Retailers Should Think Like Suppliers to Cut Costs

Zero is a powerful word in the food industry — its marketers loves to boast about “zero calories” and “zero hassle.” And then there is zero-based budgeting.

This radical cost-cutting method, which involves a clean-slate approach to corporate spending, has been embraced with gusto by Kraft Heinz and rival consumer goods multinationals, such as Unilever and Diageo.

Curiously, their enthusiasm has not been mirrored in a neighboring industry: retail. With notable exceptions, such as Walmart and Tesco, retailers have not turned to zero-based budgeting en masse to ease the pressure on their business models, even though they have seen plenty of their food and drink suppliers adopt it.

Now, however, more retailers are poised to follow suit after concluding that zero-based budgeting (ZBB) can provide them with some financial breathing space while also giving their managers new tools that can help them make better decisions.

The tectonic shifts in the industry mean that retail chains face huge funding burdens wherever they look: from investments to allow customers to move seamlessly between digital and physical channels, to the bankrolling of free delivery and lower prices. All this is happening while they grapple with rising costs in everything from labor to logistics.

What’s drawing them to ZBB now? The way it liberates resources to tackle the often-existential pressures in retail is a big attraction. Executives see ZBB as a practical alternative to clumsy, across-the-board reductions in such areas as store staffing, which can create a “doom loop” of alienated shoppers and reduced traffic.

The zero-based budgeting approach effectively requires managers to start each year’s budget from a blank spreadsheet, rather than using the previous year’s spending as a base. The idea is that ongoing spending is attached only to activities and projects that genuinely move the business forward, not because they were in last year’s budget.

Elements of zero-based cost management have received some bad press over the years, and executives can be wary of ZBB’s reputation as a destroyer of growth and company culture. It is certainly not the right answer for every company, but a growing number of retailers are taking a more flexible approach to ZBB and finding they can increase EBIT margins, revenue and employee engagement.

One US-based retailer, for instance, was able to get a clearer overview of each store’s spending after it introduced zero-based budgeting. Its aim was to release funds to pay for lower prices and to help it straddle online and brick-and-mortar shopping more effectively.

Using ZBB “dashboards,” the company’s executives compared spending across stores with similar characteristics, realizing, for example, that some had supplies budgets nearly double those of their most frugal peers. In past cost crackdowns, the company would have cut the budget for all stores by 5% to 10%. This time, the extra clarity allowed it to pare the budgets of overspending outlets while preserving—and even increasing—the sums available to other stores. Overall, spending on in-store supplies fell by $50 million, and the associated data-led discipline has prevented costs from creeping back.

Retailers also increasingly appreciate how ZBB can both shape their strategic response to disruption and refine the structure they need to deliver that new strategy. This was evident at another US-based retailer, which used the zero-based approach to recalibrate the priorities of its human resources function, as opposed to using its current configuration as a starting point for cost-cutting.

The company concluded that its HR department should focus on providing senior leaders with strategic support on the most important workforce issues, while also prioritizing spending that boosted the bottom line, such as investment in analytics. Activities deemed less essential were streamlined through automation, or eliminated. HR costs fell by more than 30%.

Clear Overview: Walmart’s chief financial officer, Brett Biggs, summed up the opportunity presented by a skillful implementation of zero-based budgeting at a recent investor event. He stressed that ZBB is “not a way to get someone in trouble” at his company. Instead, it offered Walmart a clearer overview of what’s going on: identifying, for instance, that the company was paying for a vast number of hotel rooms—totaling more than 20,000 nights — in Atlanta. Having noticed this, it then asked itself: Would it make more sense to have an apartment for visiting employees?

Walmart staff are buzzing at having access to the more precise data yielded by the zero-based budgeting push, while executives feel empowered to make “different decisions,” Biggs reported.

Any business tool that gives managers more clarity, more options and more funds to invest is indeed likely to win converts. In retail, which faces such extreme challenges, ZBB now has what it takes to rise from zero to hero status.

Kurt Grichel is a Bain & Company partner in Seattle and Lewis Weinger is a partner in Dallas. Both are members of the firm’s retail practice.
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