Retail and eCommerce – Do new things or dumb down and do more stores, renegotiate rents, reduce costs

Date: 18/06/2020   l   Category: Retail

Business is about cash flows and capital allocation (Balance Sheet) and not about P&L account.

 

What should a CEO do in the age of digital disruption?

 

Suppose a company has a shrinking brick and mortar business and is yet to invest in realizing digital opportunity.

 

Various business decisions can be taken:

 

  1. Reduce investment in inventories (buy less stock)
  2. Cut costs
  3. Reduce staff
  4. Negotiate reduction in rents

 

Or

 

Try to sustain profitability

 

  1. With new stores,
  2. New brands, and
  3. New geographies

 

Will this make sense?

 

This will improve cashflows but not increase the ‘competitive’ strength of the business – an ability to create demand and acquire more customers.
 

A $1 of cash flow from investments for customers is more valuable than $1 of cash flows from cost control.

 

Without allocation of cash flows in the following strategic investments, retail performance will be a false positive (illusion)

 

  • Digital engagement with customers,
  • Managing and influencing the customer journey,
  • Giving the customer what they want in terms of merchandise (the long tail impact of eCommerce) and
  • Omni-channel

 

A realization has dawn that this is a disruptive shift in the consumer behavior and not eCommerce. eCommerce just made disruption easier and faster.

 

A CEO can cause large potential damage slowly if he uses his thinking, time and energy brain applied to broken ideas.

 

To quote Warren Buffet ‘The situation is suggestive of Samuel Johnson's horse: "A horse that can count to ten is a remarkable horse-not a remarkable mathematician" …My conclusion … is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably…).

 

A retail company (or any company) that allocates capital saying it is business as usual or extracts cash from the P&L cost items is a good company but a poor business.