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August 1989

The trend in retailing: spend less, serve more.

by Chavie, Rick

    Abstract- The major trend in the retail trade is to reduce overhead, a result of: reduced bureaucracies due to mergers and acquisitions; the success of warehouse format retailers; and consumer demand for low pricing. To remain competitive, small retailers must reduce overhead to provide low prices. Large capital investments will not improve productivity, but will have the effect of increasing centralization, reducing the level of customer interface, and raising overhead costs. Small retailers must: evaluate their total organizations for improvement; develop overhead analysis matrices to track each department; analyze their organizational cost structures against those of competitors to find areas in which to improve; and change their organizational cultures to foster an entrepreneurial spirit.

It may be surprising in an industry not known for profligate spending to see a trend toward overhead reduction, but the signs are there:

* Recent merger and acquisition activity has resulted in drastically reduced bureaucracies.

* Warehouse format retailers, which pride themselves on minimal backoffices, are thriving.

* Consumer weariness with constant promotions and deceptive initial prices is eliciting a responsive chord for everyday low pricing--which can only be achieved by reduced operating costs.

Where will this trend lead? Who will thrive and who will perish in this environment? How long will it last?

Where Will this Trend Lead?

The initial reaction of most retailers to the notion of "spend less" is more typical of a governmental bureaucracy; cut someone else's expense:

* Merchandising is the heart of the company, so it is sacred;

* Operations run the stores, so we cannot touch them;

* Accounting reports results, and we need to know these;

* MIS keeps us competitive, so it is out of bounds; etc.

While all of these are true statements, the CEO has two options: 1) stay the course and risk being a casualty in the retail wars; or 2) act now to achieve superior competitive position in the cost structure of the organization.

When working with retailers, the following maxim appears: "The more you spend, the less effective the spending becomes." Small retailers can be extremely cost effective when everyone pitches in to do the work regardless of department or responsibility area:

* The president/owner is the entire merchandising department;

* Operations are those in the store at the same time as a customer;

* Accounting is done by a parttime bookkeeper; and

* Systems are run on PCs.

But how does a large retailer retain or recapture the entrepreneurial spirit (or if not the spirit, at least the cost structure) from the early years? The main ingredient is: Serve the customer!

Many companies are trying to address the customer service issue by increasing capital investment in point ofsale equipment, scanning devices, UPC, and massive central processing systems to keep track of sales patterns and customer needs. Their concept of customer service is keeping the "right" merchandise in the stores in the appropriate quantities. Thus, these same retailers are reducing or eliminating slow selling items and reducing labor content by substituting automated tools.

As technology becomes commonplace, how will those retailers distinguish themselves if they are intent on reducing the human element in shopping?

Many of the better-run retailers are known for their investments in people. By having people who are well trained, you can sell more, be more productive and lower costs as a percentage of sales. While not laggards in technology, such companies' customers like their people better. These retailers recognize technology alone does not rack up market share increases. The retailer must remember that retail is a people business, otherwise people would shop by mail.

Who Will Thrive, Who Will Perish?

There will always be a place for the small retailer. Good small retailers seem to fail more from being over-ambitious and growing too rapidly than from lack of customers, since they are typically very close to their customers.

Retailers who achieve superior customer service will thrive and achieve market share gains. Those who are in danger include the following:

* Department stores;

* Mass merchandisers;

* Home centers; and

* Catalog showrooms.

By and large, these industry segments are not known for superior customer service and tend to have large centralized operations with large bureaucracies. The better-run retailers mentioned earlier, are perhaps so successful because of the comparative lack of service in their segments.

It is not easy to re-orient a company's culture and infuse employees with goodwill toward customers. So what option is left for retailers who are large, bloated and headed for disaster, yet who would prefer not to go the dismemberment route a la Federated, Zayre's, Allied, etc.? The answer is reduced corporate overhead and improved productivity.

Cost Improvement Targets

An easy target is the systems group. When one hears of $10-$20 million and even $40 million system projects at some retailers, you have to seriously question how a capital investment of this magnitude will significantly and cost effectively improve profitability. Projects of this size: take on a life of their own; are very risky; are frequently dominated by outside system development staff, rather than a shared undertaking between the retailer and outside staff; may be obsolete by the time they are complete; and tend to increase centralization and decrease links to the customers.

The accountability of most systems groups is virtually non-existent as performance is obscured by "techspeak," quick fixes and finger pointing. Seldom does the CEO know when to fire a systems executive--and if he did, how can he judge the capabilities of the incoming executive?

The favored treatment merchandising gets makes it a prime target for cost reduction. The typical indirect measurement of its performance has resulted in ineffective administration of buying functions: buyers are either overwhelmed or overly enamored with computer systems and love big support staffs, all of which tend to insulate them from customers and raise overhead costs.

Accounting staffs can take on a culture of their own. Many retailers tend to look down on the accounting function as an unwanted but required evil. Consequently, these staffs tend to become combative and protective of their responsibilities. This makes it easy for them to "tune out" the goals of serving customers, moving merchandise, etc., and focus on narrow accounting goals. Whereas the systems group has lofty goals that are difficult to dispute, the accounting groups are held in contempt because of their focus. Nonetheless, with their own set of jargon, accounting rules and controls, and frequent control of the budgeting process, accountants know how to play the game, and this can easily lead to excess staffing.

The costs of the operations group are typically measured as a percentage of sales. So how can their costs get out of line without being noticed? Easily. Few companies really know how well their store staffing compares to customer traffic patterns and they tend to schedule staff for their convenience, not the customer's needs. Superior sales from superior service does not come from the retailer's desire for convenience.

Achieving Sustainable Cost


It is easy to get out the hatchet and hack away at the overhead beast. But how should a retailer who wants to preserve its identity and execute a longterm program for sustained improvements proceed? Retailers should:

* Recognize that no parts of the organization should be spared from improvement;

* Develop an overhead analysis matrix of their organization which tracks by department such information as job fragmentation, spans of control, productivity performance trends, and worker/manager ratios;

* Plot their cost structure against industry leaders to identify areas to improve; and

* Be prepared to make changes in the corporate culture to adopt a more entrepreneurial approach to spending.

Execution of cost-cutting measures and productivity improvements alone will not create a competitive edge. But these actions can provide the funds to invest in people who can create that edge for the retailer.

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