Guest Column | September 24, 2018

Retail Rebound Or Apocalypse?

By Keith Jelinek, Richard Vitaro, and Rick Maicki, BRG

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Fourth-quarter financials in 2017 demonstrate once again retailers walk a tightrope when it comes to driving sales and maintaining gross margins. Despite healthy sales increases in the fourth quarter, many retail executives felt the impact of a dynamic business environment that challenges retail companies on numerous fronts: New technology, evolving consumer preferences, digitalization, new competitors, etc. Attracting new customers and keeping loyal shoppers “in the fold” is never a fait accompli. Executives must manage both short- and long-term strategies across all their operations to maintain financial flexibility and remain relevant with consumers.

Retailers enjoyed robust Q4 and holiday sales, welcome results after several challenging years and talk of a “retail apocalypse.” But do strong 2017 holiday sales indicate the beginning of a retail resurgence? Year-to-date 2018 sales are promising. In fact, retail sales have increased 4 percent or more since July 2017. But we question: Are the sales increases actually driving increased profitability?

Q4 2017 – Promotions Reigned Supreme

Based on a BRG Retail survey[1] of over 100 retail executives, we expected heavy promotional activity for the fourth quarter of 2017. To gauge the impact of the heavy promotions, we examined the financial results of 77 large and midsize public U.S. retailers across 18 retail channels. We found that, while total sales increased 5.5 percent[2] and gross margin dollars increased 3.3 percent, gross margin rate declined by 55 basis points[3] — high promotional activity had its expected impact, especially on the bottom line.

Q4 2016 And Q4 2017 YOY Sales, Gross Margin, And EBYDTA Change

According to our analysis, this group of retailers made 4.5 percent less in overall EBITDA dollars in Q4 2017 than in Q4 2016, despite the significant sales increase. Most of the EBITDA decline came in the grocery, home furnishings, jewelry, and mass merchandisers sectors. In addition to gross margin softness due to promotional activity, retailers continue to face higher cost to serve in the highly competitive retail environment. The higher cost comes from increased transportation costs, wage pressures in a tighter labor market, and greater cost of complexity from delivering omni-channel initiatives and other efforts to grow the business.

2017 Q4 YOY Sales And Profitability

2017 Q4 YOY Sales And Profitability

While some retailers are bucking these trends, many struggle to increase profitability even with the upward trend in sales. If EBITDA does not expand in these bullish times, how will these retailers perform in more challenging environments without change?

While it is interesting to assess history and learn lessons from past performance, unless we build on these learnings to achieve profitable sales, history will repeat itself, and the odds for survival will continue to diminish for a number of retailers. As retailers prepare for the most important months of the 2018 sales calendar, we offer six actionable best practices from retailers that appear to have solved the riddle.

  1. Understand your customers’ journey. Listen to and understand shoppers through robust consumer research and insights. Greater insights lead to more informed planning, which in turn improves product assortment, reduces markdowns, and drives profitable long-term customer relationships with the brand.
  1. Leverage analytics to improve pricing and reduce margin erosion. The approach to pricing and promotions must be highly structured and strategic. It is critical to understand incremental contribution margin generated from specific promotions and determine which promotions truly drive incremental traffic.
  1. Increase store labor efficiency. Now is the time to reexamine store labor planning. Remove unnecessary tasks, simplify communications, review hours of operation, and shift labor to customer-facing activities at peak times of the day and days of the week.
  1. Optimize inventory allocation capabilities to avoid markdowns. Retailers must strategically allocate inventory to avoid moving products to clearance. Flow-and-hold tactics and leveraging geodemographic data to align sizes, colors, price points, multi-item purchase quantities, and ethnic preferences are critical.
  1. Improve e-commerce fulfillment costs. Retailers are competing to fulfill e-commerce orders. Retailers must undertake a careful examination of free shipping thresholds, take advantage of certain efficiency levers such as zone skipping, and ensure that unusual package-size accessorial charges are understood and are part of the total customer value proposition.
  1. Now is the time to reduce corporate SG&A costs. Business models have changed, and organizational structures have not kept up. Start with a clean sheet of paper and conduct zero-based budgeting. Develop the organization around what the business needs are of your customer today and tomorrow.

Despite recent green shoots, retail remains a stressed industry. Companies in all retail categories have undergone a wave of disruption, and over the last few years some have fallen short in addressing challenges. Those that remain will face more tests, but opportunities exist for those that can piece together the puzzle. It will require a strategic and coordinated effort across the operation, as well as flexibility in addressing both short- and long-term challenges, especially in the six areas noted above.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

About The Authors

Keith Jelinek has held management positions and led and advised Fortune 100 retail companies to drive transformational improvements for more than 30 years. He also has held numerous interim management roles, working collaboratively with executives and boards to effectuate key strategic initiatives.

Richard Vitaro is an impact-focused advisor who advises clients on achieving step-change and sustainable improvements in performance. He has led more than 150 engagements for 85 clients and is recognized as a trusted partner by senior management, boards, and private equity sponsors in time-sensitive, complex, and critical situations.

Richard (Rick) Maicki is a managing director in BRG Corporate Finance specializing in performance improvement. He has more than 25 years of business experience, with extensive experience leading and advising Fortune 100 companies, with a focus on retail and consumer products companies.

[1] Keith Jelinek, Rich Vitaro, and Rick Maicki, The Customer Is King: Promotions to Drive Lower Retailer Margins During Holiday 2017, BRG Retail paper, Emeryville, CA: Berkeley Research Group (November 2017).

[2] Based on US Census retail sales excluding vehicles and parts, food service and dining, and gas stations; and on BRG analysis

[3] BRG analysis based on publicly reported financial reports.