The management myth | IR News

The management myth

Posted Date: 13/08/2012

By Adrian Black

Sometimes, you are the problem.

At the beginning of 2011, many retail commentators accurately predicted the retail sector was in for a volatile year, and that the speed in which the industry would change would accelerate sharply.

Locally, each week produced news of another retailer reporting double digit negative like for like sales, the closing of stores, or shutting up shop completely. The worry and uncertainty reached unprecedented and epidemic levels. A retailer that had positive sales was generally reported as “bucking the trend”.

The larger and listed retailers inadvertently became the spokespeople for all Australian retail and the reasons they provided to explain their own poor sales or profit results, were accepted as being indicative for all retailers. The reality in the Australian retail market was very different.

Admittedly, there were and still remain brands that are struggling, but not for the reasons the larger players or mainstream press might allow you to believe. In all cases, poor sales and profit performance could be attributed to one or more of the following factors, or what I feel are the most accurate key success indicators.

1. The ownership structure, and its ability to support business objectives
2. The retail and business insight of the CEO or business owner, and,
3. The ability of the CEO or business owner to effectively and efficiently deliver solutions to their insights.

Ownership structure is one of those funny areas that might appear to be unrelated to how a retailer operates. Listed businesses present a unique range of complications and idiosyncrasies that often contradict what true retail is.

Having worked within some listed entities with customer facing retail, I have firsthand experience of how business and financial decisions are made to satisfy the expectations of the shareholders (which often includes the CEO), and not necessarily the desires of the retail consumer.

For example, anyone who has experience in managing capital works for a listed business will be familiar with the forward paying of invoices in June to manipulate the financial year end results.

Manipulating other key metrics including incremental and like for like sales are also easy to manage, and less conspicuous than processing large payments on June 28.

Suffice to say, a retailer’s key financial numbers are not always a reflection of the state of a business.

Astute corporate CEO’s understand the importance of managing the perceptions of shareholders and investment analysts, and as such, are always charismatic. How they run the business is irrelevant to an analyst or investor, so long as they deliver the forecast results. Understandably, retail isn’t quite that predictable.

It’s easy to be critical of corporate CEO’s with their Teflon coats and large salaries, but who’d want to be one?

There are a range of factors that restrict a public retailer from being able to respond to the changing habits of consumers in a timely and cost effective manner. This is almost never the case in private companies where the focus is generally always on giving the customer what they want, not juggling politics.

Although a contributing factor, the ownership and management structures are not the critical variables that determine whether a retailer will be successful and profitable. Often, it comes down to the personality traits of the decision maker.

In 2011, I met with three listed retailers to discuss their development programs. On each occasion, the middle manager responsible for making decisions on development expenditure did so for reasons other than commerciality. To be fair, this is not that unusual.

When presented with a model that would reduce capital expenditure by 30 per cent plus, one company representative asked how the savings could be staged over a three year period to ensure he was able to receive his full bonus entitlements, year on year. A retailer would want that saving from day one.

Another company was presented with a program that guaranteed an immediate saving of between $3 and $5 million in year one. It’s an awkward conversation when the decision maker chooses to decline a lucrative offer for reasons of self preservation. But speak to the business owner and you’ll get a very different response. Imagine being a shareholder of a business that mis-managed your investment!

How retailers spend their capital is indicative of the mindset and attitudes of the CEO and the corporate culture they instil.

We’ve seen many examples of how listed businesses can come undone with one unscrupulous capital works manager, which rarely occurs outside a public company.

By contrast, in the private sector we see how insightful management leads directly to a larger and more profitable operation. The management style of the CEO or owner determines which of these is more likely.

For me, the second success indicator for a retail business is the insight of the CEO or owner.

Many retailers survive and exist without a clear leader or strategic plan, but the best brands always have one key person that sees things as they really are, inside and out of their business – a true brand evangelist.

Look at any of the Australian retail success stories from the last 10 years and you’ll find an innovative entrepreneur that identified a gap in the market and developed a business around it.

Most of the time, that individual understands the importance of evolving the brand as customer needs and wants change. Being able to foresee how, and understanding why customer patterns change is the single most conclusive indicator of retail success.

Retail innovators live by the philosophy that giving the customer what they demand is far easier and profitable than convincing them to buy what they happen to sell. It’s a no-brainer.

Take Industrie for example. This brand has evolved from one man’s insights and a belief that the casual fashion market was poorly serviced.

Industrie has created a brand that sells products customers want and are unable to locate elsewhere, at a price they are happy to pay, within an environment and brand experience that is easy to understand and connect with.

To its credit, Industrie has an understanding and respect for the customer whose desires change as quickly as fashion itself does. This core belief and focus on product is what built the brand and is the reason it remains successful today.

Smiggle is another brand that changed the perception of an otherwise readily available stationery product range. As a result of the ‘be connected, be organised’ iPhone revolution, Smiggle developed a fun concept of more than 300 products in a range of bright colours.

The stores are small, cheap to fitout, and stock high margin product.
Having identified the gap in the market, the portfolio and concept grew quickly. Smiggle remains a great concept today, well executed.

Hype DC is another brand that exploded at a time when customers couldn’t find a wide range of fun and casual shoes anywhere else. It truly was as simple as giving the customer what they were desperate for.

The shoe buying process across the globe has since changed with online sales, but suffice to say that in the beginning, Hype DC was an insightful and effective retail brand thanks to the insights of one or two people.
Successful retailers that launch and grow quickly often reach a Catch 22 scenario sooner than they might expect.

At some point, a private equity or a listed business will want to buy them out. In making the transaction, the new owner has terminally changed two of the three key success indicators and often, this leads to the brand’s slow but eventual demise. The evangelist has left the building.

Blind Freddie knows that mixing innovative or fashion retailing with a listed entity is akin to mixing oil and water – one has a goal to woo and win the customer, the other is to maximise shareholder return. It really is that cut and dry.

Private equity and other listed retailers can’t help themselves when it comes to purchasing other brands, as they firmly believe they can do it better.

So let’s assume you have a great idea or existing brand, you have a detailed and insightful strategic plan and ownership support in whatever format that takes. How do you execute efficiently and effectively to ensure success and profit?

It’s people right? Right.

Many great ideas and existing retail brands fail simply by having the wrong people doing a job they are unskilled or unsuited to.

It’s not uncommon for retailers to have someone managing the portfolio that has no experience in leasing, construction or contracts.

Project delivery models are rapidly changing, as is the shopfitting industry, which will enable retailers to execute initiatives more efficiently, albeit via a methodology which may well be new to them.

So, if you are a retail CEO and haven’t developed your business and evolved your brand as consumer demands change, or blame rising rents or staff costs and sales lost to online merchants as legit reasons why your brand is not performing, or don’t have a detailed understanding of every function of your retail business, perhaps you are the problem.

My prediction is that 2012 isn’t going to be the year for you.

Adrian Black is a project director at Black Line Retail www.blacklineretail.com.au, and can be contacted on hello@blacklineretail.com.au.

* This feature first appeared in the April/May 2012 edition of Inside Retail Magazine. For more stories like this, subscribe to Inside Retail Magazine's bi-monthly print edition here

Keywords: management , adrian black, inside retail magazine, retail management

Comments:

Wednesday, August 15, 2012 by Iscariot

Good article

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