Retail cost management guide for leaders: PwC

When we asked retail executives about their prospects for growth, only a little over a third of them told us they are completely confident. That’s hardly a surprise in an industry that faces daunting challenges: Inflation and the risk of a decline in consumer spending are top of mind for industry executives.

Adding further pressure are heightened consumer expectations, from a greater desire for a seamless omnichannel experience to ultra-personalized offers and timely, convenient delivery — all of which require additional investments.

Meanwhile, wages are on the upswing and a talent shortage looms large. Retailers have also seen input costs rise while having little recourse other than to pass those costs onto their mercurial, price-sensitive customers.

How should leaders respond to this squeeze? What cost management strategies does the moment call for? The answers to these five questions can guide your company toward a more sustainable approach to cost management.

1. Which business outcomes are most important for your company?

In a world full of seemingly impossible choices, proliferating ideas and scarce resources, the challenge comes down to prioritizing where to invest.

Should you invest in more stores?
What about your supply chain?
Do you need to reinvent your format strategy?
What’s more important: strengthening your IT infrastructure or customer loyalty?

Understand what differentiates you from your competitors. Coordinate across departments to gain new insights into your cost structure, then prioritize what matters most. Link investment to the opportunities and competitive threats affecting future growth.

Expenses serve to promote the company’s purpose and strategy rather than internal functions. Align every dollar with the systems and employees that directly affect customer satisfaction and loyalty.

Align budgets with the systems and employees that directly affect customer satisfaction and loyalty.

2. How can you simplify operations to deliver those outcomes?

While it is easy to add more categories and products, it is also easy to overlook the byzantine ripple effects each additional SKU initiates as it fans out across the supply chain from procurement to store shelf.

Trying to be everything for everybody, however, does more than just add logistical complexity; it adds costs while also potentially overwhelming suppliers and consumers alike. Strategic expense management requires a relentless focus on how your particular capabilities satisfy your customers and — using that focus to best engage them.

Understanding what’s important to your customers can allow you to curate the offerings they seek. When customer outcomes become the North Star of expense line items, you can gain insight into the underlying reason for each cost and its contribution to the organization’s current and future objectives.

Strategic expense management requires a relentless focus on how your particular capabilities satisfy your customers.

3. Where does digitization offer the highest return?

Ongoing efforts to digitize supply chains are already delivering benefits to retailers. The digitization of other operational processes continues because, despite the initial outlay, digitizing and modernizing processes and equipment can be an effective way to rein in costs along the value chain.

The challenge may lie in choosing from an array of promising technologies. A new wave of technologies, for example, can further embed automation in warehouse operations. Artificial intelligence (AI) and machine learning technologies can transform planning processes to make forecasting more accurate and more responsive to changing market conditions.

Watch how consumers interact with your offerings to determine which technologies can make those interactions more engaging for them. Deploying technology in increments or sprints can provide more immediate returns while also providing a foundation for additional improvements.

Watch how consumers interact with your offerings to determine which technologies can make those interactions more engaging for them.

4. How can you best align with service providers?

By aligning cost management with your growth strategy, you can better understand which tasks are essential — to be performed internally — and which should be assigned to specialized providers.

Some retailers are expanding their use of shared services for operational processes like merchandising, marketing and supply chain management. An increasing number are turning to outsourcing — even offshoring — to support customer service or returns.

Others are shedding non-core activities by collaborating with third parties. For example, many retailers have turned to logistics providers to provide the fast, flexible delivery options popular with consumers. Include line, finance and tax specialists for the optimum benefit in structuring these arrangements.

Taking on non-essential work — outside your core strengths — likely adds unnecessary complexity to your organization, which can hinder agility and resilience. It can also increase costs without proportionate returns. Instead, work on building an ecosystem that combines internal and external expertise to best support your company’s core mission.

Many retailers have turned to logistics providers to provide the fast, flexible delivery options popular with consumers.

5. How can you develop a more sustainable approach to cost management?

Cost management done right can support lasting growth over the long term.
While the balance of near-term and foundational improvements can be challenging to maintain, it is not impossible.

Near-term cost-control moves might include wage and hiring freezes, for example. To maintain a skilled workforce for the future, however, a more sustainable action might require enhancing technology effectiveness, upskilling staff and making key hires while also determining which areas can be outsourced.

Determine which investments are going to drive growth and receive funding. Communicate which efforts will not receive further investment. Planning assumptions may need to be revisited regularly year-round. In fact, ongoing cost management requires continuous reallocation of the right resources to the right places.

Ongoing cost management requires continuous reallocation of resources.

Tax value creation: Save the savings

For continued growth and effective cost management, align your business objectives with your broader tax strategies. Otherwise, you might be caught off-guard by last-minute tax surprises that adversely affect value creation.

Maintain a holistic view across the entire value chain to uncover potential tax saving opportunities. Ideally, this can lead to tax savings that partially or even fully offset program costs. Tax value creation starts on day one with the initial investment decision.

Alongside capability investments, consider where the value from these capabilities should be created. Also identify the array of potential credits and incentives that may be available, including R&D tax credits on technology spending.

How it works: Cost transformation in action

Reduce inventory carrying costs

A regional grocer needed a current- and future-state assessment to modernize and reduce costs. After a series of technical and process enhancements — concurrent with a focus on reducing inventory carrying costs and savings across selling, general and administrative (SG&A) categories — the company now has a plan to increase sales with improved pricing and category planning.

Outcome

10% savings on Inventory carrying costs. Annual savings of up to $85 million, once the system and processes are operational.

Sharpen competitive advantage

A Fortune 100 retailer embarked on a multi-year transformation effort aimed at saving some $1 billion annually — some of it from restructuring corporate headquarters to improve processes and speed-up decisions. The company digitized, automated and streamlined processes while flattening hierarchy and boosting competitive advantage in data and analytics; omnichannel strategy and operations; and marketing.

Outcome

>20% labor cost savings at headquarters.

Build efficiency into joint business planning

Despite strong financial performance, rising costs, increased outlay for supplier contributions to promotions, unproductive assortments and inefficient use of space had become issues for a national convenience chain. Data-driven category management analyses across cost of goods sold (COGS) as well as pricing and promotion levers uncovered previously overlooked areas of greater joint business planning (JBP) efficiency. The resulting analytic playbook for category management can inform future JBP vendor discussions.

Outcome

10% savings via improvements to COGS and vendor promotional assistance.

Act now to sustain growth over the long term

With cost management taking center stage, you have a choice: Implement a one-time, cost-based reset and risk impeding your growth strategy — or make cost transformation central to your approach and reevaluate core capabilities within the overall enterprise.

Take the long view to promote radical clarity that can lead to bold simplification, digital value creation and external business alliances for non-core functions. You can go beyond managing costs. You can transform your company and shape your future.