C-Suite Focus: Effective business scenario planning to success in 2022 and beyond
The year 2020 was an unexpected and complex year for retail, maybe a “new normal”— with the K-shaped recovery where some retail sectors grew top-line sales by as much as 30%, while others declined by the same percentage or more. At the same HRC Retail Advisory time, the importance of digital as a percent of total sales grew at an unprecedented rate, often increasing to as much as 50% of sales.
This year has continued 2020’s rapid growth for the “covid beneficiaries,” including grocery, drug, pet supplies, convenience, extreme value, auto parts, home improvement, home décor, outdoor, fitness and of course Amazon.
However, 2020 was a terrible year for the discretionary sectors, including specialty apparel, department stores and others in enclosed malls. These sectors have rebounded in 2021, due to the combination of pent-up demand and further government aid to consumers. Many discretionary retailers have grown sales by as much as 30% to 50% over 2020, and 10% or more over 2019.
C-Suite Implications
To adapt to the new “normal environment,” new and/or enhanced capabilities are needed. These include new talent, digital, supply chain, analytics, digital marketing and inventory management. In virtually every retail company, C-suite leaders are being challenged by many significant asks for capital, systems, people, marketing spend and store remodeling to support the increased 2021 sales levels and to enable the new/enhanced capabilities.
We see this as a potential threat to continued profitability levels in 2022 and beyond as the sales growth rates of 2021 will not be sustained unless retailers can gain market share from competitors. Market share gains will only be sustained if excess profits from 2020 and 2021 are invested efficiently and effectively via business scenario planning.
Finding the right balance between returns to shareholders (share buy-backs and dividends) versus investing in the enhanced and/or new capabilities is crucial. Spending incrementally on additional head count to align with increased sales in this period is not the answer.
The pent-up demand spending and government aid to consumers will end at some stage and consumers will return to more normalized spending patterns. They also will shift much spending from products to experiences such as restaurants, entertainment and travel.
The underpinning of effective business scenario planning is outlined the three focus areas listed below. Retail CFO’s should champion these areas to ensure sustained financial performance improvement in our new normal environment.
1. Strong Cross-Functional Perspective and Business Case Experience
The CFO should have a strong cross-functional perspective of the business and of the key metrics that impact profitability and capital allocation, as well as the inter-dependence of operational metrics and how they should be prioritized.
The CFO also should have an intimate understanding of how business cases for investing in new and/or transformed capabilities are developed, including what scenarios need to be considered and prioritized. This is vital as business cases must include:
• the right financial baselines and metrics;
• the financial and strategic benefits to be delivered from the new capabilities;
• the agreed metrics to measure and track benefits realization; and
• the anticipated benefits-realization timeline, with appropriate investment exit points if the business environment changes or the execution results are not aligned with plan.
This will allow finance to hold operating leaders accountable for the realization of the benefits. CFO’s should allocate financial analysts to support the operational leaders in measuring and tracking progress of benefits realization versus the business case and reporting results to the executive committee.
The analysts will also be able to obtain the necessary financial and operating data and provide effective insight to the operating leaders on performance and how projects are tracking towards anticipated benefits
2. Prioritizing New Capabilities and Capital Allocation
Operational leader requests for additional capital and operating expenses in 2021 may at times exceed the business’ capacity. This will result in an unsustainable cost infrastructure in 2022 and beyond, given the anticipated normalization of sales growth rates.
The CFO is perfectly equipped to ensure capital is directed, allocated and prioritized towards the most important value-drivers to ensure adequate funding for the most important new and/or enhanced capabilities — and to prioritize which capabilities are essential versus discretionary and potentially less crucial.
3. Managing Cost Infrastructure Through Zero-Based Budgeting
Given the significant capital and operating investments needed to enable digital, omnichannel, CRM and other growth initiatives, retailers must make rigorous fact-based resource (both human and financial capital) prioritization decisions. The CFO is well-positioned to oversee these decisions in partnership with the CEO and key C-suite executives.
Zero-based budgeting is an excellent tool (rather than incremental edits to staffing and other cost budgets) to ensure the focus is on the correct prioritized investments needed to achieve the desired near and longer-term benefits. This is especially true in a rapidly changing retail environment where the zero-based approach will yield much better results than using historical spend for future planning.
