Monday, December 28, 2009

The New Retail ROI

In one of the Retail forums I attended, there was a speaker who expressed his reservation to accept the term ‘organised’ retail to refer to modern retail. He had argued – and I have begun to see a lot of wisdom in his argument – that “organised” is past tense; and connotes that we are over the learning curve and “all’s well” in retail – which you and I know is far from reality. Therefore, the speaker had suggested that we use a present continuous tense “organising” instead; to suggest that we are still in the process of putting the pieces together and therefore, it is ‘work-in-progress’. While it is a matter of semantics for a preoccupied retailer, this phenomenon called “organising retail” (to be politically correct) is a process by which large investments are committed in strategic areas of the retail value chain to derive ‘returns’ – Return on Investment (ROI).

Every retail forum kicks up the issue of deriving a (healthy) return on investment in retail. But, what remains unanswered is ‘how’? What are the various things a retailer can do to ensure ROI from investments made in all sections of the value-chain? Do some elements of the value chain hold greater potential than others, to positively impact ROI? If yes, what are those areas? And what special efforts are needed to unlock such dormant potentials?

Should a retailer go after ‘location’; like every retailer’s anthem suggests? Implying that he should endeavour to occupy the best locations in every geography (with or without parity to the value such a location adds)? Or, should a retailer go after ‘scale’? Implying that he goes purely by market instincts to expand stores (mostly to pre-empt competition rather than being a strategic move)? Or, should a retailer indeed invest in ‘merchandise’ - the heart of retail – above all else? Or, should a retailer in fact make investments in his operations – streamline operating systems and imbibe best practices that will positively impact his ROI. Which of these elements can truly influence optimising return on investment?

Is a strategic location – be it a Connaught Place or South Extension; a Commercial street or a Brigade road; a Linking road or a Phoenix; a Camac street or a South city –a singular source of competitive advantage? Is it justifiable to pay 3x or 4x the price per unit of real estate in these retailer’s paradises? By virtue of being the locations these are; they certainly lend an advantage to businesses that puts them bang in the middle of oceans of pedestrian traffic – that comprises homo sapiens; jay-walkers; pick-pockets; shop-lifters; window-shoppers and a small percentage of the most sought after species called “shoppers”. Admitted that ‘location’ has a pivotal role in a retail business being successful; but, it is not obviously the only factor. Besides, real estate forms one-quarter of every retailer’s reality (fixed expenses)! The other three-fourths contributed by utilities/CAM charges; minimum guarantees and salaries!

Will the sheer number of stores in a chain help derive ROI? That question is already answered by the Subhiksha’s of the world. Having more number of stores will only help a retailer on two counts – one, it will help increase his share of mind; share of market or share of wallet in the given market place; and two, it will also help negotiate better prices with their vendors – not to mention that more stores in the chain means more stock transfers from one store to another! More number of stores would help diversify a retailer’s portfolio – it is hoped that a few star performing stores will help bring down the negative impact of a greater number of average and mediocre stores. The recent shakeout did help retailers rationalise their portfolios by negotiating rentals on some of their stores and shutting down poor performing ones.

Merchandisers and buyers in every retail organisation like to believe that it is their function, which is the chief cause for profitability and ROI. Alas, merchandise has long ceased to be a source of sustainable competitive advantage. ‘Product’ differentiation; and by extension ‘price differentiation’ is becoming increasingly very delicate in retail. With globalisation, any retailer can access and source any product from any part of the globe at almost similar prices depending of course on how well one negotiates.

Merchandise also does not ensure uniform returns. No retailer can expect to sell every single unit of merchandise at full price – unless it is a 100% cotton white shirt – which is also a challenge because they are the most prone to getting shop soiled! If every unit of a product were to fetch uniform returns to retailers; we would be living in a world where there was no SALE; no discounts and no promotions – a shopper’s boredom!

Funnily enough, merchandise – the centrepiece of all retail; looked at from a certain angle, is essentially a multi-layered risk (and I’m saying this at the risk of being accused by merchandisers of taking a perverted view). Slow moving merchandise is a risk that it can adversely impact gross margins every time a retailer is forced to take a mark down. Non-moving merchandise is a risk that in addition to posing a mark-down risk; it also poses a write-off risk if it remains ultimately unsold. And ironically, merchandise is also a risk even when it is innocuously sitting on a store shelf as it is prone to damages or shop-lifting. Therefore quite unfortunately, unlike in I-banking where high risk equates to high return; high risk in retail could mean diminished or close to ‘no’ return!

No matter how long and boring retail speeches get talking about ‘managing value chains’ and ‘achieving economies of scale’; every retailer’s moment of truth is the customer experience they are able to create in each of their stores. Retailers will be able to create the required economies of scale and manage value chains ONLY AFTER they have successfully wooed customers into their stores; delighted them with exceptional service and given them a compelling reason to not just come back more often; but also to bring their friends and family when they come.

While store locations and merchandise categories; individually and collectively contribute in their limited ways towards return on investment, one store is becoming increasingly indistinguishable from the other. In this confusing melee, there can be only one other element; an animate, pulsating and supremely powerful one - the human element, that holds the potential to have an overarching influence on customer experience and therefore on “return on investment”. The human element forms the only one that is trainable for better output. And it is also this area of the business that retailers tend to take for granted. They make little INVESTMENT if any; thereby perhaps missing out on how they, as management, hold the key to exponential RETURNS.

I have been fortunate to see over a dozen ‘business plans’ of various retailers. And ironically; not one of them had any expressed provision for making ‘investment’ on people (and I’d like to make the distinction here that merely hiring an army of people is not investment; it’s an expense!). Have you noticed, there is always a provision for ‘miscellaneous items’ in all business plans; but very rarely for ‘training’!

One of my colleagues has this question to throw at the participants in all her training programs – “What is it that is unique to your store that no other store (in this mall or even the entire universe) has?” and this question always catches the participants unawares and they usually go bonkers with their answers. The answer becomes evident when she tries to put a mirror in front of them, as it were. “YOU” – she lingers; this unique set of people that are priceless to your business – which your competitors do not have! While it seems very melodramatic on the outside; it indeed drives home a poignant message.

Only when retailers make the right ‘Investments’ in their people – investments in ‘Training’ and ‘Re-training’ them; will they see ‘Returns’. When associates know that their employers are investing in their growth; they also tend to become more loyal. Retailers will be able to RETAIN their store staff; thereby addressing the plaguing issue of attrition.

‘Invest in Training’ should be the new mantra in retail and ‘ROI will follow’ is the implicit promise. Return on Investment (ROI) is just a point of view – it could very well be “RETAIN on INVESTMENT”