Why should private equity firms invest in retail?
By Gopi Krishnan, VP & managing partner, Consumer Domain & Consulting Practice at Wipro Ltd and Siddharth Raghuvanshi, manager of strategy, alliances & partnership, Consumer Domain & Consulting Practice at Wipro Ltd – Historically, private equity firms have always shown interest in retail. For instance, in the US itself, private equity firms have invested in over 80 major retailers in the past decade.
Private equity firms have been behind the buyouts of some of the most well-known names in the retail sector and invested huge sums of money to buy a retailer, take it private, turnaround the business only to sell it later at a profit.
While some workout, others take longer. For instance, Walmart to close the gap between itself and Amazon, bought once-popular Jet.com for USD3.3 billion, a business which Walmart has since retired. Walmart’s eCommerce business lost USD2 billion in 2019 indicating how tough it is to maintain profitability in this area.
However, 2020 forced changes upon everyone. How we work and where we work has forced PE firms to re-evaluate their priorities in the coming times. As retail continues to recover from the trough, it has brought good news for the investors. If played well, the sector offers huge gains for them as the market grows. Going into 2021, how do the key operational levers related to customers, store, and beyond stack up?
Let’s look at the three core axes from a retail perspective – shoppers, products, and channels, and the three key enablement axes that power these, viz, stores, supply chain and associates. Additionally, there are value levers like packaging, promotion optimisation and asset management.
Merchandising – On one end, Amazon is crossing off half a billion SKUs through its marketplace model, on the other are minimalistic models of German giants Aldi & Lidl who have had spectacular success selling mostly private labels with a typical store carrying less than 2000 products. Deep category analysis using advanced analytics to identify what sells where, when, and how much should aid ranging decisions in stores as well as e-commerce sites.
Omnichannel – In a world where shoppers are becoming channel-agnostic, a retailer must focus on both, store and online sales. A shopper now expects to view a product in-store before buying it online or vice versa. Buy online, pick up in-store (BOPIS), fulfilled-from-store and other models that cut across contact centres, mobile apps, store and even 3rd party return drop-boxes must be factored in.
Stores – A shopper who visits stores expects not only a safe environment but also a new instore experience. Following the pandemic, health and safety has become a prime concern for all shoppers. They want a contactless shopping experience. Stores are also transforming in their roles from being primary shopping points to experience centres as well as fulfilment points. The role of product placements, customised pricing and easy check-outs cannot be ignored.
Inventory accuracy – This includes warehouses, transportation, order management and inventory optimisation. Weak inventory management can cost grocery stores a significant 3-5 per cent of their margins especially in the case of perishables and short shelf-life products (eg: mobile phones). In the case of stockouts, retailers lose potential sales, which could cost them at least 4 per cent of their margins. On the other hand, overstocks could also cost 3-4 per cent of the margins and take up valuable shelf space. Returns is a major lever as it not only impacts the sales of a retailer, it also puts a dent in logistics cost and resale value or refurbishing costs. Additionally, it attracts a poor brand reputation especially since in the online world we live in.
Employees/turnover/productivity - Retail sales associates are key drivers for the success of physical retail, and ensuring their productivity helps create a sustainable competitive advantage. Typical associates have lower levels of education, they are busy for their entire shift (hence have less time to train) and are the group with the highest attrition. Shockingly, the average turnover rate in retail industry is over 60 per cent. This employee turnover typically costs a retailer USD3,328 (16 per cent of an employee's annual wages) to find, hire and train a replacement.
Packaging - With the changing consumer preferences, retailers and manufacturers must invest in the right product packaging. Millennials are increasingly conscious about environmental sustainability and look to brands and products which are socially responsible towards the environment. Retailers might choose to collaborate with CPG companies or their manufacturers (for private labels) to tailor packaging by channel, also reduce the usage of plastic and focus on sustainable solutions.
Commitment on brand promotions – Retailers occasionally lose money from audit penalties when they fail to deliver on promised promotions they negotiated with a manufacturer or a specific brand. This happens due to gaps in their trade promotion management. While there are technological solutions available to optimise their trade promotions, not all retailers have adapted to them.
Enterprise Asset Management - With margins under pressure, maximising yield and productivity from various physical assets and CAPEX deployed across the retail value chain is attaining prominence. This could be various devices in-store (price checkers, kiosks, etc), warehouse (handheld terminals, material handling equipment), transportation (track & trace) or could even cover facilities management expenses (HVAC, electricals, carpentry, etc).
How can technology add value for an investor? Technology interventions span all these axes whether it is around revenue maximisation, cost optimisation and/or providing a superior experience Some of the solutions that can improve retailers’ efficiency and customer experience and hence help the investors get maximum returns are:
Self-checkout – To ensure a smoother, quicker shopping experience, self-checkout kiosks are now widely accepted as the preferred point-of-sale for high-end solutions. In times where a shopper does not have time or patience to wait in a queue, multiple self-checkout kiosks provide a better customer experience and reduce manual error while billing.
Smart packaging – Smart packaging encompasses two areas – Active packaging and intelligent packaging – Active packaging improves the content by monitoring and controlling factors like moisture and temperature levels (for perishables). Intelligent packaging takes care of features that indicate the status or convey product changes information. In the future and with last-mile delivery, connected packaging will become a standard expectation.
Retail Shrink Management – Inventory loss due to shoplifting, employee theft, improper labelling or improper paperwork etc causes 1-2 per cent loss in sales. Shoplifting makes up one-third of this. Retailers must invest in sensors and tags which give each item a serial number that is updated in the inventory management system of the retailer.
Inventory management systems – As previously mentioned, inventory management errors can cost grocery stores 3-5 per cent of their margins. As retailers switch to the omnichannel model, enterprise-level inventory visibility, coupled with accurate inventory picture, has become essential to accurate sourcing and order promises.
Auto replenishments and subscription models – Nowadays, shopping will not be a regular activity. Consumers want convenience. For this very reason, retailers have begun offering subscription models where they will replenish frequently consumed supplies on a monthly or weekly basis. This also attracts customer loyalty towards a brand.
Solutions to improve workforce productivity – store associates and warehouse workforce need to be up-skilled and trained to offer superior service to their customers. Using real-time analytics and reporting systems, this facilitates visibility on the available inventory in a store and product description to assist shoppers. Clientele solutions, loyalty management, mobile POS and related solutions covering various aspects of their shift along with enhanced associate experience can work towards better shopper experience as well as lower associate turnover.
Supply chain visibility/control tower – A control tower focuses on providing end-to-end supply chain visibility and control, especially in weakly integrated systems with multiple events across the supply chain needing to be tracked (e.g. delayed shipment or partial fulfilment). Rather than trying to everything, control towers offer an alternative, providing visibility around key events along with a top-down picture. They provide operational control across the entire supply chain and optimise fulfil lead times, reduce inventory costs and mitigate exceptions in real-time.
From a horizontal technology charter, retailers are looking to accelerate cloud adoption to reduce operating costs and make applications mobile/partner ready, use advanced analytics and IoT to improve operational efficiencies and optimise cybersecurity initiatives to protect customer data and assets and ensure safety across the enterprise value chain. At the beginning of the pandemic, retail was among the worst-hit globally. As the world moves towards vaccinations, lockdowns have been lifted, stores have opened, and shoppers are back, there are opportunities for private investors to step-in, analyse and optimise ways of working at a process level and infuse the right technology components to raise enterprise value.