Good cost, bad cost - invest for success in Retail
December 04, 2018
What’s happening to the high street?
Historically, we’ve been a nation of shopkeepers, but times are changing. I worked in the Retail industry for over a decade leading large transformational programmes centred around strategy delivery and cost reduction. However, you don’t need to be an expert to see that Retail is facing one of the most challenging periods in commercial history.
It seems there are daily news headlines heralding the insolvency of yet more household names. Legacy retailers are finding the need to redefine their role on the high street by investing in their “customer proposition” and funding those investments by taking “bad costs” to fund transformation. The challenge is to ensure sustainable cost savings that requiring both reduction and re-allocation when quick wins have already been captured long ago.
So we know a bit about the ‘why’, I want to look at how Retailers can deal with challenges and even learn some best practice from the ones to watch.
What can Retailers do to survive?
Retail has traditionally been a very lean sector and continues to be so. Our latest working capital report shows that over the last five years, Retail is the second most successful sector in terms of reducing net working capital days (NWC) with an overall reduction of 1.1 days.
The fact is that blanket cost reduction is not always the answer. Retailers need to take a strategic approach to cost reduction and careful focused reallocation. What do we mean by this? Start with the customer experience. It’s all well and good stripping costs out, but if it detracts from the shopping experience, the company won’t fare well against savvier competitors. We often start with those costs that don’t directly impact the customer - like back office costs and focus on the value obtained from the cost. Protecting and investing in the ‘good cost’ and limiting and where possible removing or reallocating the ‘bad cost’.
On the subject of strategic cost reduction, there’s been an increase in the number of Landlord Company Voluntary Arrangements (CVAs) in a bid for Retailers to reduce their rent costs. Our research shows there’s been 28% year-on-year growth in the number of CVAs in the Retail sector since 2017. What many people don’t seem to realise is that CVA isn’t a cost reduction tool. In actual fact it’s an insolvency process. Whilst every situation is different, our research shows that 51% of all CVAs in Retail fail - and that doesn’t even include the CVAs recently completed where we won’t know if the company will survive for a another six months.
Retail all stars
Increasingly, there is a need to spend and a need to invest in your supply chain, innovation, customer experience to remain relevant in the retail space. Dynamics are changing in Retail at break-neck speed, but how can you consider investment when you’re struggling to find sufficient cost savings? I have seen this achieved through reprioritization in;
- Right sizing store portfolio (number, location, format) in context of wider channel strategy
- Considering other sources of cost savings for example improvements in sourcing, GNFR, headcount even turning previous cost centres which have been optimised into a income stream and buying syndicates continue to be on the increase
- Focusing on costs to prioritise and protect to deliver the customer proposition (NPD, talent, technology)
All of this is indicative of the need for greater diversification and collaboration across Retail which I think will continue into 2019.
For more information or any queries about the blog, please contact Claire Fox
For details of our Working Capital Report, please click here: https://www.pwc.com/gx/en/services/advisory/deals/business-recovery-restructuring/working-capital-opportunity.html
To receive our report on maximising deal value, register here: https://www.pwc.co.uk/register-merger-market