The pandemic is not over, the real crisis is yet to come. How can retailers survive the storm? Financial levers are crucial, Deloitte says: cash is king, working capital is essential. Dare to ask the right strategic questions now and, of course, answer them. The urgency is high: “Winter is coming“…
The real impact of the pandemic
“Covid-19 has created an economic situation we have never seen before. We did have the financial crisis in 2008 that led to an economic crisis, but this is much bigger. And hopefully we will never experience anything like it again,” Deloitte Belgium’s Geert Stienen says. And yet: even though we are experiencing one of the largest economic crises ever, at the same time we also see the lowest number of bankruptcies. So what was the impact of the pandemic?
“Three things are keeping business afloat,” Stienen explains. “Firstly: the government support. This was necessary, otherwise we would have experienced an economic catastrophe. Secondly: an enabling banking landscape, as the government has asked the banks to be more flexible in granting loans. And thirdly: we have seen smaller companies recapitalising to survive the next 18 months.”
Cash is king
But what will happen next? The support programmes are being phased out and the situation will gradually normalise – although it remains to be seen how hard the fourth wave will hit. Differences in speed between companies and sectors are becoming apparent: “Food retailers, for example, did very well during the pandemic and will now see growth stabilise. Other sectors, such as hospitality and events, experienced the worst period ever and have yet to restart. That is difficult: you saw fairs with an occupancy rate of 60 to 70 %, or discotheques that reopened with a capacity of 2000 instead of 3000 people. Their cost structure cannot cope with that.” In the meantime, the nightlife scene is largely closed again.
“The point is, companies that were not already in trouble have eaten up part of their working capital. But they need that money to make a new start. So everything will depend on how much free cash flow they have left to finance the restart. Cash is king, that is the maxim. Large companies can predict their liquidity perfectly. Medium-sized and small companies often cannot. “They should be able to. And it is a powerful driver in business management,” Stienen points out.
Crucial indicator
Your balance sheet total is a crucial indicator of your performance: “If you see that your balance sheet or bank accounts are falling, then you know that you are in trouble: either you are delivering lower quality, or you are not delivering on time, or you are delivering the wrong products… You see this immediately in your cash and you know that something is wrong. Cash management and liquidity forecasting are therefore extremely important for every company.”
This is where things often go wrong. Many companies have no idea which customers generate a positive margin and which a negative one. “Sometimes you have to drop customers. You have to at least see it: measuring is knowing. That applies to products, customers and channels alike.”
This is all the more important in light of the current changes: we made a five-year leap forward in time, in terms of digitisation. “So you have to look at your traditional customers on the one hand and your digital channels and customers on the other. As a result of digitisation, you will probably have fewer physical points of sale. Many retailers are leaving expensive locations in big cities and moving to medium-sized cities because local shopping is gaining share.”
Gut feeling is no longer enough
There are opportunities: rent and wages take a big bite out of the budget. “Rent is usually 11 % of turnover, depending on your sector. In food & beverage wages are 25 %, in fashion 17 %, in supermarkets 10 %. Many large companies looked at their costs early on in the pandemic, under the motto ‘never waste a good crisis’. That frees up cash and gives you a competitive advantage: once you come out of the crisis, you have the firepower to shift back into fifth gear.”
Many smaller companies have not done as much: “That is the difference. Smaller companies often still rely on the gut feeling of the founder or CEO. But we did not just jump five to ten years ahead in digitisation, we jumped ahead in time, so your gut feeling is not enough to determine where you are going.” Some companies were not ready for the e-commerce boom.
Rethinking the business model
E-commerce is also less profitable – that is the online paradox. “Certainly in groceries, you see that the traditional business models of retailers cannot cope with this. Consumers demand instant delivery, but if we look at the profitability per basket compared to in-store or click&collect… Food retailers need to rethink their business model, because they cannot make it with the traditional model. Look at Picnic with their ‘milkman model’, look at subscriptions and the like. The code is hard to crack for traditional retailers.”
Making it even worse, are competitors who do not have to make a profit because they raise a lot of venture capital. “That makes it even more important that you look closely at your strategy: where am I going to play and how am I going to win? You have to find your sweet spot, where you will be the best, and how. And then a laser focus on implementation, which is still often forgotten.”
Dynamic pricing
A vital aspect is pricing, for example. ‘One size fits all’ no longer works. In retail, almost everyone pays the same price, but now we see a trend towards more personalised pricing. “This is the future: dynamic pricing. Many companies already do it, but not so many in Belgium. Target in the US aligns the online prices with the offline prices, depending on the location of the consumer, when he/she is in the shop”, says Agné Vezbergiené, Deloitte Partner and Retail sector lead.
Pricing can also be used to stimulate more sustainable purchasing behaviour. Wasteless, for example, is an app for smart markdowns to reduce food waste on fresh produce. Marks & Spencer encourages consumers to shop earlier for lunch: sandwiches are cheaper there in the morning to avoid loss. “There are so many applications of dynamic pricing, it really is the way to go.”
Winter is coming…
Which retailers are best in class today? “Walmart is one of the best examples worldwide. In Belgium, Colruyt is still a reference. They could not benefit as much from the pandemic as their competitors, for obvious reasons. Nevertheless, they are still a pioneer in all kinds of areas: just think of their acquisition of Daltix. That move shows that they definitely want to stay ahead in terms of pricing. Look also at their ambitions in health & wellness, with the acquisition of fitness chain Jims, for example.”
Can we still be optimistic about the retail sector, or is that wave of bankruptcies still to come? “I will refer to Game of Thrones: winter is coming… I am not just talking about this winter, but also those of 2022 and 2023. You often see a kind of paralysis or inertia in companies. Even if you think you are in good shape, you have to act now.” The levers are clear: secure your financial position by tackling costs, cash and working capital. Make sharp strategic choices. Gain insight into your data. Focus on agility and flexibility: adapt quickly, do not strive for perfection. Start small and then scale up. “And above all: act now! It will not get better by itself: take the future into your own hands.”
