stores to find and embrace
this balance.
Topline growth
“No one needs what you sell. They need how and why you sell it.” The marketplace is now
divided into two different experiences:
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High-utility, low friction
High-fidelity, high customer service
Which category you fall in depends on your brand and how you sell it. Neither is right or wrong;
each option caters to a completely different market segment. Whether you are high-utility,
low friction (offering many goods at low prices and focusing on high volume with little to no
additional customer service beyond the baseline), or high-fidelity, high customer service (higher
margins, higher value and more focus on customer affection and loyalty), each segment should
pay attention to how its product is being offered.
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So what does this mean to you? Offer up something unique! Tailoring to the right approach is
imperative, even when in the high-utility, low friction category. In the bricks and mortar store,
not only is the distribution of product important, but the distribution of experience makes almost
as much impact. It’s about enhancing the customer experience to engage with consumers
at different touch points and ultimately become more relevant in their daily lives (i.e. through
loyalty programs) which also relates back to, and helps in, strengthening your brand.
Investing where it matters: the 80/20 rule and Uniqlo
The 80/20 rule can be applied to many sectors but it’s never truer than it is in retail: typically,
80% of your business is generated by 20% of your products. Focus on what’s important. When
evaluating your inventory strategy, be cognizant of this rule. If 80% of sales come from 20% of
SKUs, manage accordingly and of course never let your inventory of these bread-and-butter
items deplete.
Consider the example of Uniqlo, the retail clothing giant hailing from Japan, poised to take
the global market by storm. How do they manage to stay on top despite their accelerated
and aggressive expansion? They’ve evaluated their position and leveraged their strengths.
Uniqlo’s methodology to inventory in the marketplace is one for future business textbooks to
write about: limited SKUs that are offered in a wide variety of colours and patterns. Simple
and effective. Uniqlo isn’t reinventing the wheel but they’ve found their strength and leverage
it effectively. This may not be the solution to every retailer’s inventory issues, but it is a great
example of adopting a strategy and using it to one’s advantage.
Merchandise planning and the Open-to-Buy (OTB) strategy
Open-to-Buy formulas consist of inventory and inventory. That’s not a repeat - it’s a selling
cycle. Step one is beginning inventory, step two is ending inventory. Too much inventory means
poor return on investment, while too little, means missed sales. In order to drive sales you must
maximize inventory turns and have a strategic merchandise plan. This plan, when executed
thoughtfully and consistently, gives way to a basis for tracking and re-planning, which can also
lead to creating micro-marketing tactics to target specific consumers or push certain inventory
if you see the need and opportunity. This high-level approach is effective long-term and does
require thought and analysis. It’s no wonder then that best practices point to the effectiveness
of establishing a senior executive as inventory manager/analyst – a planning champion for
this type of strategy. Struggling retailers don’t often have such positions which means missed
opportunity for analysis, for shifting the strategy, and for strengthening the areas where
weaknesses might bring business down.
Factors and determinants
When implementing this type of strategy or role, heed the existing best practices. Within your
company, evaluate who plans and does the monitoring currently. What are his or her strength
areas: financial or merchandising? How is technology going to be utilized? Who else will
participate in the process?
Additionally, there are key points to consider when getting down to tactics:
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Core/replenishment vs. fashion
Seasonality
Planning Parameters
−− Sales (comparative store sales
assumptions)
−− Receipts
−− Inventory
−− Markdowns (normalizing the history)
−− Employee discounts
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−−
−−
Shrink
Initial mark-on (price/value)
Cumulative or maintained mark-on
Gross margin
Gross Margin Return On Investment
(GMROI)
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Benchmarking
Several studies have shown that an increasing number of consumers are using mobile devices
to enhance their in-store shopping experience. With the recent advancements in sensor and
beacon technologies, this allows for triggering or automation of in-store offers and further
engagement from the retailer. This convergence gives way to the opportunity to track a whole
new set of in-store metrics which were previously only reserved for online sites.
Metrics
Traditional in-store metrics
Traditional online metrics
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• Site traffic
• Conversion rate
• Shopping cart
abandonment rate
• New vs. returning
customer orders
• Page views per visit
• Click-through rates
• Time spent on the site
• Traffic source
Sales per square foot
Comparable sales
Traffic
Conversion rate
Average sale
Sales per hour
Inventory turnover
Gross margin percent
Wages-to-sales ratio
Occupancy costs as a
percent of sales
Converging the two types of retail metrics (aka Wifi!) enables tracking of:
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Percent of passerby traffic that enters the store
Average length of the visit
Physical paths within the store
Frequency of return visits
When combined, this convergence gives more insight into specific areas such as:
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Zones visited first and most frequently
Popular paths
Zone dwell times
Zone-to-zone conversions
Repeat visits
New visitors
Outside potential (people passing the store)
There are also solid methods of benchmarking that are slowly gaining new capabilities in the
digital age. Loyalty programs allow you to track recurring visitors, frequency and cross-store
visits while also building retention. Coupled with conversion metrics and engagement metrics,
it is now possible to capture storefront conversion, engagement rates, average transaction and
sales per customer as well as dwell times per store and average visit.
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These types of metrics require team work on all levels. It’s not only head office implementing
this digital strategy, but as data is collected at store level, it’s up to store associates to be aware
and a part of the process. While this does take a large amount of coordination it can open up
reams of data that will help move your business forward, and help frontline employees feel
connected to the retailer’s success, as well.
Overall, it is clear the retail landscape is going through an era of profound change. Having shed
the meager year that was 2014, the outlook for 2015 is certainly a challenging one; however,
with strategic planning, it is possible to close the year on a positive note. Focusing on your
brand, embracing the shift towards omni-channel retail, planning and managing your inventory
effectively and efficiently, adopting new methods of benchmarking and reaching out to your
customer base can help your retail business prosper in 2015 and beyond.
For more information
Weekly store sales comparative survey
Richter publishes a comparative weekly store sales survey of Canadian retailers, a compilation
of confidential data issued in newsletter format designed to help retailers gauge their
performance on a regular basis. To subscribe to this weekly summary, click here.
Information sessions
Jordan Gould,
CPA, CA
Partner, Assurance
T. 416.488.2345 - 2281
[email protected]
The first in a series of four events, Richter partners Jordan Gould and Phil Lichtsztral led a
group of retail executives, owners and bankers through a discussion, sharing information and
perspective on the changing landscape of the retail market, as discussed in this article. Three
key areas were addressed: top-line growth, open-to-buy strategy and inventory management
strategies, and benchmarking of financial performance. The next events in the series will delve
deeper into each area, more specifically.
To register for the second session in this series of four on The New Age of Retail, sign up
for the May 28th session here. (Please note attendance at the first session is not necessary
for attending the up-coming sessions.)
Jordan Gould has the innate ability to put people at ease, ask the right questions, listen
attentively, assess a problem and see the big picture. But more importantly, it’s his ability to
go beyond the numbers by providing valuable advice and practical solutions that has enabled
him to become an invaluable resource to his entrepreneurial clients. Jordan specializes in
accounting and auditing services, consulting for tax issues, and succession planning for familyowned and mid-market enterprises. With over twenty-five years of experience, Jordan works
with clients across a variety of industries, including, manufacturing, distribution, real estate and
retail, to name a few.
Phil Lichtsztral,
CPA, CA
Partner, Assurance
T. 514.934.3426
[email protected]
Phil Lichtsztral has been with the firm for 37 years and is currently head of our Retail
Consulting Services Group, which assists retail management in identifying, analyzing and
providing meaningful, practical solutions to the problems arising in today’s highly volatile
retail environment. Phil provides advice to wholesalers and retailers with respect to corporate
reorganizations and restructuring, procurements, short- and long-term financing for retailers,
mergers and acquisitions, inventory control and management, including open-to-buy, retail
organization structure and compensation, as well as store profitability.
EVOLUTION OF EXCELLENCE