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2018 State of Australian Retail — Is It Time To Panic?

At this time of year, most Australians have wound down for the annum, settled into a more civilised pace of life over the holiday break whilst they ingest the equivalent of a small nation’s GDP in seafood and mid-priced domestic beer.

For us data boffins at Myagi HQ however, we’re swapping our Santa hats for spreadsheets, letting our researchers out of their cages and getting ready to unleash on our nerdy sleigh-full of data from the year that was 2018.

This year, we decided to look inside the “engine room” of Australia’s largest retailers, to see how they fared in 2018, but also to look into the crystal ball to see what 2019 holds for them.

“Away heretic” you say — how can you possibly predict how they’re going to do?

A long time ago I read Richard Branson’s biography, in which he stated Virgin’s simple formula for success. “Take care of your staff. Your staff take care of the customers. Happy customers take care of the shareholders”. In an industry like consumer & retail, given so much of success is down to the experience created by staff, we cheat in our predictions — we simply “play the man”. This isn’t simply cookie-cutter wisdom either, six studies over the last five years have shown that employee culture is inseparable from company performance. In fact, a 2015 study in the Journal of Corporate Finance found a causative link between a strong positive culture, employee satisfaction and financial performance.

So for 2018’s review, we decided to combine our data-set, knowledge and original research with the handy work done by the folks at Glassdoor to develop a “people first” look inside retail in Australia as a bit of a crystal ball into the future.

Key Findings

Down down, culture is down

Amongst the Top 20 retailers in Australia, the average employee rating on Glassdoor was 3.2. This is lower than both Sports Authority and Toys ‘R Us’ ratings just before they collapsed into oblivion. This places them in the bottom 25% of all employer reviews.

There was a (albeit small) shining light, with two retailers making the top quartile of all employers (top quartile begins at 3.7)

When assessed using the lens of financial performance versus employee satisfaction / culture, there was a strong relationship between the two. The lowest performers in terms of staff culture, with an average Glassdoor rating of 2.7, were, unsurprisingly, “victims” of sustained poor financial and poor share-price performance. The lowest employee scorecard, coming in at 1.5 would be bad enough to make 18th century slave traders blush.

As a share market index, the ASX’s “consumer staples” and “consumer discretionary” have also underperformed the market over the last five years

Struggling with the basics

Of these companies, the areas most lacking according to employees were (in frequency order):

  • “Communication” (Mentioned by 53% of staff)
  • “Training” (Mentioned by 36% of staff)
  • “Career opportunities” (Mentioned by 33% of staff)
  • “Rosters” (Mentioned by 31% of staff)
  • “Managers” (Mentioned by 26% of staff)

Somewhat concerning is the fact these are almost an exact mirror of the the list of what is most important to employees.

Disparity between management priorities and employee needs

In a study of earnings calls, strategy briefs, annual reports and other statements into the substance of each company’s key priorities, there was a fixation with some miraculous piece of new technology that would solve all manner of perceived ailments. “AI”, “Cryptocurrencies”, “Drones”.

No employee asked for more “A.I.”

No employee asked to be paid in a cryptocurrency

Nor was their a single mention of a chat-bot

This is a tough dance to pull off — the “market” doesn’t want to hear about better communications or culture. They want to hear about autonomous robots and stuff being delivered to customers by drones dammit! So for retail execs, there is a balance between keeping the barbarians at the gate, and obsessing about building the right people organisation. If you need some inspiration to tackle the “market” head on about why you’re focusing on people, just take this classic example from Alcoa about the power of small “forcing function” changes in staff behaviour on firm performance.

Thoughts for the year ahead

Whilst this report seems about as positive as a canary in a coal mine’s life outlook, there were some “bright spots” and some hopeful direction for Australian retailers in the year ahead.

Below are some of the areas pointed to by industry leaders, external experts and our own data as to where retailers efforts were best concentrated in 2019

Leadership Skills

Much of retail’s leadership model today is still based on improving operational details such as sales per sq/ft, stock turns, gross margin etc — which is a hangover from an age when it was thought non-human factors, such as “price, proximity, product” were the keys to success.

Today, the only competitive plane that matters, is customer — constantly reconfiguring your offering to give customers an addictive experience.

Given the largest interface with customers are staff, in order to give customers what they want, logically, it makes sense to equip staff with the “tools” to play this game of constant adaptation

A leadership model centralising around helping staff build a toolkit that allows them to constantly gather “on the ground” intelligence, synthesise knowledge from a number of sources and act nimbly to put all of these into action to better serve the customer is something the best retailers around the world have been infusing into their DNA in recent years. Take Best Buy for example — in 2012, it was in a death-spiral and was not predicted to survive another year. New CEO Hubert Joly totally reshaped the management of the company — focusing on building leaders that could coach teams to develop world-class capabilities around knowledge sharing, communications, problem solving, decision making, relationship building and other capabilities that would better serve the customer. His belief — build your leadership skills to match the customer needs and the operational metrics will follow.

As of 2018, Best Buy has beaten or matched Wall St expectations for 22 quarters in a row. In terms of total shareholder returns, Best Buy has returned over 4x since 2012 — more than double that of the S&P

Culture

About four years ago, when asking about culture, a retail CEO told me that culture was “fluffy bullshit”. His view was that you pay people to do a job and that they can do it how they were told, or they could leave.

That same CEO was removed from his post not long after this encounter.

Again, an operational metric focus has perpetuated a “cog in a machine” mentality, which when working, probably delivers fine results on the surface. The main problem with this, is that in an unpredictable environment, where critical elements are changing constantly, those “cogs” part in the machine and what those cogs are supposed to do shifts daily. Because of this mentality, retail has habitually under indexed on culture.

When conducting our research, there were a number of reasons why Australian retailers had shied away from culture as a central tenet of their success. Some of the more common/interesting included:

“We develop them, and they leave” — because the alternative sounds so attractive

“People move on anyway, so we never get a chance to fully invest in them” — and I wonder why they move on?

“Culture is a nice to have for office workers” — ummm, yeah.

“Retail is typically a low wage environment — you can’t build culture when people are barely making ends meet” — thanks Maslow

“People should be doing their job, we don’t pay them to have a love-in. If they don’t like it they’re easily replaced” — wow, what an enlightened view. Probably good this person wasn’t a military commander.

Follow me here. For all but a select few retailers, customers buy on experience. Experience is primarily determined by the encounter with staff. The biggest competitive “surface area” for customer experience is staff.

The best way to coordinate and synchronise the thinking and actions of the people that make up that “surface area” is to create a strong culture that operates like an “invisible hand” to drive the kinds of behaviours that are going to be beneficial — without massive oversight or some draconian regime. Whilst this may seem common wisdom, not a single strategy document, earnings call or annual report mentioned culture as a strategic priority

The other interesting characteristic of culture is that it compounds, as per the formula below. Cultures that are average today, without active panel-beating, don’t just stay static, they actually become worse and worse. However, each point of improvement in culture today, will pay multiples of that investment in coming years

Good culture —> Attracts more good people + Rejects Bad —> Better long-term decision making —> Better Performance —> Reinforces culture (Rinse. Repeat).

If you look around your workplace and see a lot of people where you scratch your head and wonder “why are they here?”, you probably have some cultural issues.

The good news here, is that if you think your culture is weak, you can start by making small, “forcing function” adjustments now that can have an outsized impact. Whilst there are an almost infinite number of people more knowledgeable in the building of winning cultures than us — there is one thing close to home that did stand out as a key factor in building culture

Historically, culture has legitimately been a tricky one to coordinate within retail. Geographically and demographically distinct stores, huge numbers of staff, naturally high staff turnover — just to name a couple, are barriers that have made culture harder to build than a wet tissue paper house. However, with new technologies that help recruit more scientifically, synchronise knowledge, communicate up, down and across companies, there are far more avenues to package, distribute and reinforce the artefacts, rituals, beliefs that constitute culture. Those retailers that reported higher levels of tech intensity down to the employee level, scored a full point (out of 5 points) higher than those with low tech intensity.

Equip the frontline

A long held maxim of the armed forces is that “we don’t rise up to the level of our expectations, we fall back to the level of our training”.

In retail, as in the armed forces, the best trained, the best equipped and the best prepared will almost always win.

Today, advances in technology can easily (and cheaply) put all of these critical elements in the hands of every frontline worker. Investing in the largest “surface area” of the company, and factor that can most drastically change its fortunes, is a no-brainer, yet less than 10% of employees believed they had the right training, equipment and context/intel to adequately influence a customer’s thinking.

Drilling down, there were some simple improvements that could be made.

Training. Whilst staff wanted training, there was a distinct need for less “static”, situational dependent training such as “if X happens, do Y” and more flexible frameworks for dynamic problem solving. Additionally, more continual development as opposed to the annual/quarterly “one and done” approach.

Intelligence. Training without live intel is like being an accomplished sailor on a boat without navigation equipment. A lack of intel meant frontline employees lacked current information that could aid customer conversations e.g. “how is this product being received by customers, what are some of the long-term nuances of owning it”. “Intel” can be as simple as personalised productivity figures and as complex as cross-company and supplier knowledge sharing, but overall, this was the area most employees felt was lacking — actionable intel that would allow them to adjust their approach and improve continually.

Equipment. The equipment given to the frontline vastly impacts the speed, accuracy and consistency of their performance.

The primary areas where employees thought better equipment could help were:

  • Help expedite their own improvement feedback loop
  • Deliver valuable intel more reliably, more frequently
  • Connectivity with other locations
  • Knowledge sharing within their org and supplier collaboration

2018 was a revealing year for Australian retail — more than one household name “hit the wall” and countless others limped across the line. Whilst on the surface, this may seem like the perpetuation of something endemic, our research shows that, as with any period of sustained upheaval, these tremors provide once-in-a-generation windows of urgency to institute massive, structural change.

Great leaders can wait years for such events that create a singular focus which the whole company mobilizes around. In 1997, Apple had less than two months of cash left in the bank and a bleak set of options for survival as Steve Jobs stepped in for his second stint as CEO. Jobs used this opportunity as a war cry, rallying Apple people to cut, craft, refine, remove and reshape parts of the company in a set of moves that would have been nearly impossible to pull off had it been “business as usual” times. Struggling cosmetics brand Estee Lauder used the upheaval of WW2 to reposition itself as a “luxury every woman can afford” during austere times, moving from its previously upmarket pedestal to a company that represents beauty for women everywhere

The point I’m making is that difficult times are normally also tremendous opportunities. But only for those willing to take the risks necessary to take advantage of them.

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