Tactical behaviour to shore up top lines has been a feature of the recession as retailers compete harder for customers, but is it damaging to your longer-term strategy, asks Joanna Perry
Is it more important to win a battle or be victorious in the overall war? That’s the question management consultants think retailers should be asking themselves right now as they consider how to see off the recession and emerge ready for recovery.
Launching budget ranges, cutting staff, putting planned investments on the back-burner and holding one-day Sales are just a few of the tactics that have been employed as retailers attempt to cling to sales and market share.
While the short-term results can be positive, there is a worry that for some retailers strategy has gone out the window, and they will be caught out in the next couple of years.
Renowned former Kingfisher chief executive Sir Geoff Mulcahy says there is money out there, so retailers that purely blame the recession for poor performance need to focus more on the bigger picture.
“I’m not entirely sure that retail sales have been that bad,” he points out. “Where management needs to be realistic is to ask whether [sales falls] have been caused by the recession, or by not having the right offer or the economics of the business right.”
He adds: “There is a great strategic opportunity as long as retailers are properly positioned in the market and are offering value – range, service, price and innovative new products. You can get ahead of the competition and come out [of the recession] stronger than you went in.”
Boards can feel under pressure from their backers to turn to tactics to shore up sales, but Mulcahy believes it doesn’t have to be this way, “provided you have a good story you can sell to investors”.
For example, think of Kate Swann at WHSmith, who has been willing to let like-for-likes slip to create a more profitable business in the longer term.
Best Buy International chief executive Bob Willett is clear that he won’t be pushed off course by short-term actions. “I think strategically we shouldn’t move away from where we are headed, but we do also have to think about where the customer is,” he says. This means all parts of the business heading in the same strategic direction, with local tactical behaviour in order to meet customer demands and outflank its competitors.
Willett splits recent economic history down into “before Lehman and after Lehman”. He says following the collapse of the investment bank, retailers must focus on the day-to-day creation of value. This is a point others reiterate.
Despite many customers having the same or more disposable income since the start of the recession, they are cautious about their future – this is making them think more about what they buy and from whom.
Willett says: “The customer has pulled off the highway and is waiting to see what happens, rather than blasting away at 70mph. You have to stay tuned to that, but also reinforce what you stand for.” He gives the example of offering free technical support from a call centre when customers buy a product as offering better value than the competition.
And David Oliver, partner at management and technology consultancy Diamond Consultants, points out the downside for retailers competing purely on price: “The temptation is to get too aggressive on price, and it is very difficult to reverse. Retailers are going to have to live with the expectations they have set for a very long time.”
However, tactical behaviour can be entirely supportive of a successful strategy. Verdict lead analyst Maureen Hinton uses the example of school uniform sales. She says the price war playing out on school uniforms at the moment is all about grabbing volume. But there is also a subtle push to offer better quality products.
Hinton points to Asda’s 100-day guarantee on school uniform products, to highlight that price won’t be the only competitive factor in future. Similarly, M&S has focused on the easy care of its school uniform, with lots of non-iron pieces. She adds: “The other supermarkets will have to think about how they evolve their offers.”
And retailers are beginning to create products that allow them to justify higher price points. For fashion, Hinton says: “We are already seeing the trend of new ranges having much more detail on them, such as on the inside of garments, to justify their higher prices. If you are a volume retailer you have to think: ‘How am I going to sell masses of this?’”
Where to draw the line?
Other tactical moves are more contentious. Tesco has attracted considerable criticism for some of its recent efforts (see panel). The cutting of certain costs is another debated tactic. Mulcahy says he has seen retailers that hire cheaper staff, or reduce their headcount, and it has ended up losing them more money in falling sales than the cost reductions achieved.
It will come as no surprise that all the one-day Sale activity comes in for some criticism. Oliver says: “The customer finds it a little dishonest. All you do is take demand and shift it around. It can cause problems in the supply chain and it is not clear that it creates incremental business.”
However, Hinton says that such Sales continue to be important to retailers trying to drive footfall to their stores, bringing in cash despite it clearly damaging margins in the short term.
She expects to see more single-day Sales in the run-up to Christmas this year, but says retailers are likely to be building this type of promotion into their planning, and thinking creatively about them in advance, rather than as a reaction to being caught on the back foot.
So it is essential to have a plan in place to produce suitable tactical moves, or in other words to continue having a strategy.
Striking the right balance
Mulcahy argues that there must be a balance between tactics and strategy, and says retailers become too tactical when their leadership doesn’t understand the brand and gets pushed off a strategic course by the actions of other retailers. “Leadership is essential – you must communicate with everyone in the business on the brand values,” he explains.
Willett agrees, saying: “We will never take short-term action that in any way damages our brand or our employees.”
Retailers also strongly agree that the recession has created strategic opportunities. “If anything, we want to accelerate what we are doing strategically,” Willett says, explaining that this means speeding up adoption for TVs, computers and mobile phones that work together, and making sure that customers can optimise their capabilities once they are bought. “We have to remain a growth company. Once you stop that then you become a Woolworths or a Sears.”
But this does not mean that costs can’t be examined. In fact, according to Diamond Consultants’ research on the last recession, cost-cutting was crucial for those companies that came out of it best (see panel). It is just that cost-cutting must be focused on activities that don’t create value for either consumers or investors.
The recession gives the opportunity to take advantage of competitors’ weaknesses, says Mulcahy, adding that you must not cut costs that affect your brand, such as the number of people in your stores or training.
Willett adds that the recession should get retailers thinking about what their core activities are. “In all of these periods you have to step back and ask what are your core competencies, and can you partner or outsource for what is not important to you.”
The other issue is whether the measures that retailers take of their short-term success are any indication of the long-term outcome of their strategy.
Planet Retail global research director Bryan Roberts says like-for-like sales growth is treated like the be all and end all by many. But many other measures – such as market share, earnings, dividends and PE ratios, to name just a few – must be taken into account when thinking about long-term prospects.
Oliver takes this further, saying retailers must fundamentally rethink their model to take account of the web, rather than being happy with, for example, 4% to 5% like-for-like sales growth in stores plus 5% growth in store space each year.
He says: “People aren’t systematically measuring the impact of the web on their store sales.”
He believes that this is leading to underinvestment in their multichannel strategy. Similarly, he thinks that smaller specialist retailers with less than 50 stores should think carefully about physical expansion and instead examine whether their business would work better if focused online.
The upshot of all this is that strategy and tactics are perfectly compatible, but it is essential to have the right tactics, and the right strategy.
Mulcahy and Willett agree that strong brands will emerge from the recession stronger than ever, as long as they stay on track.
“It is never easy, but you have got to make your own luck. Pennies aren’t made in heaven. Even though things are tough, people will spend on products and services that are excellent value for money,” concludes Willett.
And why should you take any notice of what he says? As he points out, Best Buy is outperforming the market in nearly every country it operates in.
Tesco: too many tricks?
Tesco has engaged in what some suggest is highly tactical behaviour in the face of recession and the perceived threat of the discount grocers.
Oriel Securities analysts’ view of the second phase of Tesco’s Clubcard relaunch is that it begs a lot of questions. The doubling of loyalty points earned on all items “does smack of a
move to prop up short-term trading” in the couple of weeks before Tesco’s half-year end, according to Oriel.
It added that Tesco’s other initiatives in the past year – the launch of its Discounter range last year and the doubling of Clubcard points on its non-food items in May – were “marketed and executed with little of the usual Tesco verve”.
Oriel concludes that for the first time in 15 years Tesco is being outmanoeuvred by its peers.
Planet Retail global research director Bryan Roberts says the Discounter push has been dangerous for Tesco’s brand, having a negative impact on the store experience and aggravating its suppliers.
He adds that the grocer’s panic has led it to “shoot itself in the foot”, with the move hitting its own top-line growth and margins.
However, in other areas Tesco continues to make decisions and take actions that surely suggest it has its eye on the future.
Consider its buy-out of the Tesco Personal Finance joint venture from Royal Bank of Scotland. It is investing in systems and staff for this division and is already making noises about moving into the mortgage market as well as offering current accounts and bank branches within stores.
What’s more, Roberts concludes that if you think of Tesco as an international retailer, rather than a UK one, it has significant opportunities to further replicate successes such as its loyalty scheme and multichannel proposition in other countries.
Thrive or survive
- Analysis of the qualities that served businesses well during the last recession has been undertaken by Diamond Consultants.
- It split 400 businesses into ‘stalwarts’, ‘disappointed stars’, ‘opportunists’ and ‘low idlers’ based on their performance over the course of the previous recession. The top two performing groups – stalwarts and opportunists – cut capital expenditure as a percentage of sales during the downturn, but by the end of the recession had improved their margins by an average of 20%.
- Diamond says that smart cuts improved the design of their businesses, and created operational advantages over their competitors.
- Based on its analysis it recommends the following to thrive rather than just survive:
- Cut the right costs – get to the root cause of expense by carrying out an operational review and identifying where money can best be spent. Don’t cut costs across the boardn
- Up variable costs but drive down total costs with your suppliers’ help – extending strategic relationships with key suppliers can reduce near-term costs. Also rethink your core competencies
- Identify customers to grow with – segment your customers and cater for the most profitable, rather than those that add nothing to your bottom line
- Optimise your marketing mix – you can cut marketing spend and still improve the results you get by matching different interactions to the optimal marketing channels
- Invest when others can’t, invent the future – stalwarts that maintained good performance through the recession continued to invest in research and development
- Put all your eggs in one or a few baskets. Scattered diversification of investment increases the chance that the business units with the most potential are underfunded. It says focus on your core strength, or your next core strength