New strategies for CFOs
From investments to support omnichannel initiatives to energy efficiency programs and equipment upgrades, prioritizing and approving capital expenditures has become increasingly complex for retail CFOs.
“Retail CFOs are performing a high wire balancing act these days,” said Rod Sides, vice chairman and retail and distribution practice leader for Deloitte. “Online sales are growing while the traditional business is flat to declining, but still accounts for 80% of the revenue. Do you cut investments in stores — which still account for 80% of the revenue — and go all in for digital, or try to meter out investments in a way that balances both? That is the big challenge facing CFOs.”
Antony Karabus, CEO of HRC Advisory, agreed: These are very challenging times for CFOs. A recent HRC study found that operating earnings as a percent of sales declined by up to 25% due to a shift from in-store to online sales, combined with e-commerce and omnichannel investments and the high cost of fulfilling e-commerce transactions.
“Retailers need to do more conservative financial forecasts bottom up for each channel,” Karabus said. “They will have to make tough choices in evaluating their cost infrastructure, store fleet and capital plans, and find the most cost-effective omnichannel capabilities that are right for their customers.”
The consultant believes the metrics used to justify spending in today’s harsh retail climate need to be tougher.
“People have tolerated way too much capital being spent on discretionary and very soft ROI models,” Karabus added. “CFOs should be concerned with whether an investment is going to result in increased sales margins, turn inventory faster or specifically be noticed by customers. And they should hold off on approving until metrics are agreed upon in advance on whether the money was well spent.”
CFOs almost always will apply some return metric in making their investment decisions. But the level of granularity at which they evaluate those returns can differ by CFO.
“If a strict ROI assessment is applied at the tactical project level, certain critical — but foundational — projects may not make it through,” said Reaves Wimbish, managing director at Accenture. “Some CFOs choose to look at a strategic bundle of investments and apply the ROI metrics at that level. In a time of high strategic change, this can allow foundational capabilities to be built and be ‘funded’ by other more cash-flow positive projects.”
Some things remain unchanged.
“First cost and hard ROI are important measures, and remain one of the best methods of prioritizing investments and ensuring that hurdle rates are met,” said Joel Alden, partner in the retail practice at A.T. Kearney.
Indeed, payback and ROI are essential for retail CFOs to manage new investments, agreed Wimbish.
“But what also has to be squarely in their view is use of capital in the day-to-day running of their business,” she added. “As we have seen in the consumer goods industry, renewed rigor through strategic cost management in running the business can open up substantial capital for building new capabilities or returning to shareholders. Too often legacy methods of doing business aren’t challenged and rationalized.”
LIFE CYCLE: Many industry veterans hold that in some instances, particularly with a store’s physical assets, first cost is deceiving.
“In general, the materials that are cheapest upfront will cost you the most in the long run, and that’s certainly true with paint,” said Jim Gorman, senior strategic account manager at Benjamin Moore & Co. in Montvale, N.J. “All the savings are in the life of the product. Cheaper paint will need three coats instead of two, which ups labor costs and causes more business disruption.”
Others also see merit in the argument that cost of ownership or life-cycle costing can be a better guide than payback or first-year ROI.
“In this time of digital disruption, the most effective long-term measures tend to be focused less on financial returns and more on superior omnichannel customer experience, ideally enabling a differentiated experience in the eyes of the customer,” said Aneel Delawalla, managing director at Accenture Strategy, CFO & Enterprise Value.
A.T. Kearney’s Alden believes that for major capital expenditures, CFOs do take a longer-term view on the ROI of the investment. “However, the total cost of ownership is often not fully understood or given full consideration in decision-making,” he added. “For example, the organizational cost required to support a new technology or offering can often be overlooked.
In some cases, the support doesn’t exist. “I’ve had a number of client CFOs make tough decisions on certain projects that had a tremendous ROI because they lacked the foundation or in-house skills to be able to execute it,” said Deloitte’s Sides.
FINE LINE: One industry expert cautions there is a fine line between prioritizing mandated technologies and equipment with investments that CFOs feel will have the strongest payback and ROI.
“Retailers must have the proper payment and cyber security systems in place to safeguard data and effectively maintain records, as well as up-to-date back-office technology to ensure compliance,” said Natalie Kotlyar, partner in the consumer business practice at BDO. “But these investments do not yield short-term results and are more difficult to measure.”
Equally important, Kotlyar noted, are investments in proper omnichannel programs and technology to improve customer experience and effectively complete. “These systems can also provide retailers with real-time ROI data, which can be an influential incentive as CFOs weigh their options and determine the best way to allocate their spends,” Kotlyar said.
SOFT SAVINGS: Soft savings usually are considered in assessing system/equipment upgrades and store remodels. “
The challenge is to accurately assess the value of these benefits as sales lift is influenced by multiple factors, including merchandising and promotions,” said A.T. Kearney’s Alden. “Retailers must track actual return after the investment to better understand whether these past investments are delivering on their promise.”
That’s easier for some investments than others. For example, the energy savings of a new HVAC or lighting system can be easily compared with the older systems. “For something like lighting, the CFO would look at the hard costs, but also the softer costs in energy savings and maintenance,” said Deloitte’s Sides.
Making the case for facilities maintenance investments can be harder since many CFOs still regard facilities mainly as an expense.
“An investment in facilities maintenance should include both short- and long-term ROI goals and be integrated in the overall brand and customer experience strategies,” stated Kellie D’Andrea, SVP planning at EMCOR Facilities Services.
“This is often an overlooked component, because facilities maintenance is sometimes treated as an expense versus an investment and part of the brand and customer experience.”