It is no surprise these days that the retail industry – one that was always characterized by constant change – continues to bear a large share of the economic shock driven by COVID-19, but the pandemic continues to drive the reimagining of the retail operating model.
Retailers developing a transformation plan will certainly engage their operations and real estate teams for such strategies, but savvy leaders will include their support functions in a holistic approach. Those types of leaders know that a plan can be executed quickly when involving a few, but an enduring plan is developed when it is informed by many.
When forming a plan, management should take into account:
- How to determine the most efficient and productive store footprint in terms of size, location and function, and work with landlords to maximize the economic results, and
- What role the finance and accounting teams should play in these decisions.
The long-term effects of COVID-19-related retail industry challenges are more easily discerned now, and businesses should use this knowledge to create a transformation plan that capitalizes on a retailer’s present situation, while also laying the framework for future success.
Optimization lessons learned
The pandemic has only accelerated the way retail companies need to rethink their omnichannel strategy to manage the end-to-end customer experiences, integrating all types of touchpoints to deliver a seamless customer journey, said Daniel Forman, a Transformation manager with Grant Thornton. Forman said it is no accident that the companies most proactive in creating an omnichannel delivery model pre-COVID-19 are the ones that are benefitting the most from it now, so the lesson seems to be an obvious one.
But Forman said what is not as obvious is where the focus should be to improve that experience. An easy answer is to follow Amazon’s lead and just allocate more resources into e-commerce, figuring the past year has led to permanent shifts in customer preferences towards online shopping and home delivery. Many retailers poured resources into e-commerce early on during the COVID-19 outbreak, looking at their “brick-and-mortar” sites as unnecessary bloat either to be downsized or eliminated altogether. But Forman suggests this approach may prove short-sighted.
“What we are seeing,” Forman said, “is retailers realizing that and saying, ‘if we’re talking about omnichannel, it’s not just e-commerce, there needs to be a brick-and-mortar aspect to support that,” even with COVID-19 continuing. Forman points to early e-commerce pioneer, Bonobos, an e-commerce men’s clothing retailer, found the need to open physical “guideshops” to respond to customer needs and better support operational excellence. During the height of the pandemic, customers preferred to do in-store or curbside pickup for online sales, to acquire the product the way they wanted, when they wanted – and to have the assurance of seeing the product for the ultimate completion of the sale.
Retailers ought to consider innovative partnerships and be willing to continuously pilot and test which ideas improve the customer experience and deliver the necessary financial results, said Neima Golnabi, a Transformations director with Grant Thornton. For example, Amazon has partnered with Kohl’s and other retailers that have the brick-and-mortar capacity for pickups and returns. This type of arrangement can optimize the customer journey and offset the logistical nightmare associated with return requests.
Golnabi said the lessons learned from a re-examination of a retailer’s brick-and-mortar assets is to first understand the financial viability of existing locations under today’s new circumstance, and then to re-evaluate the assumed purpose of each store. That purpose may have changed during the pandemic, and a less profitable location could be redeployed for a new purpose as a distribution center or a pickup-only outlet.
A true omnichannel approach, Golnabi said, can take advantage of new technological innovations to achieve a level of interaction not previously possible. Virtual reality and augmented reality sales methods, where an app can provide a better visual guide of a particular product, has been a boon to jewelry and upscale apparel retailers.
“The customer experience has become more important than ever,” said Jason Rogers, an Audit partner with Grant Thornton. Whether that’s on the e-commerce side and the connectivity there, or in person. If you think about omnichannelling, from the very beginning to the very end, retailers want it to be a positive experience.”
When deciding whether to rationalize the physical store aspects of a retail business, optimizing one’s omnichannel strategy requires paying close attention to dynamic customer preferences. Regardless of the path that a retailer chooses, a fundamental recipe for success is cross-functional collaboration and seamless information flow, especially between the operations and real estate team with its finance and accounting departments.
Finance and accounting team’s involvement
Kevin Kelly, an Audit partner with Grant Thornton, said while accounting should not be the driver of a retailer’s store optimization decisions, they should be involved in the process. The insight of the finance and accounting team typically provide the keys that unlock a plan’s possibilities and illustrate the impact on financial reporting.
Restructuring a business model carries a greater risk of unintended consequences if you ignore or minimize accounting concerns, said Lisa Kaestle, a director in Accounting Advisory with Grant Thornton. Operations and real estate managers must keep finance and accounting personnel informed so financial implications of business options are known, and considered, right away.
“Especially with COVID-19,” Kaestle said, “Companies are in situations they have not dealt with before, and many are making operational decisions without fully considering the financial reporting implications.”
The challenge for certain companies looking to enact business strategy goals often comes down to liquidity, said Matt Esposito, a partner in Accounting Advisory with Grant Thornton. One place to find immediate cash is through an examination of the store leases, and options there range from renegotiations, sale leasebacks, to closing locations altogether. What it means is a retailer’s finance and accounting staff must work with the operations and real estate departments hand-in-hand.
Often, business owners can have more negotiating leverage than they may at first see when talking to a landlord about a struggling retail location, Kaestle said. Landlords can be motivated to offer concessions based on their desire to preserve a strong tenant relationship. These concessions can include deferred rent payments, rent abatements or some form of rent relief that may be coupled with a lease extension.
In situations where a company decides to leave a location as part of a restructuring plan, landlords may be willing to accept an upfront termination fee. It’s important for the finance and accounting team to know about these fees and negotiations because it could help minimize a loss, Kaestle said.
Alternatively, if the owner of the store or distribution center is having liquidity issues, some companies are considering whether to enter into a sale leaseback transaction, which would result in immediate cash. However, when negotiating contract terms, the accounting team should be closely involved to avoid an unintended outcome in how the financing is reported to investors.
“When retailers are going through these different decision points, the ones who are experienced know to bring in the accountants early, and not when the ink dries,” Esposito said. Even when a business restructuring plan involves the certainty of store closures, management will want to understand what it also means to the bottom line and how investors will see it. The impact of those closure decisions can vary depending on the guidance and perspective a retailer’s accounting staff can provide to management. Furthermore, the picture on the transformation strategy becomes clearer to investors.
Transformation with a holistic approach
Above all, a business should form and execute a transformation plan through a holistic approach, Golnabi said – one where departments collaborate alongside senior management. To guide this holistic approach, Rogers advises businesses to keep in mind his “three C’s”: coordination, collaboration and communication. It’s not enough to simply have an idea of a holistic approach; a business must institute practices that make the approach work. If accounting doesn’t know a lease was executed, say, or operations doesn’t provide information to finance and accounting where they think the right place is to optimize, that’s when the trouble happens, Rogers said.
“For finance and accounting teams, if they are proactive, they will get the information from operations -- the operations teams do not always know what you need, but when you engage them, they will provide it to you,” Kelly said. In order to establish a lockstep approach, it comes down to basics – monthly or more frequent check-ins, quarterly reports, all aimed at systematizing communication so that frequent, substantive discussions and exchanges of information actually happen.
The bottom line, Kelly said, is you can think you know what new trend or emphasis is the right one for a transformation of the business, but consumers are “channel-agnostic” and will shop in different ways, at different times for different products.
“I do believe that as we move beyond COVID-19, there will be a greater connection with consumers in stores,” Kelly said. “Retailers, to be successful, need to provide access to their products in many channels so that they can connect with the consumer in the format that their customers are comfortable with.”
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