Taking Action

During the past 12 months, retailers across the board have focused on cost-cutting strategies to stay profitable as they wait for the economy to turn around. From slashing capital expenditures to cutting inventory, the strategy has worked—amazingly well in some cases.

Indeed, many retailers have seen their profits rise even as overall revenue and traffic fall thanks to tighter cost controls across functions. But some industry experts contend that the time has come to look beyond cost cutting to more analytical capabilities that can impact top-line growth.

“You can bring costs down, but at the end of the day there is only so much you can squeeze out. Just cutting costs isn’t going to cut it anymore,” said John Avallon, VP, Capgemini, in a presentation at the SAP Retail Forum, in October.

Avallon believes there is a clear set of initiatives that retailers should implement in response to the downturn and to help prepare for the upturn, ones that go beyond short-term cost-reduction activities to also boost long-term prosperity.

“Short-term survival measures should be combined with measures that can place retailers ahead of their competition,” he explained, “and ready to face what could be continuing tough times ahead. These are differentiators, as opposed to must-do cost-cutting measures with short-term impact.”

Here is a quick overview of Avallon’s recommendations for profitability and cost optimization while also providing a foundation for growth going forward:

• Implement best-practice workforce management: Improves employee productivity and enables retailers to run stores more efficiently, helping reduce costs. Implementing workforce management can result in a 3% to 7% reduction in store headcount in six months. “Retailers should focus on task management and labor scheduling elements of a workforce-optimization program to ensure staff efficiency improves within stores,” he said.

• Outsource elements of head office and field functions: Head office outsourcing is another way of helping retailers to substantially reduce costs while also allowing them to focus on core competencies. Department headcount costs can be reduced by up to 30% through outsourcing. “At the least, retailers should strongly consider outsourcing of support activities, such as payroll, human resources and some elements of finance,” he advised.

• Implement dynamic pricing: Applying dynamic pricing based on relational data-driven analytics enables retailers to provide the right products at the right prices at the right time to drive volume and/or margin, increasing revenue by more than 5%, and margins by 2% to 10% per category.

• Invest in a customer-centric store differentiation approach: Includes tailoring local proposition to local customers. Financial benefits include increased sales through optimization of the product portfolio in each store, and reduced cash tied up in inventory via more targeted stockholding.

“Sales uplifts of up to 7% to 10% have been achieved through store differentiation,” Avallon said.

Avallon’s recommendations involve some upfront investments. But with consumers still skittish and likely to remain that way for some time, it’s obvious that retailers will have to become more strategic when it comes to meeting the challenges ahead.

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