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Retail Board Governance in the Age of Disruption

How do boards of traditional retailers cope with the need for governance and guidance in this moment of disruptive change? Capitalism may be at its best as industry disruption allows for new business models to better meet consumer demand and create new value propositions. But it sure makes it difficult to sit on the board of a public company and assist the C-suite as members navigate and adapt long-term strategies amid today’s rapid technological change.

Box Scores

The pace of change and ability to disrupt have reshaped the classic barriers to enter and compete in retailing. And the stock market tells the story. The graphs exhibit the two-year stock performance through December 1 for Macy’s (-32%), Gap (-40%), and Walmart (-17%) versus the S&P 500 at +5.8% and Amazon (+133%). This picture is far from complete. Note the bankruptcies of erstwhile investor (hedge fund) darlings Aeropostale and PacSun and the nearly dead Sears and Kmart.

Disruption is accelerating in the retail industry, creating new competitors while making existing business practices obsolete. Meanwhile, retailers are doing their best and we would argue that it’s the job of boards to focus the C-Suite on fundamental questions:

  • What business are we in? Selling staples, fulfilling dreams, entertainment, diversion?
  • Who are our competitors? Traditional B&M, omnichannel retailers, online commerce, Facebook, Instagram, YouTube?
  • Why should consumers choose us? What is our differentiator and how sustainable is it?
  • Product, point of view, service, in-store ambiance, price, breadth/depth of assortment?
  • Does management as currently structured have the ability to win in today’s environment? What new competencies are required?

There are no quick fixes, and with the accelerating pace of change in the retail industry, board members must be proactive and assertive in assisting management to respond to this new environment.

Changing Consumers

Controlling the controllables, long a reflexive strategy for retailers as they encountered new competition, is too sanguine a response to today’s rapid disruption. Look at your competition and nontraditional competitors. Subscription models exist for diapers and pharmaceuticals as well as office clothing for busy female executives. These alternatives are meeting consumer needs and siphoning incremental growth that, in a pre-tech age, would have gone to mall-based retailers, driven comp sales and operating leverage. Retail fragmentation is the new catch phrase. Deloitte recently estimated that large traditional retailers are losing as much as $200 billion annually to small and mid-sized retailers that focus on niche products and experiences.

Changing Benchmarks

Out-of-the-box thinking is paramount as leaders assess the competitive landscape. In studying technology and its impact on retail, Paul Charron, who sits on Unifi’s board and holds board/advisory roles at numerous VC and PE firms and who served as chairman and CEO at Liz Claiborne and chairman at Campbell Soup, said: “It is appropriate to pay attention to best practices companies, the vast majority of which are not in the retail industry. Look outside of retail. The learning will be much more relevant than those within.”

What Is Today’s Board to Do?

To get to the root of performance issues, Laura Weil of Village Lane Advisory, who sits on the boards of Carnival Corp. and Christopher & Banks (and who previously held COO and CFO roles at American Eagle, Ann Taylor, New York & Company, and more) says that boards “should focus on selecting the right CEO and supplement the board’s core mandates of ensuring corporate integrity, ethics and compliance, and risk mitigation with a deeper dive into the nature of technological disruption on the company, its strategy and the industry.” Charron agreed, adding, “It is imperative that the board be intimately involved in corporate strategy, thereby ensuring a sound basis for competitive advantage and the entirety of capital allocation process.”

New Metrics

We need new metrics to gauge value creation for shareholders. Comp sales and operating leverage are legacy metrics as stores engage in commerce, and operate as brand houses and storytellers as well as distribution centers. Comp store sales were once a reflection of real estate use. Today, the measurement may be a false indicator, as it blurs online purchases and returns in-store. Four-wall returns are obfuscated when retailers use store locations for fulfillment for orders placed online and at other store locations. Assessing a store’s value takes on new meaning in an omnichannel world. The operating leverage of a 3 percent comp is gone and omnichannel execution has many variable costs that are absent in a four-wall retail model.

Boards need to be involved in helping establish new metrics and evaluate performance against the established metrics. Customer-centric, rather than channel-centric, measures are required in an omnichannel world. Comps and sales per-square-foot should be replaced with sales per customer and the long-term value of a customer. Long-term winners in retail are channel-agnostic and know that they need to offer customers the convenience they expect. A focus on new metrics, well communicated to the investment community, could stem the market’s disillusion with retail investments.

Knowing when to manage growth and when to shift priorities to enhancing brand equity as well as gross margin dollars or operating profit margin is missing from many retailers’ skills.

New Board Agendas

Too often, board members sit through glossy superficial management presentations that are focused on past performance or short-term initiatives, not the long-term strategies that will affect the health of the business. The seeds of decline at many retailers were sown years ago by underinvesting in operational excellence, unresponsive sourcing strategies, undisciplined real estate growth and, most importantly, a slow recognition of the changing customer and her increasing control over purchase channel and price.

A board can be influential in actively setting the agenda of board meetings with management and assuring that new metrics are part of the discussion. Weil offered two suggestions to retail boards: understand the shopping experience, and the power and use of data, digital marketing and technology. How well is the board attuned to the customer and her shopping experience as she moves from website to mobile to store? Customer engagement, shopping ease and convenience are pivotal in increasing conversion, average order size, and lifetime customer value. Weil said, “Data and technology acumen doesn’t supplant the need for strong merchandising talent. Rather, it complements it. Technology has been important for decades, but it is more important than ever in the age of Amazon. Technology, like the wheel, isn’t going away and we’ve only begun to scratch the surface of what data analytics can do for retail.”

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In the exercise of fiduciary responsibility and sound governance, a board can and should ask questions about technology and how it has changed and is changing the nature of the organization’s business and its risk profile. We are in the era of big data, and companies like Amazon and Netflix are capturing consumer data and using it to create competitive advantage. What is your company doing? While the C-Suite is managing the day-to-day operations, the board must take the longer strategic view. Does your board have the independent innovation and technology capability to support more informed decisions in our tech-heavy world and keep pace with advances that impact your business? If your board doesn’t have this today, it better have it in the near future. Our conversations with executive search firms reveal that contemporary technology expertise is in much demand as corporations seek new board members.

Some Questions Boards Should Be Asking

As the C-Suite addresses a multitude of complex strategic and operational issues, the board should add some technology-specific questions to the agenda:

  • What are the strengths we can use to compete with Amazon?
  • Do our core merchandising strengths and knowledge of customer shopping habits give us an edge when combined with strong data points?
  • Does our company have the IT strategy, team and resources needed to optimize customer, POS, store and CRM data? How does this compare with peers? Are you a leader or a laggard?
  • What strategies can we employ to create a stronger bond with our customer? Should we consider mobile apps that provide key information, loyalty points or other information that solves problems for our customers? (Look outside retail to Starbucks and Delta for examples of strong apps.)
  • How are we deploying capital for the highest and best return? How are we evaluating capital and cash flow strategies in a period of contracting square footage growth? Are we investing in people (sales associates) and the in-store experience?
  • Do we have inventory visible across channels to ensure accuracy? Have we evaluated RFID as a tool for this?
  • What corporate processes will keep pace with technology innovation and its implication for your customers and your business? Is innovation an integral aspect of the corporate culture?
  • Do you have a dedicated budget with compensation for innovation? In a typical CPG company, 11 to 14 percent of annual sales come from new products. Continual innovation that improves customer experience should be the goal.

Tech Savvy

Digital technology impacts every part or your retail organization, from the consumer experience and operations to supply chain and finance. Digitization has put unprecedented pressure on organizations to quickly evolve, and boards need to be technologically astute to support a comprehensive digital strategy that spans traditional areas of control for the benefit of the entire company and can create differentiated competitive advantage.

Innovation and change, either organic or via M&A, will be pivotal to a retailer’s success. Nimble thought and an open mind to different ways of doing business, the ability to test, learn and pivot, and innovate to better solutions are demanded of today’s C-Suite. In today’s age of disintermediation, the board must ask pointed questions and seek responsive answers, but the real work of strategy development and activation belong to the executive team and management, supported by the board.

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