Retail - Deloitte US · the Retail sector, 91% of respondents plan to undertake cost reduction initiatives over the next 24 months, significantly higher than the global average across

Save-to-transform as a catalyst for embracing digital disruption Deloitte’s Second Biennial Global Cost Survey: Cost management practices and trends in the Retail sector

Global Cost Report 2019-2020 Retail

Contents

Executive summary 4

About the study 8

How is Retail different? 10

Firmographics 14

Retail survey results: Detailed insights 18

Digital and technology solutions applied to cost management in the Retail sector 34

Save-to-transform as a catalyst for embracing digital disruption 40

2

Save-to-transform as a catalyst for embracing digital disruption | Deloitte’s Second Biennial Global Cost Survey: Cost management practices and trends in the Retail sector

Digital technology and digital disruption have burst onto the scene as key levers for cost management and business transformation around the world and throughout the retail sector. In Deloitte’s 2017 Biennial Global Cost Survey, digital disruption was identified as an emerging risk by respondents in the United States but was barely visible elsewhere. Now, however, technology investments and innovative digital technologies are top-of-mind for retailers in all regions.

The “Amazon Effect” is constantly raising the bar for responsiveness, convenience, and product availability—while also creating a need for smaller, nimbler “last mile” delivery options that can more efficiently satisfy growing demand in urban centers. Many retail companies are responding by aggressively optimizing the use of their brick-and-mortar square footage, with physical retail locations now being used not only for direct fulfillment of online orders but also for digital engagement and product concierge services. Meanwhile, the retail market is becoming increasingly bifurcated, with value-focused customers gravitating toward the low end and prestige-focused customers gravitating toward the high end.

In this challenging environment, cost management continues to be a strong imperative for nearly all retailers. However, the industry’s prevailing mindset is expanding from save-to-grow to save-to-transform. Most retail companies continue to have very positive expectations for revenue growth, and many are using cost reduction as a tool to help fund their required growth investments—including transformational activities such as digitizing the supply chain, developing better customer data insights, and finding ways to make the retail experience dramatically more convenient.

The need to satisfy customer demand for increased convenience in the face of continued price pressure is one of the retail industry’s greatest challenges. Traditionally, hard trade-offs must be made between transaction speed, customer value, and cost—prompting heated discussions about what really matters to consumers and how much convenience retailers can afford to provide.

Digital technologies and innovations can ease the trade-offs by enabling dramatic improvements across multiple dimensions simultaneously: competitiveness, performance, operating efficiency and, increasingly, cost savings. Just as important, digital investments can strengthen a retailer’s positioning for adverse future events, including economic downturns and digital disruption.

With digital innovation emerging as a critical enabler for both cost reduction and business transformation, we are delighted to present the results from our latest global cost survey. The study includes responses from more than 1,200 executives and senior leaders around the world with direct involvement in cost management, including 44 respondents from the retail sector.

This report provides an up-to-date view of the cost management practices and trends shaping the future of retail and global business. It also takes a detailed look at how the latest digital technologies and cost management strategies are acting as a catalyst for transformation in a world being actively redefined by digital disruption.

We hope you find these insights useful and look forward to hearing your thoughts and feedback.

Foreword

Sam Balaji Global Consulting Leader

Omar Aguilar Strategic Cost Transformation Global Market Offering Leader

3


Executive summaryHow is Retail different?

Cost management is much more prevalent in retail than globally, but targets and failure rates are similar. In the Retail sector, 91% of respondents plan to undertake cost reduction initiatives over the next 24 months, significantly higher than the global average across industries (71%). Among retail respondents, 71% have cost reduction targets of 10% or higher, and 84% did not fully meet their cost reduction targets.

The revenue outlook in retail is less positive than the global average. Over the past 24 months, 80% of retail respondents had positive revenue growth, which is lower than the global average across industries (86%). Similarly, over the next 24 months the revenue outlook is less positive in retail (77%) than the global average (86%).

The save-to-transform mindset is even more prevalent in retail than globally across industries. The survey results show that the save-to-transform mindset is even more prevalent in retail than globally. This cost management philosophy is characterized by a simultaneous strategic focus on sales growth, cost reduction, product profitability, technology implementation, and digital enablement. Relative to the global averages across industries, retail respondents report higher priority levels in all those areas.

Expected implementation rates for key digital technologies are generally lower in retail than globally, except for automation. In retail, implementation rates for digital technologies over the next 24 months are expected to be lower than the global averages across industries for cloud (-47%), business intelligence (-7%), and cognitive/AI (-3%), but higher for automation (+6%).

Digital leaders in retail have a minimal impact on technology implementation, in sharp contrast to the global results. On average, retail companies with a designated digital leader have a lower level of technology implementation (-4%) than those without one. This is dramatically different from the global results across industries, where the overall impact of digital leaders is highly positive (+118%).

Retail survey results: Detailed insights

Cost management is much more prevalent in the Retail sector than globally across industries.

In Retail, the likelihood of undertaking cost reduction initiatives over the next 24 months is significantly higher than the global average.

91%Retail

71%Global

Cost targets in Retail are similar to the global averages.

The large majority of Retail respondents have cost reduction targets above 10%, slightly higher than the global average across industries.

71%Retail

68%Global

The percentage of retailers with targets above 20% is on par with the global results.

Cost programs in the Retail sector have a higher failure rate than the global average.

According to the survey results, Retail respondents who failed to fully achieve their cost reduction targets is slightly higher than the global average across industries.

84%Retail

81%Global

4


Digital disruption is the top external risk in Retail, followed by currency fluctuations.

84%digital disruption

77%currency fluctuations

Globally across industries, cybersecurity is the top external risk (62%), with digital disruption a close second (61%).

Information systems and business continuity are the top internal risks in Retail.

41%reliability and functionality of information systems

41%lack of controls, processes, and systems to ensure business continuity

34%recruitment, development, and retention of talent

Those same three internal risks top the list globally across industries.


Strategic priorities align with save-to-transform.

In Retail, top-rated strategic priorities over the next 24 months:

86%sales growth

86%technology implementation

84%product profitability

This broad set of balanced priorities typifies the save-to-transform mindset.

Retailers have been focusing on tactical cost actions over strategic cost actions.

According to the survey results, retail respondents over the past 24 months tended to favor:

51%tactical cost actions

47%strategic cost action

This resembles the global pattern across industries.

Growth is the top cost reduction driver in Retail over the next 24 months.

84%required investment in growth areas

That driver is up significantly from the past 24 months (+7 percentage points).

The focus is shifting toward strategic cost actions.

Looking ahead to the next 24 months, Retail respondents expect to emphasize:

61%strategic cost actions

55%tactical cost actions

Similar to the global results across industries, change business configuration is the top-rated cost action for Retail (68% in-process or planned).

ERP systems and implementation challenges are the top barriers to successful cost reduction.

Top barriers to successful cost reduction are:

75%lack of an effective ERP system

65%implementation challenges are the top barrier globally across industries.

73%implementation challenges

Capability development activity in Retail is slightly above the global averages.

Most actively developed capabilities in Retail in the past 24 months were:

57%new policies/ procedures

43%improved ERP infrastructure

55%automation

5

Save-to-transform as a catalyst for embracing digital disruption | Deloitte’s Second Biennial Global Cost Survey: Cost management practices and trends in the Retail sector Save-to-transform as a catalyst for embracing digital disruption | Deloitte’s Second Biennial Global Cost Survey: Cost management practices and trends in the Retail sector


Cloud leads the pack.

In Retail, the most widely implemented technologies covered by the survey are:

68%cloud

43%business intelligence

Cloud was also the most actively implemented technology globally across industries (49%).

Automation is expected to be the most actively implemented technology in Retail.

In Retail, the technologies expected to be most actively implemented over the next 24 months:

66%automation

61%cognitive

The technology expected to be least actively implemented is cloud, most likely because current implementation levels for cloud are already very high.

25%cloud

Digital and technology solutions applied to cost management in Retail

Top reasons for applying digital technologies. In Retail, reducing costs and increasing productivity is the primary reason for applying cloud, robotic process automation (RPA), and cognitive/AI technologies.

Most technology implementations meet or exceed expectations.

73%When implementing each of the technologies covered by the survey, at least 73% of Retail respondents had their expectations met or exceeded.

Cost management maturity in Retail is higher than average.

Overall, the percentage of Retail companies that rate themselves high maturity is far above the global average.

52%Retail

35%Global

Lessons learned.

In Retail, the top lessons learned were:

No. 1designate a full-time position to drive efficiency and cost improvement initiatives (80%).

No. 2design a solid tracking and reporting process (80%).

The top lesson learned globally was to invest in technology improvements (72%).

6


Digital rises to the top of the Retail agenda. Digital disruption is now recognized as the top external risk in Retail (84%). Meanwhile, technology implementation has emerged as the Retail sector’s top-rated strategic priority over the next 24 months (86%)— an 8% increase over the past 24 months.

Save-to-grow.In the recent past, most Retail companies were firmly grounded in save-to-grow mode. Cost and growth were the main business levers, with talent (including capabilities) as another key component. In this mode, cost reduction is a high priority, with cost savings used to fund growth initiatives and strategic investments that support a differentiated business strategy.

Save-to-grow expands into save-to-transform.Many retailers are now shifting into save-to-transform mode, with the save-to-grow mindset expanding to include a strong focus on digital enablement and implementation of technologies. This shift can transform a company and help it capitalize on digital opportunities, while at the same time positioning the business for potential adversity that may be on the horizon—such as an economic downturn or credit crisis—using digital innovations to unlock new levels of cost savings, efficiency, and financial performance.

Save-to-transform as a catalyst for embracing digital disruption

7


Deloitte Consulting LLP (Deloitte or Deloitte Consulting) engaged Dynata to conduct a global cost-management survey to better understand business leaders’ perspectives on current and future cost-reduction initiatives within large companies, multinationals, and other companies that are representative of the industries and regions surveyed

Study objectives

Understand factors, approaches, actions, and targets related to cost initiatives

Assess the effectiveness of the cost actions, including lessons learned from previous efforts

Understand the drivers and scope of past and future cost initiatives

Provide context on how digital disruption and advanced digital technologies are affecting cost management

Assess industry results, and provide insights on different behaviors related to cost reduction

MethodologyData was collected through detailed online surveys conducted between November and December 2018.

January February March April May June July August September October November December

About the survey

FirmographicsThe global survey of more than 1,200 executives and senior leaders with direct involvement in cost management decisions and actions included 44 respondents from the Retail sector.

88



9

Most findings from this year’s global cost-management survey are directionally consistent across industries and geographic regions. However, there are a handful of key differences between the Retail sector results and the global survey results, which include data from all industries.

How is Retail different?

1010


Likely Neutral Unlikely

Global Retail

Likelihood

91% of retail respondents plan to undertake cost reduction initiatives, compared to 71% globally

Exceededgoals

Met goals Did notmeet goals

Lessthan 10%

10% to lessthan 20%

Morethan 20%

Cost targets Success analysis

84% of respondents failed to fully meet their targets, compared to 81% globally

71% of respondents reported targets above 10%, similar to 68% globally

% o

f Tot

al R

espo

nden

ts

71%

91%

30%

2%

20%

9% 8%

0%

% o

f Tot

al R

espo

nden

ts 30%

37%

41%

31% 30%

% o

f Tot

al R

espo

nden

ts5%

14% 14%

81%84%

Cost management is much more prevalent in Retail than globally, but targets and failure rates are similarIn the Retail sector, 91% of the surveyed companies plan to undertake cost reduction initiatives over the next 24 months, significantly higher than the global average across industries (71%). The percentage of Retail respondents with cost reduction targets of 10% or higher is slightly above the global average (71% in Retail versus 68% globally

across industries). Failure rates in Retail are also slightly above the global average, with 84% of Retail respondents failing to fully meet their cost reduction targets (versus 81% globally across industries) (see figure 1).

Figure 1. Cost program likelihood, targets, and success analysis

The revenue outlook in Retail is less positive than the global averageOver the past 24 months, 80% of Retail respondents had positive revenue growth, which is lower than the global average across industries (86%). Similarly, over the next 24 months the revenue outlook is less positive in Retail (77%) than the global average (86%) (see figure 2).

Figure 2: Past revenue performance and future expectations

Survey findings1 Over the past 24 months, 80% of Retail respondents had positive revenue growth, lower than the global average across industries (86%).

2 Over the next 24 months, 77% of Retail respondents have a positive growth outlook, lower than the global average (86%).

3 In Retail, the percentage of respondents reporting (or expecting) flat revenue is almost twice the global average across industries.

Increased Remained the same Decreased

Global Retail

Past 24 months

Increase Anticipate flat top line Decrease

Next 24 months

77% of respondents anticipate an increase in revenue over the next 24 months

80% of respondents have witnessed an increase in revenue in the past 24 months

% o

f Tot

al R

espo

nden

ts

86%80%

7%14%

7% 7% % o

f Tot

al R

espo

nden

ts

86%

8%14%

6% 7%

77%

11


Global Retail

% o

f tot

al r

espo

nden

ts

43% 42% 37%

In process of implementationNot implemented but planned

Business intelligence(not including cognitive or AI)

Cloud solutionsAutomation: Robotic process automation

Cognitive technologies: AI and machine learning

38%

24% 24% 20%

14%

9%14%

14%

39% 39%33%

57%48%

41%25%

62% 63% 59%

47%

66%61%

55%

25%

-7%

+6%-3%

-47%

0

20

40

60

80

100

Sales growth

Cost reduction

Balance sheet management

Productprofitability

Organization and talent

Technology implementation

Digitalenablement

% o

f tot

al r

espo

nden

ts

72%

86%

68%73%

61%

73% 73%

84%

68%

80%73%

86%

69%77%

Global Retail

The save-to-transform mindset is even more prevalent in Retail than globally across industriesThe survey results show that the save-to-transform mindset is even more prevalent in Retail than globally across industries. This cost management philosophy is characterized by a simultaneous strategic focus on sales growth, cost reduction, product profitability, technology implementation, and digital enablement. Relative to the global averages across industries,

Retail respondents report higher priority levels in all those areas: growth (+14 percentage points), technology (+13 percentage points), product profitability (+11 percentage points), digital enablement (+8 percentage points), and cost (+5 percentage points) (see figure 3).

Figure 3. Strategic priorities (next 24 months)

Expected implementation rates for key digital technologies are generally lower in Retail than globally, except for automationIn Retail, implementation rates for digital technologies over the next 24 months are expected to be lower than the global averages across industries for cloud (-47%), business intelligence (-7%), and cognitive/AI (-3%), but higher for automation (+6%) (see figure 4).

Figure 4: Implementation of technologies (next 24 months)

12


0

10

20

30

40

50

60

0

10

20

30

40

50

60

Automation: Robotics Process Automation

Average Cognitive technologies: AI and machine learning

Business intelligence (not including Cognitive or AI)

Cloud solutions

44%

17%

37%

29%

29%

39%

32%

42%

68%

53%

17%

30%

67%

118%-4%

222% 190%-3%

129%-16%

77%1%

No designated leader

Designated leader

Global Retail

34%

46%

9%

33%

10%

33%

50%

3%

% o

f tot

al r

espo

nden

ts%

of t

otal

res

pond

ents

Digital leaders in Retail have a minimal impact on technology implementation, in sharp contrast to the global resultsOn average, Retail companies with a designated digital leader have a lower level of technology implementation (-4%) than those without one. This is dramatically different from the global results across industries, where the overall impact of digital leaders is highly positive (+118%) (figure 5).

Figure 5. Impact of a designated digital leader*

Survey findings1 Overall, Retail respondents with a designated digital leader report lower levels of technology implementation (-4%). However,

the impact varies by technology. For automation and cloud, the level of implementation increases with a designated digital leader (+3% and +1% respectively).

2 Globally across industries, the impact of a designated digital leader on technology implementation levels is very high (+118%).

3 The difference in digital leader impact for Retail versus the global average is highest for automation (+3% in Retail versus +222% globally across industries).

*Averages calculated for global and Retail results are weighted averages

13


FirmographicsGlobal information was collected to provide meaningful insights across regions and industries. Within the Consumer & Industrial Products (C&IP) industry, the Retail sector represents 14% of all responses (44 responses) (see figure 6).

Figure 6. Respondent breakdown by industry and region

8

Retail sector breakdown:Number of responses by sector and region

Retail

Consmer Services

Automotive

Consumer Services

Process Industry

Industrial Products and Construction

Wholesale and Distribution

Aerospace and Defense

Transportation, Tourism,and Hospitality

Other

Total

63

61

109

77

8

10

328

Canada

South Africa

APAC

Europe

LATAM

USA 13

4

14

8

2

5 2 3

3 2 1

22 23 5 4 3 21 9

25 17 3 10 6 7 8 3 16

18 6 3 2 5 3 2 2 16

11 10 1 2 1 25

14



Management-level breakdown(% of respondents by level and region)

Executive Management (enabling functions)*Executive Management (business units)**President, CEO CFO, COO

RetailGlobal

24%

21%

14%

42%

18%

7%

36%

39%

Only leaders and executives with direct involvement in cost-management decisions were included in the survey. For the Retail sector, 39% of respondents were Presidents or CEOs, 18% were CFOs or COOs, and the remaining 43% were executive management (see figure 7).

Figure 7. Respondent breakdown by management level

* Executives Management (enabling functions): VP or above in finance, logistics, IT, HR, marketing, etc.** Executives Management (business functions): VP or above business units, regions, or countries

15

Nearly three of four of Retail respondents (73%) had revenues of $1 billion or higher, while more than a third (37%) had revenues of $5 billion or higher (see figure 8).

Figure 8. Respondent annual revenue (US dollars)

$200M toless than $500M

Global Retail

0

10

20

30

40

$500M toless than $1B

$1B toless than $5B

$5B toless than $20B

$20B toless than $60B

Over $60B

15% 16%

7%

20%

24%

36%

24%

16%

13%

7% 8%

14%

Note: The survey was conducted in local currencies. For analysis purposes they have been converted to US dollars.

16



Lessthan 1,000

0

4

8

12

16

20

1,000to 2, 499

2,500to 4,900

5,000 to 9,999

10,000to 24,000

25,000to 49,999

50,000to 99,999

Morethan 100,000

8%

5%

15%

11%

15%16%

18%19%

13%

11%

14%

10%11%

14%

9%

11%

Global Retail

68% of retail respondents had more than 5,000employees, compared to 62% globally across industries

In Retail, 68% of respondents had at least 5,000 employees, 39% had at least 25,000 employees, and 11% had more than 100,000 employees (see figure 9).

Figure 9: Respondent employee headcount

17



18

Likely Neutral Unlikely

Global Retail

71%

% o

f tot

al r

espo

nden

ts

0.0

12.5

25.0

37.5

50.0

62.5

75.0

87.5

100.0

91%

8%

0%

20%

9%

91% of retail respondents plan to undertake cost reduction initiatives.

1

1

22

3

3

Survey findings1 On average, 91% of Retail respondents plan to undertake cost reduction initiatives over the next 24 months, significantly higher than

the global average across industries (71%).

2 In Retail, no respondents say they are unlikely to undertake cost reduction initiatives over the next 24 months.

3 9% of Retail respondents are neutral towards cost reduction initiatives, significantly lower than global average across industries (20%).

Cost management is much more prevalent in the Retail sector than globally across industriesIn Retail, the likelihood of undertaking cost reduction initiatives over the next 24 months (91%) is significantly higher than the global average across industries (71%) (see figure 10).

Figure 10: Likelihood of cost reduction (next 24 months)

19


Survey findings1 On average, 71% of Retail respondents have cost reduction targets above 10% or higher, slightly higher than the global average

across industries (68%).2 The percentage of Retail respondents (30%) with targets above 20% is on par with the global average across industries (31%).3 In Retail, 30% of respondents have targets below 10%, matching the global average across industries (30%).

Most retail respondents (71%) reported targets above 10%.

Less than 10% 10% to less than 20% More than 20%

Global Retail

% o

f tot

al r

espo

nden

ts

0

10

20

30

40

50

30%30% 31%30%

37%

41%

1

1

1

21

2

3 3

Cost targets in Retail are similar to the global averagesThe large majority of Retail respondents (71%) have cost reduction targets above 10%, slightly higher than the global average across industries (68%). The percentage of retailers with targets above 20% is on par with the global results (30% in Retail versus 31% globally) (see figure 11).

Figure 11. Cost reduction targets

20


Survey findings1 Cost programs in Retail have a higher failure rate (84%) than the global average across industries (81%).

2 14% of Retail respondents met their cost reduction goals, matching the global average (14%).

3 Only 2% of Retail respondents exceeded their goals, less than half the global average across industries (5%).

Met goals Exceeded goalsDid not meet goals

Global Retail

% o

f tot

al r

espo

nden

ts

0

15

30

45

60

75

90

84%81%

5%2%

14%14%

11

2 2 33

Cost programs in the Retail sector have a higher failure rate than the global averageAccording to the survey results, 84% of Retail respondents failed to fully achieve their cost reduction targets—slightly higher than the global average across industries (81%) (see figure 12).

Figure 12. Cost program success and failure

21


Political climate Macroeconomic concerns Currency fluctuations Commodity price fluctuationsCredit risks Cyber security concerns New market entrants Digital disruption

0

10

20

30

40

50

60

70

80

Global Retail

% o

f tot

al r

espo

nden

ts 2 2

1 1 1

1

59% 59% 58% 59%57%

62%

75% 73%77%

68%

61%

75%70%

84%

57%61%

Survey findings1 The top-rated external risks among Retail respondents are digital disruption (84%), currency fluctuations (77%), political climate (75%), and

cybersecurity (75%).

2 Globally across industries, the top external risks are cybersecurity (62%) and digital disruption (61%).

3 Overall, ratings for external risks in Retail are significantly higher than the global averages across industries.

Digital disruption is the top external risk in RetailIn the Retail sector, the top-rated external risk is digital disruption (84%), followed by currency fluctuations (77%). Globally across industries, cybersecurity is the top external risk (62%), with digital disruption a close second (61%) (see figure 13).

Figure 13. Top external risks

22


Lack of strategic plans or execution to provide clear direction to the business

Liquidity and financial position to support business plans

Recruitment, development and retention of required talent to support business initiatives

Reliability and functionality of information systems to support business processes and decisions

Lack of controls, processes and systems to ensure business continuity

Lack of regulatory, legal and/or management controls

0

10

20

30

40

Global Retail

% o

f tot

al r

espo

nden

ts

2 22

1

1 1

23% 23%25% 26%

24%22%

30%

23%

34%

41% 41%

27%

Survey findings1 In Retail, the top-rated internal risks are information systems (41%), business continuity (41%), and talent (34%). Globally across

industries, those same three internal risks top the list: information systems (26%), talent (25%), and business continuity (24%).2 Overall, ratings for internal risks in Retail tend to be significantly higher than the global averages across industries.

Information systems and business continuity are the top internal risks in RetailThe top internal risks in Retail are reliability and functionality of information systems (41%); lack of controls, processes, and systems to ensure business continuity (41%); and

recruitment, development, and retention of talent (34%). Those same three internal risks top the list globally across industries (see figure 14).

Figure 14. Top internal risks

23


Survey findings1 The top strategic priorities for Retail respondents over the past 24 months were sales growth (91%) and product profitability

(86%). Both of those strategic priorities were also in the top three globally across industries.

2 Over the next 24 months, the top priorities in Retail are sales growth (86%), technology implementation (86%), and product profitability (84%). Those same three priorities also top the list globally across industries.

3 In the Retail sector, the priority of technology implementation is expected to increase by 6 percentage points from the past 24 months to the next 24 months.

Strategic priorities align with save-to-transformThe save-to-transform cost management approach uses cost reduction to fund investments in growth and transformational digital technologies, while in turn using many of those same digital technologies to boost the efficiency and effectiveness of cost reduction programs.

In Retail, the top-rated strategic priorities over the next 24 months are sales growth (86%), technology implementation (86%), and product profitability (84%). This broad set of balanced priorities typifies the save-to-transform mindset (see figure 15).

Figure 15. Strategic priorities

% of total respondents

Sales growth Cost reduction Balance sheet management Product profitability

Organization and talent Technology implementation Digital enablement

Glo

bal

Next 24 monthsPast 24 months


69%

61%

73%

69%

73%

69%

73%

68%

61%

73%

68%

73%

69%

72%

Reta

il80%

66%

86%

80%

80%

77%

91%

73%

73%

84%

80%

86%

77%

86%


1

1

1

1

2 2

2

2

2

2 3 3

24


Growth is the top cost reduction driver in RetailOver the next 24 months, the top driver for cost reduction in Retail is required investment in growth areas (84%). That driver is up significantly from the past 24 months (+7 percentage points) (see figure 16).

Figure 16. Cost reduction drivers

Survey findings1 Over the past 24 months, the top cost reduction drivers in Retail were international growth opportunities (84%), investment in

growth areas (77%), and reduction in consumer demand (75%). Two of those drivers were also in the top three globally across industries: investment in growth areas (66%) and international growth opportunities (63%).

2 In Retail, the top cost reduction driver over the next 24 months is investment in growth areas (84%); the same driver tops the list globally across industries.

3 Looking ahead, Retail respondents expect “investment in growth areas” to rise significantly as a cost driver (+7 percentage points).

Significant reduction in consumer demandDecrease in liquidity and tighter creditUnfavorable cost position relative to peer group

Required investment in growth areasChange regulatory structure

Intensified competition among peer group

Increased international growth opportunities


Glo

bal



52%

56%

59%

66%

65%

63%

52%

73%

64%

73%

77%

73%

84%

75%

Reta

il

53%

57%

61%

67%

66%

65%

55%

77%

70%

77%

84%

68%

77%

77%


1

1

1

11

2 23 3

25


Survey findings1 The Retail sector’s most actively developed capabilities over the past 24 months were new policies/procedures (57%), automation

(55%), and improved ERP infrastructure (43%).2 Globally across industries, automation was the most actively developed capability (48%), followed by cognitive/AI technologies (42%).3 Zero-based budgeting (ZBB) was the least actively developed capability in Retail (9%), lower than the global average (12%).

Capability development activity in Retail is slightly above the global averagesOver the past 24 months, the most actively developed capabilities in Retail were new policies/procedures (57%), automation (55%), and improved ERP infrastructure (43%) (see figure 17).

Figure 17. Capabilities developed over the past 24 months

Created a new executive position and/or full-time positions to drive cost management

Set-up or improved ERP infrastructure

Developed or implemented automation technologies

Developed or implemented cognitive and artificial intelligence technologies

Implemented new policies and procedures and strengthened the compliance mechanisms

Improved processes for forecasting, budgeting, and reporting to enable effective cost management

Implemented zero-based budgeting or process

0

10

20

30

40

50

60

Global Retail

% o

f tot

al r

espo

nden

ts

2

2 1

11

3

34%

41%

48%

42% 41%

34%

12%

3

9%

36%34%

41%43%

57%55%

26


Retailers have been focusing on tactical cost actions over strategic cost actionsAccording to the survey results, Retail respondents over the past 24 months tended to favor tactical cost actions (51%) over strategic cost actions (47%). This resembles the global pattern across industries. Tactical actions tend to produce incremental improvements and relatively small cost savings,

whereas strategic actions have a much broader and deeper impact. Examples of strategic actions include: centralizing business activities (action 1 in the chart); structurally reconfiguring the business (action 2); and outsourcing/offshoring (action 3) (see figure 18).

Figure 18. Implemented cost reduction actions over the past 24 months

Note: Respondents who had implemented those actions were selected for this question.

Survey findings1 In Retail, the most commonly implemented cost reduction actions over the past 24 months were streamlined organization structure

(59%), streamlined business processes (57%), and improved policy compliance (57%).2 Globally across industries, the most commonly implemented cost reduction actions were streamlined business processes (37%),

improved policy compliance (37%), and streamlined organization structure (36%).3 Retail respondents have been focusing more on tactical cost actions (51%) than strategic cost actions (47%).

Averages

Global Retail

32% 47%34% 51%

% o

f tot

al r

espo

nden

ts

3

2 2 2

11 1

35%31% 31%

36% 37% 37%

32% 32%30%

45%

55%

41%

59%57% 57%

50% 50%

34%

Action 1 Increased centralization – Integrated business units and functions into the corporate center

StrategicAction 2 Changed business configuration – Divested underperforming assets, adjusted number of products/services, geographies, customers, etc.

Action 3 Outsourced/Off-shored business processes to low cost service providers

Action 4 Streamlined organization structure – Increased spans of control, and modified reporting relationships

Tactical

Action 5 Streamlined business processes

Action 6 Improved policy compliance

Action 7 Reduced external spend by leveraging scale to source purchased materials/services and reduced demand for materials and services

Action 8 Implementation of specific automation or cognitive technologies

Action 9 Aligned incentives of executives or employees to cost reduction objectives

27


The focus is shifting toward strategic cost actionsLooking ahead to the next 24 months, Retail respondents expect to emphasize strategic cost actions (61%) over tactical cost actions (55%). Similar to the global results across industries, change business configuration is the top-rated cost action for Retail (68% in-process or planned) (see figure 19).

Figure 20: Expected cost reduction actions over the next 24 months

Note: Respondents who had planned to implement those actions or were in process of implementation were selected for this question

Survey findings1 The most expected cost reduction actions in Retail over the next 24 months are change business configuration (68%

in-process or planned), streamline organization structure (61% in-process or planned), and outsource/offshore business processes (59% in-process or planned).

2 Globally across industries, change business configuration is the most expected cost action (65% in-process or planned).3 Over the next 24 months, Retail expects a shift in emphasis from tactical to strategic cost actions.

Averages

62% 61%61% 55%

StrategicIn process of implementationNot implemented but planned

% o

f tot

al r

espo

nden

ts

42%

19%

44%

21%

43%

16%

42%

18%

46%

16%

40%

19%

43%

18%

41%

22%

41%

14% 57

%11

%

50%

9%

50%

11%

50%

2%

34%

16%

45%

9%

48%

9%

2

Global Retail

3

1

1 1

Action 1 Increased centralization – Integrated business units and functions into the corporate center

StrategicAction 2Changed business configuration – Divested underperforming assets, adjusted number of products/services, geographies, customers, etc.

Action 3 Outsourced/Off-shored business processes to low cost service providers

Action 4 Streamlined organization structure – Increased spans of control, and modified reporting relationships

Tactical

Action 5 Streamlined business processes

Action 6 Improved policy compliance

Action 7Reduced external spend by leveraging scale to source purchased materials/services and reduced demand for materials and services

Action 8 Implementation of specific automation or cognitive technologies

28


ERP systems and implementation challenges are the top barriers to successful cost reductionIn Retail, the top barriers to successful cost reduction are lack of an effective ERP system (75%) and implementation challenges (73%). Globally across industries, implementation challenges are the top barrier (65%) (see figure 20).

Figure 20. Barriers to successful cost reduction

Survey findings1 The three top barriers to successful cost reduction in Retail are lack of an effective ERP system (75%), implementation challenges (73%),

and weak/unclear business case (70%).2 Globally across industries, implementation challenges (65%) and lack of an effective ERP system (62%) are the two top-rated barriers.3 Overall, Retail respondents’ ratings for cost reduction barriers tend to be higher than the global averages across industries.

Lack of understanding/acceptance of the solution by the audience

Erosion of savings due to infeasible target setting

Weak/unclear business case for cost improvement

Poorly designed reporting and tracking

Lack of an effective ERP system to enable date availability, decision-making, process improvement, performance management

Management challenges in implementing initiatives

0

10

20

30

40

50

60

70

80

Global Retail

% o

f tot

al r

espo

nden

ts

57% 57% 58%61% 62%

65%70% 68% 66%

64%

75% 73%

11

1

22

29


Lessons learnedIn Retail, the top lessons learned were to designate a full-time position to drive efficiency and cost improvement initiatives (80%), and design a solid tracking and reporting process (80%). The top lesson learned globally was to invest in technology improvements (72%) (see figure 21).

Figure 21. Lessons learned for effective cost management

Survey findings1 The top lessons learned in Retail were: designate a full-time position to drive efficiency and cost improvement initiatives

(80%), and design a solid tracking and reporting process (80%). The three top lessons globally were: invest in technology improvements (72%); design a solid tracking/reporting process (70%); and adjust targets to reflect reality (69%).

2 Overall ratings for lessons learned in Retail tend to be significantly higher than the global averages across industries.

Designate a full-time position to drive efficiency and cost improvement initiatives

Develop, validate and sponsor a clear business case for cost improvement

Deploy change management activities to raise awareness, acceptance, and benefits of initiatives

Design a solid tracking and reporting process

Assess, validate, and adjust targets reasonably according to the reality throughout the implementation phase

Invest in technology improvements to enable data availability, reliability, and decision-making process

0

10

20

30

40

50

60

70

80

Global Retail

% o

f tot

al r

espo

nden

ts

61%65% 66%

70% 69%72%

80%77%

73%

80%77% 77%

1 1

22 2

30


Cost management maturity in Retail is higher than averageAccording to the survey results, cost management maturity levels in Retail are higher than the global averages across industries. In particular, the percentage of Retail companies that rate themselves high maturity (52%) is far above the global average (35%) (see figure 22).

Figure 22. Cost management maturity levels

Survey findings1 In Retail, 52% of respondents rate themselves high maturity at cost management, while 23% rate themselves intermediate maturity.2 Globally, 35% of companies across industries rate themselves high maturity, while 31% rate themselves intermediate maturity.3 14% of Retail respondents rate themselves at the lowest levels of maturity, similar to the global average across industries (15%).

% o

f tot

al r

espo

nden

ts

Lowest High

High

Intermediate

Low

Lowest

Cost policies and procedures are continually reviewed and examined to ensure best practices around efficiency and cost management

Relevant cost policies and procedures are typically well known, and personnel are trained and generally comply

There may be written cost policies and procedures documented but not readily available and essentially not followed

Few or no formal cost policies or procedures are employed or documented, or they are significantly fragmented

35%31%20%15%

23%11%14% 52%

Global

Retail

3

1 1

2 2

31


32


33


Digital technologies are having a major impact on all aspects of business in the Retail sector—including cost management. Breakthrough innovations made possible by digital technology are enabling companies to operate and compete more effectively in an increasingly digital world. They also have the potential to enable new levels of cost savings.

Digital and technology solutions applied to cost management in Retail


34

Global Retail0

10

20

30

40

50

60

70

% o

f tot

al r

espo

nden

ts


Cognitive technologies: Artificial intelligence and machine learning

Business Intelligence (Not including Cognitive or AI)

Cloud Solutions

25%25%

35%

49%

34%32%

43%

68%

1

1

2

2

3

3

Survey findings1 In Retail, the most actively implemented technologies covered by the survey were cloud (68%) and business intelligence

(43%); cognitive/AI was the least widely implemented (32%).2 Cloud was also the most actively implemented technology globally across industries (49%), followed by business

intelligence (35%).3 Implementation activity levels in Retail were higher than the global averages for all technologies, especially cloud (+19

percentage points).

Cloud leads the packAmong the technologies covered by the survey, the most actively implemented in Retail over the past 24 months was cloud (68%), followed by business intelligence (43%). Cloud was also the most actively implemented technology globally across industries (49%) (see figure 23).

Figure 23. Technology implementation levels (past 24 months)

35


Cloud

% o

f tot

al r

espo

nden

ts

0

10

20 30 40 50 60 70 80 90 100

Reta

ilG

loba

l

63%

43%

48%

64%

73%

37%

50%

63%

RPA Cognitive & AI

Reduce Costs and Increase Productivity

Increase revenue Enhance product/service capabilities Tighten data security and Improve business control

1

1

0

10

20 30 40 50 60 70 80 90 100

80%

57%

53%

69%

100%

80%

73%

80%

0

10

20 30 40 50 60 70 80 90 100

76%

56%

59%

68%

86%

71%

64%

79%

2

2

3

3

Survey findings1 The top reason for applying cloud in Retail is to reduce costs and increase productivity (73%); globally across industries, the

top reason for applying cloud is to tighten data security and improve business control (64%).2 The top reason for applying RPA in Retail and globally across industries is to reduce costs and increase productivity.3 The top reason for applying cognitive/AI in Retail and globally across industries is to reduce costs and increase productivity.

The top reason for applying digital technologies is to reduce costs and increase productivityIn Retail, reducing costs and increasing productivity is the primary reason for applying cloud, robotic process automation (RPA), and cognitive/AI technologies (see figure 24).

Figure 24. Reasons for applying technologies

36


Unable to assess results at this point

Results according to expectations

Results below expectations

Results above expectations

Global

Cloud

29%

56%

13%

2%

Global

35%

41%

23%

1%

Global

36%

47%

16%

1%

Retail

33%

57%

10%

Retail

53%

27%20%

Retail

22%

57%

21%

RPA Cognitive & AI

12 3

Survey findings1 When implementing cloud, 57% of Retail respondents had their expectations met and 33% had their expectations exceeded.2 When implementing RPA, 53% of Retail respondents had their expectations met and 20% had their expectations exceeded.3 When implementing cognitive & AI, 57% of Retail respondents had their expectations met and 22% had their expectations exceeded.

The vast majority of technology implementations meet or exceed expectationsWhen implementing each of the technologies covered by the survey, at least 73% of Retail respondents had their expectations met or exceeded (see figure 25).

Figure 25. Results of implementing technologies

37


0

10

20

30

40

50

60

70

80

RetailGlobal

% o

f tot

al r

espo

nden

ts

In process of implementationNot implemented but planned

38% 39% 39%33%

24%20%

62%

47%

59%

24%

14%

63%


Cognitive technologies: Artificial intelligence and machine learning

Business Intelligence (Not including Cognitive or AI)

Cloud Solutions

2 2

3

57%

48%41%

25%

9%

14%

66%

25%

55%14%

61%

11

3

Survey findings1 Automation (66%) is expected to be the most actively implemented technology in Retail over the next

24 months, followed by cognitive/AI (61%).2 Cognitive/AI (63%) and automation (62%) are expected to be the most actively implemented technologies

globally across industries.3 Expected implementation activity for cloud is much lower in Retail than globally across industries

(-22 percentage points).

Automation is expected to be the most actively implemented technology in RetailOver the next 24 months, the technologies expected to be most actively implemented in Retail are automation (66%) and cognitive (61%). The technology expected to be least

actively implemented is cloud (25%), most likely because current implementation levels for cloud are already very high (see figure 26).

Figure 26. Technology implementation levels (next 24 months)

38


39


Cost management practices and approaches have grown increasingly sophisticated over time, with digital solutions— although still maturing—now representing the most advanced level of cost management. Companies that relied on more traditional cost management methods in the past are finding that digital solutions can open the door to a whole new level of savings—as well as enable new and more innovative business models.

The rise of digital technologies and innovations is also contributing to a shift in how retailers around the world approach cost management, with the save-to-grow mindset from 2017 steadily expanding into a save-to-transform mindset where investments in digital enablement and transformational technologies play a key role.

Save-to-transform as a catalyst for embracing digital disruption

40


Digital disruption as external risk Technology implementation as a strategic priority

0.0

12.5

25.0

37.5

50.0

62.5

75.0

87.5

100.0

0.0

12.5

25.0

37.5

50.0

62.5

75.0

87.5

100.0

75%73%

77%

68%

61%

75%

70%

84%

73% 73%

86%

Past 24months

Global

Next 24months

Past 24months

Retail

Next 24months

80%

+8%

% o

f res

pond

ents

% o

f res

pond

ents

1

1

Digitaldisruption

Digital disruption (84%) is the top external risk in retail.

Technology implementation has risen to become the top strategic priority in retail.

2

A

A Digital disruption is now the top external risk in the Retail sector (84%).

1 Over the next 24 months, technology implementation is expected to be the Retail sector’s top strategic priority (86%), exceeding the global average (73%).

2 Technology implementation as a strategic priority is expected to increase by 8% from the past 24 months to the next 24 months.

Digital rises to the top of the Retail agendaDigital disruption is now recognized as the top external risk in Retail (84%). Meanwhile, technology implementation has emerged as the Retail sector’s top-rated strategic priority over the next 24 months (86%)—an 8% increase over the past 24 months (see figure 27).

Figure 27. The rising importance of digital issues in Retail

41


TurnaroundSave-to-turnaround. Focus on immediate actions to reduce costs, maximize liquidity, achieve stability, and capture savings to avoid further deterioration of the business.

FundSave-to-fund. Focus on actions that help improve cost and competitive position; avoid cuts that might inhibit future growth rebalance costs to fund investment in business strategy enablers.

GrowSave-to-grow. Enable or develop a scalable cost/business platform to fuel growth and investment in core capabilities while supporting a differentiated business strategy.

TransformSave-to-transform. Invest in digital technologies and technology infrastructure to make operations more efficient and effective, enabling new and more agile business models to prosper in a digitally disrupted market.

Turnaround Fund Grow Transform

Cost levers

Liquidity Cost Growth Growth

Cost Growth Cost Cost

Talent Talent Talent Talent

Growth Liquidity Liquidity Liquidity

Prio

rity

+

-

Save-to-growIn the recent past, most Retail companies were firmly grounded in save-to-grow mode. Cost and growth were the main business levers, with talent (including capabilities) as another key component. In this mode, cost reduction is a

high priority, with cost savings used to fund growth initiatives and strategic investments that support a differentiated business strategy (see figure 28).

Figure 28. The continuum of cost management approaches

42


1. Save-to-turnaround 2. Save-to-fund 3. Save-to-grow 4. Save-to-transform

Scope Narrow Broad

Competitive situation

• Losing market share • Structural operating flaws • Liquidity concerns • Flat profit growth

• Adjusting to demand levels • Growth concerns • Healthy balance sheet • Excess cash flow/reserves • High growth potential

Playbook

Defense-oriented playbook

• Short-term tactics to improve balance sheet • Cash flows • Stabilize business through any cost and/or liquidity

improvements • Compensate sales decline

Growth-oriented playbook

• Achieving profitable and sustainable growth through structural cost efficiencies and improvements

• IT investments • Innovation • Actions to strengthen performance and competitive position

Cost levers priority

Save-to-turnaround Save-to-fund Save-to-transform levers

Growth Talent Cost Liquidity Growth Talent Liquidity Cost Growth

Technology

Talent CostLiquidity

New

Low Low HighHigh Low High

Save-to-grow expands into save-to-transformNow, many retailers are moving into save-to-transform mode, with the save-to-grow mindset expanding to include a strong focus on digital enablement and technologies that can transform a business and help it capitalize on the vast

opportunities in an increasingly digital world. Shifting into save-to-transform mode means that in addition to cost, growth, talent, and liquidity, technology is also a high priority (see figure 29).

Figure 29. Save-to-grow expands into save-to-transform

Save-to-transform not only helps a company capitalize on digital opportunities, it can also position the business to withstand potential adversity that may be on the horizon—such as an economic downturn or credit crisis—by using the power of digital solutions as the key to unlock new levels of cost savings, efficiency, and financial performance.

43


Save-to-transform can not only help a company capitalize on digital opportunities, it can also position the company to withstand potential adversity that may be on the horizon by using the power of digital solutions as the key to unlock new levels of cost savings.

Looking ahead

44


45


Conclusion

AuthorsOmar Aguilar PrincipalStrategic Cost Transformation | Global Market Offering LeaderDeloitte Consulting LLP USA: +1 215 870 0464 International: +1 267 226 [email protected]

David Izquierdo SánchezSenior Consultant Monitor Deloitte Deloitte Consulting [email protected]

Sakshi Kastiya Consultant Strategy & Operations Deloitte Consulting India Private Limited [email protected]

This year’s survey findings—consistent with our direct experience working with leading retailers around the world—highlight the continued importance of effective cost management throughout the retail industry. Cost management and digital investment are very common among retail companies, not just as a way to ease the traditional trade-offs between price, customer value, and convenience, but also as a way to fund investments in technology and transformation that can help retailers position themselves for long-term success in a marketplace that is constantly evolving.

Although the survey results show that many retail companies are struggling to fully achieve their cost management goals, this should not deter their efforts. With save-to-transform, the ultimate goal is to strategically position a company for a digitally-disrupted future—not just to meet its short-term financial targets. Keeping this larger transformation objective in mind is essential to achieving sustained cost management success.

Also, while retail companies face unique challenges, the survey data shows that many of the challenges associated with cost reduction and digital transformation are common globally across industries. Leveraging external insights and lessons learned can accelerate the learning curve and help retailers achieve their savings and transformation goals more quickly and easily.

46


US Contacts

US Strategic Cost Transformation

(MarginPLUS™) Leaders

Caleb Longenberger

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Strategy & Analytics

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MarginPLUS™ Retail Team

Save-to-transform as a catalyst for embracing digital disruption | Deloitte’s Second Biennial Global Cost Survey: Cost management practices and trends in the retail sector

Michael Jeschke

Principal



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Global Contacts


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Documents

Retail - Deloitte US · the Retail sector, 91% of respondents plan to undertake cost reduction initiatives over the next 24 months, significantly higher than the global average across