KPMG report: CEOs focused on physical, digital infrastructure investments
U.S. retail CEOs are optimistic about growth prospects.
That’s according to the 2017 KPMG U.S. CEO Outlook report by U.S. audit, tax, and advisory firm KPMG, which found that 95% CEOs of U.S. consumer goods and retail companies are confident about the growth outlook for the global economy, the industry and their companies over the next three years, despite potential technological risks. Their peers in other parts of the world, do not share the same optimism, the report found.
“While CEOs are optimistic, they recognize the need to continue to transform their businesses to build stronger relationships in this era of the ‘connected customer’,” said Mark Larson, National Line of Business Leader, Consumer & Retail. “Technology, as the key enabler to delivering the right customer experience, will play a huge role in determining which companies will thrive and which ones will fall into obscurity.”
Sixty-eight percent of U.S. CEOs are concerned that they are not leveraging digital solutions to connect with their customers as effectively as possible. Two-thirds agree that technological innovation is likely to disrupt the sector in the next three years, weakening or eliminating some traditional players.
To address their concerns, U.S. CEOs say they will invest heavily in physical and digital infrastructure over the next three years. The report makes one thing clear: Customers are central to the strategies U.S. CEOs are prioritizing for their businesses with digitization through technology transformation, greater speed-to-market and stronger marketing, branding and communications topping their agendas.
“Achieving growth is an urgent issue for companies as increased competition from new entrants disrupts the market and erodes share for traditional players,” said John MacIntosh, national leader, consumer goods. “Investments in technology and digital to establish better relationships with customers will go a long way in getting CEOs to see top-line growth for their organizations.”
Key findings from the report with regard to the U.S. retail and consumer goods CEOs include:
• Regarding technology investment, 56% of CEOs cited cognitive technologies – including artificial intelligence and machine learning – and 41% selected Internet of Things as the most significant areas. But 29% of these CEOs acknowledge that they will need to reskill their current workforce and attract new strategic talent to meet their organizations’ technology challenges in the next three years.
• Although 73% of respondents say that new investments or ventures are evaluated for customer impact and 85% say their middle and back office processes are aligned to reflect a more customer-centric approach to their front office, 63% say their organizations struggle to evaluate the return on investment from customer-focused programs.
“As all of these technology transformations are conceived and planned at organizations, it’s vital to consider the impact on your customer and ensure that these measures not only drive traffic to your store or website but also enhance their experience with your brand,” said Larson.
KPMG surveyed 41 U.S. and 134 global consumer goods and retail CEOs on topics including growth, corporate strategy, disruption, and risk. The 2017 KPMG U.S. CEO Outlook report can be viewed here.
Toys ‘R’ Us secures $3.1 billion financing
In an important vote of confidence in its brand from key lenders, Toys "R" Us closed on crucial financing just in time for the holiday crunch.
The retailer announced that it has closed on $3.1 billion of financing facilities that will support its operations during its restructuring process. The financing was from a group of lenders led by JP Morgan.
Toys "R" Us said the financing will also provide additional funds that will allow it to invest in various initiatives, including the renovation and modernization of its stores through improved layouts, updated lighting and other areas. The retailer also plans to use the finds to update its e-commerce sites and infrastructure “to better reflect its brand, promote the hottest toys and provide improved delivery capabilities so Toys "R" Us can effectively compete in the online shopping space.”
Toys "R" Us filed for Chapter 11 bankruptcy protection on Sept. 18 with a goal of restructuring its outstanding debt. The company's Canadian subsidiary was granted protection in parallel proceedings under the Companies' Creditors Arrangement Act ("CCAA").
The retailer is gearing up for the holiday rush, hiring some 12,000 seasonal workers for its stores and fulfillment centers. It also has opened a temporary holiday store in Times Square.
Using Unified Retail Planning to Break Out of Functional Silos
Retail today isn’t for the faint-hearted. A recent quote from business magnate and investor Warren Buffet is quite telling, “I think retailing is just too tough for me, just generally.”
The sector is undergoing profound transformation and only time will tell who the winners will be. In any case, it is evident that retailers no longer can afford to sustain inefficient operations. The ability to keep operational costs in check is essential for profitability and even survival.
Three Types of Operational Costs
In retail, three kinds of costs dominate: space, staff and stock. The relative importance of each expense varies by retail segment and company. Proportionally, apparel retailers typically have the largest cost of space (real estate and leases), while grocery retailers have the largest staff costs (store personnel), and specialty retailers fall somewhere in between.
Improvements in each of these cost areas – space, staff and stock – can have a significant impact on the bottom line. Consequently, you can be sure that the merchandising, store operations, and supply chain departments at any given retailer are constantly honing their processes for improved efficiency.
Build a Unified Planning Process
Something that is routinely overlooked, however, are the strong links between retail’s core processes. A decision made by one department may substantially augment or lessen the efficiency of the others. Failing to take these inter-dependencies into account gives rise to sub-optimization, which has the potential to seriously hurt any retailer’s business.
The biggest opportunity for increased operational efficiency in retail lies in building a unified planning process spanning retail’s core functions: merchandising, supply chain and store operations. I’m not saying that the opportunities for improvement within each of the departments are exhausted, far from it. But by optimizing the processes in conjunction, the impact of improvements can be multiplied.
Here are a few ways retailers can build a unified planning process to reduce costs:
1. Decrease shelving costs by making changes in replenishment planning. Take grocery for instance. Fresh products require frequent deliveries between distribution center and stores. Despite the opportunity for next-day delivery across almost all categories, retailers should aim to concentrate their shipments of center-store products by aisle to specific days. That way, less frequent and much more consolidated deliveries of products displayed in the same aisle are planned, significantly increasing shelving efficiency. Because shelving is one of the most time-consuming tasks in supermarkets, the cost savings are huge and have the potential to be greater than the retailer’s total cost of transportation from distribution center to stores.
2. Lower store labor costs by using forecasts created by the supply chain. Traditionally, store workforce planning has been based on sales budgets or sales forecasts. However, this approach has proven to be inefficient. Instead, retailers should utilize forecasted customer footfall to estimate the workload at checkouts in combination with forecasted incoming deliveries per store and per day for estimating shelving workload. This means that the two most important workload drivers in retail are accounted for, making it possible to create rosters that meet the daily workload much more accurately. In addition to efficiency gains, more level workloads and better planned work schedules increase employee satisfaction.
3. Reduce out-of-stocks by optimizing planograms. Retailers should optimize shelf space based on each store’s local demand and replenishment cycles so that almost all incoming deliveries can be placed directly on the shelves. This minimizes the need for backroom storage and almost eliminates the risk of stock-outs caused by goods sitting in the backroom rather than made available to customers out on the shop floor. Naturally, the efficiency of shelf replenishment also increases as the number of trips between backroom and store floor are minimized.
Organizational Changes Are Key
Why then is sub-optimization so prevalent despite the obvious benefits of taking a more holistic view of planning? A major impediment has been the lack of systems support.
The second, and in my mind, more important challenge is organizational. Unified planning requires stepping out of the retail planning silos and replacing territorial fights for status and power with a shared understanding of strategic goals and the most important means of getting there. Strong leadership, clear prioritization and analytical skills are needed to master the complexity of optimizing the whole rather than the parts.
Unifing retail planning is a hard and big change. Yet, I am convinced that it will happen. Competition is tough, market growth is limited, and operational excellence is required to make a profit. For many retailers, unified retail planning will simply be a requirement to stay in the game.
Mikko Kärkkäinen is Group CEO of Relex Solution, which provides an integrated retail and supply chain planning system. Through precise demand forecasting, automated replenishment, innovative space planning and assortment optimization, Relex helps businesses plan better, sell more and waste less however fast the market changes.