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Retailers Are Cutting Costs When They Should Be Spending to Survive

Lessons from Successful Retail Turnarounds

For much of the 20th century, Henri Bendel was one of the most innovative retailers in the world. It was the first retailer to spot Upper Fifth Avenue’s potential for affluent foot traffic, the first to offer an annual sale, the first to offer in-store makeovers, and the first to have its own fashion show. It was early to direct-to-consumer, too, developing the first in-house fragrance. Andy Warhol got his start there. However, Henri Bendel will close its doors for good early in 2019 after the holiday shopping season, according to parent company L Brands, which cited the need to focus on profitability.

The axing of Bendel is only the latest example of retail’s misguided belief that the path to self-preservation comes solely from cutting costs. But in an environment of rising expenses, increasingly fickle customers, and pressure to compete in multiple offline sales channels, retailers should actually be spending money, and investing wisely, to survive. Believe it or not, e-commerce and Facebook ads aren’t the cure-all to all of retail’s financial problems. If anything, the opposite might be true.

Online advertising costs have increased to the point that the channel might not be as cost-efficient as it once was. Facebook’s average cost per impression more than doubled in 2017 alone, according to a review by AdStage, driven in no small part by unpredictable changes to its Newsfeed making it less likely to hear from brands. The price of Google’s Adwords has been climbing for years, as featured snippets and videos, the news carousel, and recommended search were all introduced, creating far more competition for brand-related queries. All in all, customer acquisition costs have climbed 50 percent over the last five years, according to ProfitWell.

Competing with Direct-to-Consumer Brands

Competition from direct-to-consumer brands is evident. Gillette maintained a 70 percent market share in men’s razors in 2010. By 2016, that number had fallen to 54 percent, almost entirely due to direct-to-consumer models like Dollar Shave Club and Harry’s, according to the Interactive Advertising Bureau (IAB). The percentage of mattresses sold direct-to-consumer doubled between 2016 and 2017.

However, a walk through Manhattan’s Soho neighborhood reveals that the most glamourous retail space is now occupied by some of the same direct-to-consumer brands that once disavowed the necessity for brick-and-mortar stores, including Glossier, Bonobos, Warby Parker, Everlane, Allbirds, and Away. Why is that? Cost and customer reach are important factors in managing the mix of the online and brick-and-mortar channels.

Store door and window displays can actually be a more cost-efficient way to spend ad dollars. Given the option to buy the same item online or in a nearby store, 65 percent of consumers will choose the store, according to data from the Specialty Equipment Market Association. The problem is that retailers are still too reliant on the same tropes to drive foot traffic, from “buy one, get one” promotions to offering deep discounts, rather than coming up with “smart promotions” that drive store visits without undermining brand equity.

A window display filled with half-off signs doesn’t make for a good Instagram. Brands need to move toward providing experiences that entice potential customers to linger and convert them into buyers. Since store visits are down, retailers have no choice but to find ways to drive higher conversion among existing repeat clients with greater basket sizes.

Perfecting the In-Store Experience

Customer service is paramount, and it begins with investments in talent acquisition and training. Sixty percent of consumers buy more than they planned when they like the salesperson, according to data from the Specialty Equipment Market Association. Customers should be able to interact with salespeople who live and breathe the product, who understand their needs, and who are always looking to enhance their clients’ experience by contributing to their knowledge of the product. Managing these relationships is so important that retailers should allow their salespeople to be far more candid when there are better options elsewhere. When asked, any Apple tech will give an honest assessment when their own products aren’t necessarily the right fit for a customer.


 

Given the option to buy the same item online or in a nearby store, 65 percent of consumers will choose the store, according to data from the Specialty Equipment Market Association.

 


Making the most of each customer interaction requires a pleasing store layout. Messy shelving and distracting displays and color schemes make customers less likely to invest time in searching for the right product.

Finally, rather than using technology to cut costs, retailers should use it to help customers cut lines. Affinity programs should be used to provide customers the option to do status-merging in line (e.g., merging online and offline orders), and the queue itself should be as engaging as possible. Rather than providing an excuse to waste time playing on their phones, queuing should be pleasant and give the customer a reason to shop more.

Staying Nimble with Technology

Retailers looking for places to cut costs should look to their information technology (IT). Saddling teams with long request for proposal (RFP) and implementation lead times in the process is not the answer. Retailers need to be nimble with the technology that they adopt. Ensuring IT doesn’t become too great a part of capital costs is key. Technology is not something implemented for three years in hopes that the software will last for the next 10 years. The simple fact is that retail trends are changing too quickly to accommodate lengthy SAP implementation. Migrating to a new system is an expensive, time-consuming process and has a dramatically unclear return-on-investment timeline.

Instead, chief information officers (CIOs) need to be aligned with their customers, which involves stepping into their shoes. Acquiring more customer information and keeping customer lists fresh through regular cleaning and purging are essential. Loyal customers help conversion rates.

Investing in Supplier Relationships

CIOs need to be aligned with their suppliers as well. Maximizing conversion requires keeping merchandise fresh and relevant by reacting quickly to changing trends and maintaining seamless partnerships with vendors to manage inventory. To achieve these objectives, retailers must invest in supplier relationships, which may require providing better terms to “critical vendors.”

Additionally, retailers must manage warehouses and anticipated shipping times, particularly around significant holiday buying periods. Stock-outs or inventory that gets held up before critical sales periods can have a significantly adverse impact on businesses—especially those that rely on just a few holiday buying periods to meet their profit goals for the year.

Stressful times are surmountable with the right stewards of leadership. The dynamic retail market requires constant vigilance and swift reaction. While centralized management can lead to more control, larger national retailers require in-depth knowledge of the regional markets they serve because a one-size-fits-all approach may not work for each market. Leadership that focuses on the power of branding and reputation, and those that aren‘t afraid to invest in their talent, their vendor relationships, and their store experience, will win the game.

Ajay Bijoor

Ajay Bijoor

Guggenheim Securities LLC

Ajay Bijoor is a managing director in Guggenheim Securities’ Restructuring Group. His experience includes representing companies and creditors in out-of-court and Chapter 11 restructuring and liability management transactions. In addition to his significant recent retail experience, Bijoor has worked across a number of industries, including casino/gaming, automotive supplier, media, and general industrials. He holds a bachelor’s degree in economics from the University of Pennsylvania and an MBA from the Wharton School.

Topics: 
Retail
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