Retail Sector Challenges for CFOs and Treasury Managers

Among the fundamental causes of the storm faced by Europe’s
retailers the most obvious has been the dreadful global economic conditions,
leading to the longest-ever recession in countries such as the UK. This in
itself, coupled with the austerity measures to counter ballooning deficits, has
hit consumers’ pockets hard. One might also argue that UK local authority
strategies for rateable values and car parking compounded the situation in
Britain.

However, another ill wind that has blown traditional retailing far
off course is unrelated to the recession. This particular gale, for
traditional ‘bricks and mortar’ retailers, has been the wholesale move to online
sales. Retailers who changed their business model, adopting techniques such as
click and collect, cash back check-ins, or touch and feel demonstration centres
to cope with this fundamental shift have thrived, whereas those who regarded
online as a separate channel have paid a heavy price with profit margins
eroding and liquidity under pressure.

A typical example is music
and DVD retailer HMV – before its welcome rescue by restructuring specialist
Hilco in January 2013 – and shows the effects of such pressures. Many regard the
move to online sales as exposing weaknesses in the business models utilised by HMV
and others, in particular changing consumer behaviour brought about by the
internet. In some cases, retail businesses were too slow in reading the
currents and reacting to change. The ‘full steam ahead’ approach left them stuck
with cost models that just didn’t work.

The lack of response to online trade has
often seen an accusing finger pointed at the retailer’s financial management, as
efforts to adapt and embrace online technology are costly and require long-term
investment. Given the threats to liquidity that this change entails, it just
wasn’t a popular option. Some retailers, though, discovered the need to change
far too late in the day.

As European economic forecasts turn more positive,
consumers’ confidence might improve but their real spending power is set to
remain under pressure. Indeed, given that living costs have sharply increased,
disposable income could even become tighter before it improves as family budgets
are squeezed and costs stay ahead of pay increases. In addition, memories
of price-competitive promotions and the shrewd purchasing tactics that consumers
have learnt in harder times are not going to vanish overnight. They will still
be deal focussed.

Problem Equals Solution

One consequence of subdued
consumer spending and resultant highly tactical spending habits is that
retailers must fight harder for their share, which often results pressure on
price. Inevitably gross margins then come under pressure and trading has had
to become sharper to succeed under these conditions.

So with change and
challenge coming in so many forms, can a strategy balance the future in favour
of the retail chief financial officer (CFO) and treasury function? Ironically,
the latest developments in technology also hold the answer for retailers if they
use it to drive highly tactical pricing and stock positions at the sharp end to
protect and even boost margins and returns.

If one takes the recent
evolution of big data retail analysis systems, it is possible to effect sophisticated management of pricing right across retail businesses. This is
critical to maintaining the balance between revenue and margin. It doesn’t mean
a race to the lowest price – not everyone can be the cheapest – but it is about
pricing and stocking right as often as possible for each business that is the
key.

The technology exists to monitor competitors’ pricing and stock points in
real time and to outmanoeuvre them. This boosts margins significantly and there
is evident interest and demand for this functionality, driven directly by the
financial demands of the retail business.

Having a clear pricing strategy that
commercial teams can work with is an important starting point, as it helps
businesses to forecast on a more predictable basis. A strategy declaration that
‘whatever happens, we’ll be the cheapest in the market’ isn’t
sustainable for most businesses – whereas being known for great prices on
specific key products, price matching against named competitors or following a
specific competitor to within a given percentage, are all more
relevant market-led strategies. The ability to sustain a cost plus model is ever
more difficult in markets where price competition is increasing. 

Performance versus Strategy

To be
able to consistently track performance against strategy, the first requirement
is a clear and accurate view of those retailers operating in relevant markets.
Collecting this information over the internet is an established method, with
many businesses collating data for varying reasons.

Everyone from the
smallest retailer upwards (using out of the box ‘screen scraping’ technology) is
tracking web-based pricing information.  The key to success is not collecting
the data (although doing so well is critical) but ensuring that the
resulting analysis is appropriately organised and presented to the commercial
teams. 

With the right tools and analysis retailers’ trading teams,
who are working to margin guidelines set by the CFO, can quickly identify
products where they are out of alignment based on expectations developed from
the strategy. By identifying changes in the market that have moved products
outside the expected ranges, adjustments can be made on a product-by-product
basis or promotions run to temporarily manage a particular change.  

Additional information, such as stock and promotion, are other key metrics in
this process both in terms of finance governance and tactics. Maintaining
trust in the analysis is critical for major price changes to be completed
efficiently. If commercial teams lack this trust, more time can be
spent checking the price points in the analysis rather than actually trading on
them. This is where investment in the right provider and processes is
important; to ensure that quality is at the right level and the provider can
respond to changes quickly.

It can sometimes be assumed that these
processes are used to continually lower prices. This shouldn’t be the case.
Identifying where prices need to drop to meet customer expectations and drive
revenue is often easier, but quickly identifying when prices can be increased is
an important means of limiting loss of margin due to previous price drops.
Highlighting these opportunities by seeing where products have been
discontinued, sold out or increased in price within hours of the change taking
place can generate significant profit increases on the related products. Thus, there is evidently a need for CFOs to communicate margin
requirements clearly down the line.

The information required to drive this
process can also be taken further, with the CFO’s help, by bringing cost price
data into the process. This enables teams to more easily assess the financial
impact of prices changes and run reports to get a total percentage impact on
margin by making the changes. To maximise the number of price changes executed a
semi-automated process can be developed, based on a set of basic rules. 

By
applying the rules to data that is refreshed more frequently the rules can
identify products that should have prices moved up or down without the need for
commercial decision making. Exceptions can then be identified that require a
commercial decision to support the price change and the final list of changes
pushed out to the appropriate back end business application. Both the CFO and
treasury functions should be aware of how these processes are panning out at the
sharp end as and when they happen.

A further step is to incorporate volume
data.  This indicates the full financial impact of price changes based on the
current rate of sales. Using historical volume changes mapped against price
changes can also indicate price elasticity, adding a further variable to the
process which highlights products that historically have benefited from
increased sales based on price, and those where price has had little impact on
sales.

Externally it is also possible to better understand competitors’
behaviour and trade around it. For example if a retailer tracks what days of the
week and times of the day his competition changes prices or trigger promotions
it can assist his own planning. Going beyond that, it is also possible to see
changes in activity on a bigger scale. The ability to track pricing activity
verses price movement also gives useful insights. 

Use of these
technologies to manage pricing has increased rapidly over recent years. Going
back eight years, this type of activity was limited to early online markets such
as electricals.  A combination of online sales broadening and the economic
downturn increasing price competition has meant that savvy retailers in all
categories have increased their investment in online pricing intelligence to
maximise both revenues and protect margins. The trend is set to continue and
rapidly advance as more businesses see a strong return on their investment. Thus
in plotting a course to derive these margins, CFOs and treasury managers need to
work closely with their commercial crew to maintain margins. Chances are it is
big data pricing analytics that will keep them very much on course.

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