CFOs adjust to new retail reality, according to survey from PwC

TORONTO, Nov. 3, 2010—As this year’s critical holiday season approaches, CFOs have shifted their focus from reducing operating costs to driving profitable sales through better strategy execution, improvements to merchandising effectiveness and inventory management, according to a new Global Retail CFO survey from PwC's Retail Consulting Services.

According to the survey, many retail CFOs reported that customers are slowly beginning to feel more optimistic about spending, and retail chains are responding with initiatives to attract customers back into stores by investing judiciously in inventory and technology. This was in contrast to last year’s report, which was characterized by a significant focus on managing in the midst of the recession, leading to stringent monitoring of inventory controls and capital expenditures and driving substantial reductions in operating costs.

The 2010 Global Retail CFO survey, which was conducted to explore the efforts retailers have taken to improve business and financial performance over the past year and their priorities going into 2011, is compiled from interviews with 56 retail CFOs, including 33 North American and 23 international retail chains in the specialty, grocery and department store sectors. CFOs were asked to provide insight into five key areas: consumer sentiment, marketing/advertising, e-commerce, inventory productivity and real estate.

KEY SURVEY FINDINGS:

1. Consumer sentiment — Although consumer sentiment and confidence is slowly rising, there remains a significant “lingering” effect from the recession as customers are more attuned now to the “price value” proposition. Forty-nine percent of CFOs surveyed believe their customers are feeling slightly more optimistic about their financial situation and have begun to slowly resume retail purchases.
2. Marketing/advertising — Faced with a tough sales market, retailers have been working hard to find new and more effective ways to communicate with current and prospective customers. According to survey respondents, retailers are more focused now on spending advertising dollars on retaining and growing current customers instead of acquiring new shoppers. Some cited modest early successes with social marketing programs while others continued to enhance their loyalty and targeted outreach tactical programs at the expense of more traditional campaigns such as circulars, catalogues and other brand building campaigns. Most retailers agreed that the jury is still out on the impact of social media on sales and customer satisfaction but that increasingly it is becoming a “necessity.”
3. E-Commerce — While the growth rate of e-commerce is outpacing that of traditional brick-and-mortar stores, most retailers have not achieved the needed scale to make online sales significant to their financial performance. While all participating retailers have web sites, only 67% of CFOs said that their sites were actually e-commerce transactional sites. All participants felt some degree of channel blurring as customers often use web sites for product research or competitive price checking and then buy in store or at a competitor. A year later, retailers still have a long way to go to leverage e-commerce opportunities.
4. Inventory productivity — Unlike 2009, when retailers were keenly focused on reducing inventory due to much lower sales and weaker balance sheets, improving consumer confidence has begun to shift the focus from stringent inventory management to merchandising effectiveness and targeted inventory investments in an effort to best serve customers. CFOs noted that while their balance sheets are much stronger now versus the last two years of economic turmoil, inventory management remains a key priority.
5. Real estate — Compared to last year’s survey results, landlords in general were less responsive to retailers’ attempts to renegotiate leases. Many retailers surveyed stated they were generally unable to get significant concessions from landlords except on renewals where they were able to better negotiate controls on future increases especially in strip malls and enclosed malls that were not Tier “A” class shopping malls. About a third of retailers surveyed continued to defer new store openings where possible, but those that deferred did so on a smaller percentage of planned new stores.

2010 holiday and 2011 priorities for CFOs

With many analysts predicting modest comp sales improvement for the 2010 holiday season versus last year, CFOs ranked cash flow management, tighter management of inventory and sustainable reductions to SG&A as their top three key priorities for 2010 holiday season. New to the list of key CFO priorities from last year was a heavier focus on quality of talent. Given the changes to the retail landscape, 10 percent of CFOs felt that they had talent gaps either at store level or in corporate support centres in order to navigate through today’s challenging economy.

For more information on PwC’s Retail Consulting Services, please visit www.pwc.com/ca/retail-consulting.

Notes on Survey Methodology and Analysis

This survey of 56 retail CFOs includes 33 North American and 23 international retail chains in the specialty, grocery and department store sectors. Within this group, which was 30% public and 70% private, annual sales ranged from US$200 million to over US$10 billion. These results are based upon the survey responses of 56 retail CFO participants, collected during July-September 2010 and are not meant to be representative or projectable for the entire domestic or international retail market.