Comment: Who owns profitability in retail?
Thursday September 20 2012
Retailing is the eighth biggest sector of the world economy in terms of total market value and accounts for more than $2.5 trillion of the US annual GDP and 10% of the UK’s working population. By Guy Yehiav
In today’s economic climate the uptick in consumer spending has been marginal, which does not bode well for the industry that is the largest employers of private sector jobs. As we wait for consumer spending to increase, retailers need a way to continue to grow and expand margins.This is why I wasn’t surprised to discover that according to a recent survey conducted by Retail TouchPoints, 52% of retailers cited profitability pressures as their greatest internal challenge.
To expand margin, you can either increase revenues (which we know is challenging), or reduce costs and losses. Opening new stores and increasing same-store sales are often offset by increases in operating expenses. Even worse, revenues can drop while internal costs continue to impact the bottom line. Being able to find and control the balance between increasing revenues and reducing costs is what we call margin expansion.
Surprisingly, though, there is no one organization or person within retail who is responsible for profitability within the organization.
Why doesn’t anyone own profitability within retail? Traditionally, each department focuses solely on how it is being measured. Merchandisers are judged by the sales, assortment and merchant margin, so they focus on increasing sales, buying low and managing the assortment; supply chain is evaluated by efficient inventory movement, so that is where they focus; loss prevention focuses on shrink reduction; and operations is measured by revenue growth and staff efficiency.
Since these departments work in silos regarding margin expansion, there is no single owner of profitability. It tends to be a shared responsibility, distributed among a pool of resources, processes, and people. However, profitability is everyone’s responsibility, and requires central management and collaboration to maximize the margins.
So who should own profitability? Finance would seem to be a logical candidate, since it owns the measurement and reporting on profitability. But it doesn’t have the means to manage profitability at the most granular level. Similarly, most other departments are unable to own profitability because they lack cross-departmental visibility and influence.
In my opinion, this leads us to three options. The first is to transform an existing department into the profitability hub, owning margin expansion. The second is the development of a team comprised of cross-departmental representatives. The third option is to create a new department solely charged with managing margin expansion across the organizations.
When looking for a department to transform into the profitability hub, a good candidate would be the loss prevention or asset protection team. I recently attended a conference of loss prevention executives sponsored by the Retail Industry Leaders Association (RILA). At the conference you could clearly see the transformation that LP departments are undergoing. Reduced budgets are forcing LP departments to look for new ways of impacting the business. Some leading LP teams are starting to embrace analytical methodologies, and sharing the findings with other departments. By already monitoring internal and external behaviors that contribute to losses, LP teams are well positioned to adapt to a new role as the profitability hub.
Creating a new cross-departmental team, performing functions similar to the S&OP (Sales & Operations Planning) process for manufacturing, would also allow for the visibility and influence that is needed for successful profitability management. This new POP&E (Profitability, Operation Planning and Execution) process would be cross-departmental in nature to monitor profitability and develop strategic operational plans designed around margin expansion. Each member will bring the concerns and strengths from his own department to the table, and then be able to bring the profitability plan back to their home department and monitor the progress of the company’s margin expansion. The leader of this new team should have influence at the highest levels of the organization in order for this to be successful.
A new department also has its merits. It would eliminate any departmental bias that may arise in a cross-departmental team and can also be used as a center for POP&E, because it will have the ability to influence and monitor cross-departmental profitability performance. This new profitability organization would need to have the right tools to identify opportunities to increase profitability and then be able to provide a prescribed solution for the opportunities. This solution should then guide and act as the hub to support the merchandisers on new assortment opportunities based off those products that are helping or hurting the brand; to instruct the supply chain on profitable distribution centers (DCs) and transportation opportunities; or inform operations on what processes are being as efficient and effective as possible. This organization would act as the eyes and ears of the retailer, with a cross-functional discipline to look at revenue growth and profitability as a whole.
Regardless of how retailers choose to manage profitability in the organization, it's clear that they need to take better ownership of profitability, and that it must reside within a department or group of people that with influence across the entire value chain and the ability to improve profitability, both in the long and short term. Otherwise, retailers will continue to struggle with profitability – and that's unacceptable for an industry that drives so much of the world's economy.
Guy Yehiav is CEO at Profitect
http://www.profitect.com/
Profitect are exhibiting on Stand 520 at Retail Business Technology Expo 12th 13th March 2013
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