Retail has been facing critical challenges for years: the shifting of power to the customer, the accelerated growth of digital, a surplus of square footage, and balance sheets weakened by years of private equity transactions that didn’t deliver. The industry was already poised for a Darwinian weeding out before the outbreak of COVID-19, but now this process is accelerating.
For retailers that still have relevance with consumers, a Chapter 11 reorganization presents an opportunity to reinvent themselves. The plan must reposition the business model to become more agile, innovative and scalable, and as such, it's critical to thoroughly assess the business model, re-imagine the cost structure and operations of the business, and look ahead for ways to continually innovate.
Successfully completing this process will enable the retail business to thrive.
Evaluate the Business Model
When evaluating your current business model, don’t bring your baggage with you. Ask questions such as: “If we were opening this business today, what would it look like? Who is the customer? What are their needs? How will they engage with the brand?”
Businesses will leverage the Chapter 11 process to close unproductive stores, renegotiate leases, and move out of markets that don’t make sense long term. With the shift to digital and the increased deployment of omnichannel strategies such as buy online, pick up in-store (BOPIS) and curbside pickup, Chapter 11 can be used strategically to better align the business model with the reset of customer shopping habits post-COVID-19.
Rethink Cost Structure and Operations
Businesses that thoroughly scour through every dime spent in operating and capital expenses have the most success restructuring the cost side of the business. Review every line item and every invoice as an executive leadership team. This exercise usually uncovers millions of dollars of hidden waste.
The more transformational cost reductions will require a re-examination of the organization structure and operating processes. Ask the tough questions: “What functions should be in-sourced versus outsourced? Where should contractors be leveraged? Where are the inefficiencies?”
The current merchandising calendar process of most retail companies is ripe for overhauling. Most calendars are too lengthy and overburdened with excessive sampling, product development and travel costs. Making wise technology investments in customer data analytics and compressing current product development calendars will unlock a lot of desperately needed cash.
Look for Ways to Innovate
Companies that utilize the reorganization process to differentiate their business from competitors will have better odds of surviving and thriving in the future. The scarcity of capital will require carefully considered investments. These investments will need to have a short payback period and attractive return on investment.
Customer data analytics platforms are likely candidates for worthwhile investment. These platforms will enable retailers to make more effective product selection and pricing decisions. Innovative improvements such as this will result in better conversion, increased margins, reduced product development costs, and improved stock turn.
Also, consider investing in customer engagement platforms. Falling behind in new customer experience standards isn't an option. In fact, discovering ways to emerge as a leader in all customer-facing disciplines is paramount.
Lastly, it's critically important to make the right investments in human capital. Building the capabilities of the organization by adding and developing the right talent will be vital to success.
Chapter 11 is a viable option for relevant retailers to transform themselves into thriving businesses. To do so, it's critical to rethink the business from the customer’s perspective. Capital investments and operating expenses need to be carefully evaluated based on the value they deliver for the customer. Re-inventing the business with a customer focus should afford reasonable prospects a successful go-forward business.
Daniel Binder and Rich Pedott are partners at Columbus Consulting.
Daniel Binder is a partner at Columbus Consulting focused on Merchandising and Supply Chain strategy; he has +35 years of global retail experience. Daniel was formerly President of DFS, a Luxury Travel Retailer across 16 countries and division of LVMH, based in Hong Kong. Daniel led significant Supply Chain re-engineering and systemic innovations coming out of 9/11, SARS, and the 2008/2009 financial crisis.
Rich Pedott is a partner at Columbus Consulting and has 34 years of experience in the retail industry, including leading the MP&A function during the Great Recession of 2008. He has held senior level positions including Chief Supply Chain Officer and SVP of Planning and Allocation for leading specialty retailers. Most recently Rich was the Chief Executive over the Retail, Wholesale, and Direct-to-Consumer business for The Metropolitan Museum of Art.