Retail's Uncertain Horizon

NEW YORK — In a packed conference room seating no fewer than 75 people at the Javits Center last week, only five hands went up when Karen Lowe, general manager of IBM's global retail industry unit, asked if anyone in the audience had bought an automobile in the past three months. More hands went up when she asked how many people had made the shift from name-brand to private-label products over the same period. If the respondents had been strictly consumers, this response may not have been surprising -- but this was a room full of retailers.

The session, "Retail Horizons: Benchmarks for 2008 - Forecasts for 2009," relied on results from the National Retail Federation's seventh annual "state of the industry" report, sponsored by IBM. Panelists included Chip Molloy, senior vice president and chief financial officer of Petsmart, and Freeman Zausner, chief administrative officer of Urban Outfitters. Suffice to say, the panelists and the report findings agreed that the industry looks bleak -- but there was also the sense that the situation requires retailers to be all the more persevering.

Given the worsening economy, one of the key findings of the report was a clear "defensive" approach on the part of retailers, Lowe reported. Retailers are:

• managing inventories more closely;
• increasing supply-chain efficiencies;
• increasing labor productivity; and
• controlling operating costs.

In doing so, retailers also report that they're making moves to reduce costs, including:

• decreased store expansion;
• decreased spending on information technology; and
• a focus on immediate return on investment (ROI).

In other words, Lowe summarized, "retailers are getting lean and mean."

Top priorities, in order of importance, were:

• customer satisfaction/retention;
• cost reduction/containment;
• employee retention and development;
• product differentiation; and
• supply chain optimization.

"The world's changed dramatically over the last year and a half," Molloy said. Given that, he advised the audience to have a handle on balance sheet management, a task he admits he probably wouldn't have mentioned in good times. "We need to ensure our balance sheets are as clean as we can make them -- make sure our debt positions are at a minimum, make sure that we have liquidity, make sure we can survive for a period of time that could be 18 to 24 months, or longer," he said.

Molloy then shared a more somber -- or perhaps, more realistic -- outlook on the economy. "We've had a history of ‘what if-ing' and being more optimistic," he said. Instead, he said he now believes retailers need to be more pessimistic, as we may now be in the midst of a multiyear "what-if" scenario. He recommended retailers look closely at what could be characterized as discretionary investments and that they more clearly identify absolute necessities. The challenge, of course, is making cuts that don't adversely impact the brand. (When asked what he would do differently five years ago knowing what he knows now, Molloy said he would have focused more on building the brand and community, and less on unit growth.)

More important, cuts should never negatively impact the customer. In fact, Molloy said, in a time like this, it's critical to optimize the customer experience, while still looking for ways to cut costs. One area where many retailers drop the ball here is in their supply chain -- failing to maintain inventory based on demand.

According to the study, 69 percent of retailers said "customer satisfaction/retention" is a top priority for 2009. Urban Outfitters' Zausner echoed the sentiment, citing his company's policy of "obsess[ing] about the customer." At a time like this, he said, it's critical to be better and more interesting to the customer. He recommended that retailers focus on speed-to-market. "We constantly [monitor] our assortments so that they don't become stale," he told the audience. "We don't look backward, we look forward." Based on customer feedback and product reviews, Urban Outfitters is able to anticipate what customers want to see in the future, making analytics a critical tool for the company.

A good experience may keep customers in the store, but appearances are what lure them in. "No one wants to go into a retail environment that's dirty, that's dingy, that's smelly," Molloy said. "We've seen retailers go out of business. [You can] sense it in the store, sense it in the associates.... You've got to maintain your standards in your stores." The same standards, he added, must be applied to your employees. "[The cost of training] looks like a big number you wish you could take off, but,…especially in retail, training is really important because you're differentiating yourselves by providing customer service in the store." He added that if you're investing in your talent -- from associates in the stores to managers to regional vice presidents -- ultimately you're investing in the customer.

December's unemployment rate hit 7.2 percent, a 16-year high, but on the bright side, there's a lot of talent available. "We look at it as a great opportunity," Molloy said. "[There's] potential to make an investment. We're looking for the right talent, and continue to upgrade our people."

Technology costs are being reduced throughout the industry, with 12 percent of retailers reporting headcount decreases in this department, compared to 3 percent last year. Only 22 percent of the sector plans to increase technology headcount in 2009; last year, 33 percent increased staff. Moreover, 60 percent of retailers indicated that they are outsourcing some portion of their technology. For the panelists, the riskiness of outsourcing seemed to outweigh the potential benefits. "If you asked me six months ago, I would [have said], 'Yes, [outsourcing is] important to us and we need to do more of it,' " Molloy said. "If you ask me today, I'm not so certain." Zausner, for his part, said that Urban Outfitters doesn't outsource directly, with the exception of a vendor that supports its Web infrastructure.

What investments, Lowe asked, make sense for 2009?

Petsmart's Molloy responded that the answer is complex. "As long as we see ROI, we'll proceed with that investment," he said, citing supply chain initiatives, product-data management, speed-to-market, marketing, and CRM initiatives.

"In the new economy, retailers must adapt to fundamental shifts in consumer behaviors to attract new shoppers and create more advocates while driving down costs, and creating new value," Lowe said later, in an email interview with CRM magazine. "Businesses [can] reduce costs and improve performance through smarter operations. New technologies are optimizing processes to make merchandising and supply chains more efficient and cost-effective, so retailers can keep their focus on delivering a superior shopping experience to consumers."

As if managing brick-and-mortar stores weren't challenging enough, retailers are feeling the pressure to establish (or expand) an online presence. Nine out of 10 respondents sell products online. Six out of 10 have 80 percent of their assortment represented on the Web; last year only four out of 10 were able to make the same claim. Moreover, 30 percent of respondents report having over 20 million Web site visitors, more than double the 14 percent that saw that level of traffic in 2007.

Urban Outfitters has long seen the Web's importance. "Over 20 percent of our volume [comes from the Web]," Zausner said. "We're worried we're not investing enough." Moving forward, the company is making a concentrated effort to integrate all of its channels and look at technology improvements in its Web infrastructure to expand the consumer's online experience. All retailers, he said, will have to focus on that experience. Looking back, Zausner said that if he could change anything, "we probably would have put more money [into] our Web presence sooner and deeper."

For Petsmart, selling pet food online wasn't working out. "We struggled with the Web for years," Molloy said. "If you look at research and surveys on what makes economic sense to sell on the Web, if the list was of the top 25 items, pet products were 25th. If it was the top 50, pet products were 50th." Instead, Petsmart realized that the Web was a place to grow a community of pet lovers, rather than pushing for transactions.

While this is a dismal time for many retailers, those who have long invested in customer-centric practices and a consistent brand image can afford to have a more hopeful outlook in what will be a historical case of retail Darwinism. "For some retailers," Molloy said, "we [will] look back and [see] this is the best thing that could have happened -- because the strong [will] get stronger and the weak [will] get weaker."

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