Are Your Stores Firing on all Cylinders?

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1 Retail Update November 2015 Are Your Stores Firing on all Cylinders? Smarter shoppers and intense competition are putting more pressure than ever on traditional brick and mortar retailers to fine-tune their operations or potentially risk irrelevance. At one time, brick and mortar retailers dominated the retail landscape and had a customer s undivided attention when they were shopping. Today, a customer shopping in their store aisle has probably researched the product they are shopping for, read online reviews, polled their friends on Facebook, scanned the bar code with a smart phone app to see competitors pricing and might finally choose an onlineonly seller who will ship it for free in two days. Welcome to retailing in the 21st century. Technology has significantly lowered barriers of entry into the retail marketplace and niche online-only companies are taking market share and pressuring margins. This trend is apparent in the marketplace as retailers sales growth and EBITDA margins have been declining for two years running (Exhibit 1 and 2), and more are closing stores and trying to shrink their footprint (Exhibit 3). This has put an added burden on brick-and-mortar retailers to make sure their stores are operating as efficiently and cost effectively as possible. In our experience, conducting a store operations review can yield significant cost savings, improve employee retention and satisfaction, and improve customer service levels, ultimately helping to generate incremental sales. This article will provide our approach to a store operations review and highlight some key areas that can yield significant results. However, before a company can begin to take on this project, it must first consider how it influences its store operations. CRITICAL THINKING AT THE CRITICAL TIME FTI Consulting, Inc. 1

2 How Should a Retailer Think About its Store Operations? At a high level, store operations define the ways in which a company wants to be perceived by customers. The look, feel, assortments, layout and perhaps even the way the store might smell are all a reflection of the company s strategy and vision (Exhibit 4). Exhibit 4 What many companies often forget is that as products, messaging, service levels, and overall strategy change, their stores are impacted the most, but are also given the least amount of resources. Senior management expects that their stores will get it done with their current labor budget and technology, and most of the time they do. However, this is also a time when inefficiencies at the store level can begin to occur and incremental costs arise, typically in the form of labor, or customer service levels and sales suffer. When this happens, it may be time to perform a store operations review. Where to start and how to approach When stores begin to underperform, the typical reaction is to perform a cost cutting exercise. While this approach may be understandable, it can be harmful to the business and could escalate the problem. The reason this can be a damaging course of action is that it assumes cost cuts will address the store s underperformance, but it does not approach the situation from a holistic view of performance. In some cases, a store might not have enough labor to provide the customer service levels the business requires. For example, let s assume a company has two stores that each generate $1 million in sales, but one touches 100 customers and the other touches 1,000 customers. In this case, the store that touches 1,000 customers would likely perform better if more labor investments were made, as it is likely losing sales based on its low conversion rate. In our experience, a retailer should focus on three main areas when approaching a store operations review: Store Labor, Communication Practices, and Tasks (Exhibit 5). In each of these areas, it is important for the project team to view this Exhibit 5 Store Labor Key Focus Area Communication Practices Items to Review Full-time vs. Part-time mix Store hierarchy /Spans and layers / Regions and zones Minimum staffing requirements Hours of operation Store scheduling practices Commission structures and incentives How are stores communicated with? What information is sent to stores and by who? Is there a set time that stores receive communication by? Are the measurements (KPI s) clear, correct, and reinforcing the right behavior? Who controls the information flow and is it organized? Store Tasks Requirements of managers, associates, and other employees How are tasks communicated? Opening and closing activities Opportunities for implementation of best practices, or elimination of non-value added items FTI Consulting, Inc. 2

3 as a mandate to improve overall operating results, rather than engaging in a cost cutting exercise. If the team focuses only on the latter, it will often reduce labor costs but not address the root causes of underperformance in its stores. Exhibit 6 Why is labor so important? Labor is typically the first and easiest place to identify cost savings opportunities when performing a store operations review for the following reasons: 1. After merchandise, store labor is the largest controllable expense for retailers Store payroll typically runs between 10% -20% of sales, depending on service levels and complexity Store payroll is often the fastest cost-containment lever available to retailers 2. The right merchandise is key, but, sales will suffer if staffing levels are sub-optimal Previous experience shows that for a typical retailer, effective allocation of store labor (by location, day of week and time of day) can increase sales 2% - 4% This sales increase can be achieved at comparable or lower payroll, as a percentage of sales 3. Many retailers plan labor today the same way they did 20 years ago The most common practice is a spreadsheet-based matrix based on sales volume Exceptions rule the day, with little or no analytical backup for support 4. Given the challenging retail climate, labor optimization is more critical than ever Effective labor allocation will give retailers an edge against their competition Rule-based tools, based on ground up realities, will help ensure that when payroll is cut, it is done as efficiently as possible, minimizing risks to sales One common flaw with a labor optimization project is to view it as a one-time event rather than a continuous improvement process. There are many items that influence store labor; each needs to be analyzed, monitored and routinely modified (Exhibit 6). During this process a company must review the reinforcements, incentives and training it has in place to determine if it is encouraging the desired behaviors in stores. For example, during a store operations review of a recent client, we found that store associates and managers were paid commissions based on what they personally sold. While this works in some instances, this particular practice was driving the wrong behavior in its stores for multiple reasons: Store associates rushed customer engagement because they were more concerned about the next sale Customers received subpar levels of service if they were looking for low priced items Employees were reluctant to perform non-customerfacing tasks, such as organizing shelves, unloading trucks or training The store had a difficult time hiring and retaining parttime associates because full-time associates were scheduled during peak traffic times For these reasons, we eliminated the old commission system and set up a new tiered approach based on the achievement of store-wide goals. Everyone recognized these benefits and employee engagement and morale improved. Furthermore, the store had an easier time hiring part-time labor after modifying the pay structure. FTI Consulting, Inc. 3

4 While a store operations improvement initiative will yield different results for each retailer, in our experience a successful project can reduce store payroll by 10% - 15% annually while preserving customer service levels. However, after these savings have been identified, a common tendency we have noted is that retailers stop right there. This is a mistake in our judgment because the retailer only addressed a symptom but did not fix what might have caused labor to spike in the first place. For this reason, it is important to continue down the path of a store operations review and begin to analyze its communication practices. Improving store communications The process of improving store communications revolves around two separate areas: (1) establishing a gatekeeper and an environment where stores are not overburdened with information and (2) making sure that stores understand how they are being measured. Empower a gatekeeper The amount of information, requests, and incremental tasks that are pushed down to stores can be overwhelming even for the most well run stores in a retail chain (Exhibit 7) Exhibit 7 A gatekeeper s responsibilities should include: Owning the master calendar of all activities impacting store operations and payroll, including: Standardizing, reviewing and editing all communications Acting as a primary spokesperson for protecting the quality and quantity of communications Assisting in the build out of the annual operations calendar for weekly and monthly activities Prioritizing and approving new items added to the calendar Ensuring stores are not over-burdened and proactively monitoring store workload Without an empowered gatekeeper who is proactively helping stores handle the information flow to them, stores will not be able to focus on serving the customer. This power also allows the gatekeeper the discretion to say no or you need to wait to incremental tasks sent to the store. At a recent client engagement, while interviewing the operations team and visiting the stores, we noticed that the company lacked an empowered gatekeeper. Instead, they had a loosely defined process for communicating with its stores. This resulted in various people sending multiple pieces of unstandardized information at different times each week and month for stores to complete. This might seem trivial, but it can have a huge impact at the store level and can waste significant payroll if the store struggles to schedule labor effectively. By establishing a gatekeeper and setting up clear guidelines for the store communication process, the company was able to quickly reduce 35% of the items sent to the store on a monthly basis. This quickly helped store managers understand what they should be focused on each week and allowed them to schedule variable labor more efficiently, saving the company money. For this reason it is important to establish and empower a gatekeeper. A gatekeeper is an essential employee who approves operating activities, labor allocation and communication to the stores. They also manage the flow of all corporate impacts to store payroll to assure both compliance of time and validity of the value added impact. Clear, accurate and timely measurements Let s start with three basic questions: 1. Do you have 7 10 metrics that are easily defined and calculated that judge store performance? FTI Consulting, Inc. 4

5 2. If we asked store managers the same question, would they answer similarly? 3. Are these same metrics on the stores regular scorecard and are they delivered in a timely fashion? Many times when we ask these questions we will receive a resounding Yes from corporate management, but what the stores experience is often different. The most common shortcomings we see in store reporting are: Stores are overwhelmed: Stores are often overwhelmed by the amount of items that are tracked and reported on their behalf. Companies should try to focus their regular conversations with stores on no more than 10 KPI s and make the measurements simple. This also means excluding more complicated metrics from reports, such as ROIC or GMROI, which are influenced by too many variables that are out of a store s control. Weekly and monthly calls should focus only on metrics listed on the page. If there is a metric someone wants to talk about that is not on the page everyone is looking at, it should be discussed offline. Data is not shared easily or timely: Having timely conversations with stores is vital. This means that data must be easily shared across all levels and standardized for interpretation and repeatability. We often find that stores have to search for their weekly and monthly reports on a shared system. Instead, reports should be ed nightly and be formatted to print or view without additional manipulation or calculations. The report is missing information: This is most common when a company does not have store incentives aligned with reporting. For example, during store visits we often sit with management to review their performance reporting and also ask them to show us what other reports they utilize. With one particular client, many managers were using a separate report that contained qualitative metrics around customer engagement levels. The reason this report was so important to the stores is that it was tied to their bonus structure. However, because no one in corporate was incentivized on that metric, it was not included on the store scorecard. The last element that needs to be understood and scrutinized that is directly related to communications that are sent to the store and can easily affect labor costs are store tasks. Simplifying the store All stores are not the same due to multiple reasons such as employee talent, location, square footage and even the assortments they might carry. However, every store is mostly required to perform the same tasks, offer the same levels of customer service and in store shopping experience. However, what we often observe during store visits is the opposite. Some stores behave and perform differently. We typically find two main reasons for this: 1. Legacy items: This is the most common problem we run into at the store level. A veteran store or area manager cannot let go of a certain task that used to be performed. Or, there might be a less demanding process that was implemented to save time, but due to an ineffective communications process, the store did not change its ways. 2. Store manager mandates: This is often due to a store manager who believes he/ she needs to implement incremental tasks to counteract a store-specific problem. For example, a store that had a high week in theft for a specific item might suddenly start performing inventory counts during opening and closing times. This might seem like a reasonable response, but the incremental cost of that labor time might outweigh the benefit, as that employee is now spending less time serving customers. A better solution might be to review store wide spider wrap and other theft deterrent policies. The best way to truly gain an understanding of what, how and when your stores are performing tasks is to visit stores often and ask questions as you work alongside associates. Building this partnership is an impactful way to demonstrate your commitment to solving their pain points. In our experience, store-level employees know where wasted activities occur. Sometimes the best suggestions come from conversations with people who perform these tasks every day. FTI Consulting, Inc. 5

6 As the retail landscape continues to evolve and technology further lowers barriers to entry for competition, store-based retailers need to continually focus on improving their operations. While most will focus on top line growth and cost savings opportunities, it is important to remember that the goal is to improve the overall operations of the store. In addition to the financial benefits described above, a store operations project will typically improve the following areas: Improvement Area Description Benefits Labor Mix Labor Planning Simplified Store Targeted Investments Part-time associates represent 30-40% of the labor A systematic approach for defining when to hire a new full-time or parttime employee Non value-added tasks and requirements are removed from the store List of tools or technology items that could increase productivity Greater flexibility in scheduling will save payroll costs and help align labor with store traffic Will allow the stores to scale more profitably and provide visibility into the hiring process Increased employee satisfaction and retention Increased customer engagement Incremental revenue and customer satisfaction Communication Standards Defined Hours of Operation Stores receive communications in a set template, at a set time and from one person By store analysis that shows when employees should work and adjustments to hours of operation Improved execution within the stores and clarity of goals Will eliminate potentially unprofitable periods throughout the day Align store labor with customer traffic Clear Measurement and Reinforcement Store reporting and measurements are clear, accurate, and timely Commissions and training all reinforce the ideas and practices the company is trying to instill Goals and objectives are clear Employees and management are focused on what should drive results The views expressed herein are those of the authors and do not necessarily reflect the views of FTI Consulting, Inc., its management, subsidiaries, affiliates, and other professionals. FTI Consulting, Inc. 6

7 For More Information Contact Bob Duffy Global Leader Corporate Finance Steve Coulombe Senior Managing Director Christa Hart Senior Managing Director Keith Jelinek Senior Managing Director Adam Malpocher Senior Director About FTI Consulting FTI Consulting is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring FTI Consulting, Inc. All rights reserved.