Knowledge Is Power: How retailers can take greater control of spending in stores
We know it’s a complex, challenging world for retailers. Consumers expect to be constantly delighted, with their immediate needs met – and exceeded – and their future needs anticipated and planned for. Getting this right means providing a compelling customer experience, optimizing product assortment and responding to emerging consumer trends.
Satisfying today’s customers is an expensive undertaking, however, and is made more difficult because margins are already under pressure from trade uncertainty, rising wages and competitive discounting. This is why brands are applying a new level of operational rigor to everything they do – not least to where, when and how they allocate their spending within stores.
In practice, this greater attention to detail means building a clearer picture of spending across two broad categories – capital and operating expenses – with labor costs taking up the bulk of the latter. As a result, a growing number of retailers are using modelling tools to fine-tune their workforce according to seasonality, traffic patterns, market trends, promotions and other factors.
Yet other non-labor operating expenses are not always subject to the same scrutiny as labor costs, with key cost drivers – such as store location, size and revenue – not taken into account. Why? One reason is the sheer complexity of the task and granular visibility of expenses. A non-labor operating expense category such as store supplies can contain up to 12 sub-categories, including restroom and cleaning supplies, grocery bags, postage and store signage.
Lack of accurate data is another bugbear. Stores rarely have the granularity they need to isolate the main drivers of expenses within a sub-category. All too often, regional and store managers end up making requests for additional budget based purely on sentiment and “gut-feel”, rather than hard facts and reliable data.
A new approach, a new way of thinking
So, how can retailers move beyond this impasse and take better control of their expenses, across the store footprint. In our view, the answer lies in adopting a zero-based mindset and building a new “should cost” model that captures data on spending for items and services at each store. This model should be structured around a zero-based approach, whereby the budget returns to zero at the beginning of each period and is reformulated only to cover those expenses that can be justified.
For many retailers, pivoting to this “should cost” model means making a radical break from well-established processes. Inevitably, it means investing time to ensure that staff on a regional and store level understand the rationale for the change and can meet the new expectations placed upon them.
The good news is that the advantages of a zero-based approach present a clear case for its adoption. A newly released book from Accenture Strategy – ‘The Big Zero’ – highlights that a zero-based mindset can help reduce expenses by as much as 15%, for example. Moreover, if the approach is used in conjunction with advanced analytics, retailers can identify what is driving demand on a store-by-store basis, helping them develop forecasts that are sensitive to nuances in the local market and competitive landscape.
Above all, a zero-based mindset provides a disciplined and intuitive way for retailers to use data and analytics to improve how they allocate and manage operational expenses at each store. There are five key benefits of this approach:
1. A clearer view of performance
By its nature, with all expenses isolated and scrutinized, a zero-based mindsetshines a light on the worst performing stores. Once identified, retailers know where they should invest in understanding root causes and developing target interventions that will have maximum impact.
2. Stores that are learning from example
By comparing different stores’ expenses, retailers can understand the behaviors, levers and tactics that the top-performing stores deploy and use these to define best practice and improve performance across the chain.
3. A better understanding of external factors
Across a major retail chain, there are many local differences in consumption patterns and pricing trends. Routine maintenance activities, for example, can vary considerably between stores, but many retailers do not currently have the insight to understand the impact that this has on their business.
4. Greater competitiveness
A zero-based approach to expense allocation establishes a more considered internal environment. No one wants to be the lowest performer in a network of stores, so sharing expense rankings across the group will motivate stores to tighten their spending and identify new efficiencies.
5. A new level of discipline
Establishing a zero-based mindset helps enable a disciplined and factual approach to resource management, which is essential in today’s challenging and fast-moving retail industry. Leveraging data can help to set budgets, unearth opportunities for continuous improvement and re-allocate expenses to fuel growth opportunities.
Conclusion: No time like the present
Adopting a zero-based mindset presents a significant opportunity for retailers to improve how they allocate resources at a store level and thereby position their stores to become more efficient, measurable and – ultimately – competitive.
In a market that is regularly disrupted by innovative new entrants, retailers need to be able to invest quickly in new initiatives. They need to be able to experiment and take risks at a store level, and this simply isn’t possible if they don’t have the data to know exactly what they are already spending and where. When it comes to agility and innovation, the power of local knowledge cannot be overestimated.
Jill Standish is senior managing director and head of retail, Accenture, and Praveen Kishorepuria is managing director, Accenture Strategy.