In retail, success has five S’s

One of the simplest and most effective things I have learnt in business was while I was attending the general manager’s course at the Australian Graduate School of Management (AGSM) almost 20 years ago. I’d studied a management diploma at Henley, begun an MBA and taken executive courses in finance and strategy in several countries. Plus I’d been a senior executive in large corporations for more than a decade. But this learning was still a light bulb moment for me.

“The last stakeholders to be paid in any business are the shareholders.”

If a company has the available cash to pay a dividend to its shareholders from its post-tax profits then the business is performing well. That’s dividends from free cash, not from borrowings. If you can provide what your customers want, pay your suppliers and staff fair value for their products and services, re-invest in the systems and assets to maintain your business, pay the bank, and the tax man, and still have money left over, then you’re in good shape.

Watching the changes that have moved through the retailers operating in Australia over the past five years, it’s a simple lesson that still stands the test. We’ve lost Dick Smith and several smaller retailers. Coles, Kmart, JB Hi-Fi, Officeworks and Myer are in good shape, while Woolworths, Metcash, Target and Big W are all works in progress. Aldi, Zara, IKEA, H&M, Kikki K, Costco, Apple and Cotton On continue to grow.

I spend a lot of time across my businesses working within retailers’ offices with senior executives across four key areas: shoppers, suppliers, staff and systems. Looking at their systems to lift productivity or improve shopper experience. Looking at their branding, communication and product offerings in relation to Millennial shoppers. And walking through thousands of stores. So what trends have been evident over the past five years?

Put simply, those retailers that put the shopper at the centre of their world, and put Millennials at the front of their mind, are performing best. Those that put the shareholder at the centre of their world, and front of their mind, are doing the worst or have gone under. So updating my learning from the AGSM and applying it to retail: “the last person to be paid is the shareholder. And every single dollar that flows to a shareholder has started in a shopper’s pocket or purse.”

Here are the five S’s that need to be aligned, and in order, to keep all stakeholders happily engaged in your retail business: shoppers, suppliers, staff, systems, and finally, shareholders

Shoppers

It all starts with the shopper. The amount of times I hear retail executives talk about logistics or supply chain as the first and most important part of the mix still surprises me. It is a key lifeblood system to allow shoppers to walk into a store or log on to buy what they want, when they want it, but it comes after happy shoppers and happy store staff.

The rise in importance of the Millennial shopper is key to shaping a relevant offer today for all of your shoppers. Millennials allow retailers to shape offers and communication that are relevant to all shoppers all the way through Boomers to Centennials. Millennials naturally move between physical stores and their phones, tablets and laptops. They live their lives conveniently and are open minded to new services, pricing and product offerings. They pay a fair price for a product and good service and share that experience, good or bad, freely. They don’t see social media as anything other than part of the shopping journey and sharing thoughts and observations freely. A good shopping experience doesn’t flow from the old to the young; it flows from the young to the old.

Suppliers

Whether retailers are buying branded products from suppliers or their own retail brands from suppliers, their supplier-base is their greatest source of product inspiration and innovation. Suppliers invest huge amounts of  time and money in product development, research, and watching their own specialist product markets, in far greater detail than any retailer can ever do. Your supplier’s sales director or account manager is your greatest ally in shaping new offerings to your shoppers if you build a strong, mutual relationship with them.

Staff

Constantly trained, fairly rewarded and frequently talked and listened to, retail staff are the key bridge to your shoppers. Every day they communicate your values, retail strategy, and the health of your business. They manually overcome problems with your legacy systems, build relationships with frequent shoppers and are your greatest source of shopper insights – every single day. When Coles was transforming its stores five years ago, it was the checkout staff that proudly and spontaneously told me what their company was doing. At a Woolworths checkout last week it was a 30-something lady who told me how much their prices had dropped. Two days later in an ALDI store, it was a new employee in a brand new store who told me how good the company is to work for – unprompted.

Systems

Retailers have some of the largest and most convoluted systems of any type of business. They are second only to government in size and complexity. The systems are large and small, new and old. Some operate from the cloud, others from IBM AS400s. And they are linked manually via developers who keep them talking to each other in scenes reminiscent of mechanics with oily rags in a factory from the industrial revolution of the late 1700s. I have seen a PC in a major retail head office with the handwritten sign “DO NOT SWITCH OFF!” – I thought it was a joke but it apparently ran their store staff scheduling and rostering system. The system is 20 years old. I know IT professionals who are contractors in their 50s and whose only role is to maintain a 30-year-old piece of software running on 20-year-old hardware. There is currently no greater strategic, operational or financial challenge for large retailers than bringing all of their legacy systems up to the same level of integration and performance as their newer online retailing competitors who were all birthed on the internet – Millennial retailers if you will.

Shareholders

Shareholders who invest in retailers are conservative by nature; when it comes to investing they are also not patient people. So it takes a long period of strong performance to get them onto the share register, and they’ll leave quickly if they sense a decline in performance. I know several private equity executives who will “never” invest in retailers as they have “never had a good experience with investments in retailers.” However, well-run retailers put their shoppers at the centre of their world; train and talk with their staff constantly; partner with their suppliers; and have ongoing and strategic investment plans in their systems. And these retailers deliver constant and predictable returns to their shareholders.

So over the past five years who has done well in retail in Australia based upon the shopper experience I have observed, and long-term shareholder returns? In that time I have owned ASX shares in Myer, Wesfarmers, Woolworths and JB HiFi. Ben Gilbert, the retail analyst at UBS might not fully agree, but I believe it’s a short list of listed retailers that have done well that includes JB Hi-Fi and Wesfarmers. Those that retail in Australia but send their dividends back to other sharemarkets or to private shareholders include ALDI, H&M, Zara, Apple, COSTCO and IKEA.

Looking at the eight years of pain that large US and European retailers have had to go through to reinvent their offering to compete with online retailers and woo Millennials, we ASX shareholders probably need to be patient with our large retailers to allow them to get their businesses into shape. But only if they are demonstrably putting their shoppers at the centre of their world.

Kevin Moore is a retail expert and the chairman of Crossmark Asia Pacific Holdings and Mirador Retail Technology. He is also the founder of TheRoadToRetail.