How you measure success goes a long way toward achieving it
Through a special arrangement, presented here for discussion is a summary of a current article from the Mark Heckman Consulting blog.
More than a few years back, I had the special privilege of taking part in a strategic discussion with Feargal Quinn, the iconic Irish grocery retailer. The question was raised as to how Mr. Quinn prioritized his day. Without hesitation he noted that the very first thing he did each morning was to look at how many customers he had the previous day. He would then look at them in the context of the previous week, previous year. For him, it was not about sales but rather answering the question, "Are my customers coming back to shop with us?"
Certainly, Mr. Quinn eventually looked at sales and other metrics, but his personal prioritization of "Customers" set the tone for how he ran his business, knowing if the customer returned, sales, profit and even EBITDA would likely follow. They did. The resulting customer-driven culture was contagious. His associates were consistently rated the best and his stores as well.
The learning here is not necessarily that we should all run our stores as Mr. Quinn did, rather we should be aware that prioritizing certain success metrics often have unintended consequences. For example, those that dwell on a metric like "gross margin rate" often elevate "hitting a specific number" to such a level of importance that they forget that the "wrong" gross margin number can negatively impact sales and customer count.
Unfortunately, the finance department determines the metrics and goals for many retailers. In my career, I met two, maybe three finance people who actually understood the importance of the customer and the intangibles that drive shopper loyalty and sales. Most do not. They assume that their set of financial metrics live in a purely linear relationship with each other.
There is a better way and it starts with an acknowledgment of shoppers and the competitive environment. To establish more thoughtful and useful goals, operators should build a financial plan within the context of the specific investments in margin, capital and labor needed to delight shoppers and effectively take market share.
It’s not a coincidence that companies that think about the customer first are generally growing and healthy while those who begin the planning process with EBITDA and gross margin rate mandates are steadily finding themselves measuring declining sales and margins.
Discussion Questions
Are EBITDA and gross margin rate mandates often overemphasized by retailers in developing financial plans? Do you agree that many finance departments don’t understand the intangibles that drive traffic and shopper loyalty?
EBITDA and gross margin rate are financial measures that should be used by the finance people, but the CEO should be the one running the company and that’s where the emphasis on the customer should come from. Not saying a finance person can’t rise to become CEO, but many retailers don’t put the customer at the center of their universe and it shows in their performance.
Look down the hall from the finance department and you’ll find another department that all too often doesn’t “get” the realities of store front retail … IT!
Somewhere along the way, IT came to believe it was the “kingpin” of retail, with finance right along with them. I don’t mean to be harsh … there are a lot of good retail minds in both IT and finance. Just not enough.
As customers become more knowledgeable and demanding, these departments and the metrics they measure and focus on will have to evolve. It’s about the customer and staff experience. Not the bits and bytes.
EBITA is an “outcome” … a calculated metric on a financial balance sheet.
Even “gross margin” is a calculated metric that is the final outcome of many behaviors related to purchases, terms and conditions, pricing, promotions, markdowns, etc.
There is nothing wrong with “outcome” metrics as benchmarks of business health and success. BUT they do not change the critical behaviors that drive the day to day actions which influence consumers. If consumers don’t open their wallets and spend, and then return again … there is no business.
Mark Heckman hits the nail on the head regarding most retailers in trouble today – they are so preoccupied with EBITA and gross margin that they try to “expense manage” themselves to profitability.
There has never been a greater need for balanced scorecards in retailing. What is most missed on scorecard metrics is not EBITA, but metrics related to traffic, conversion and NSAT (consumer satisfaction and advocacy).
Totally agree. Excellent article. A customer that visits weekly and purchases something is better than a customer who only comes once a year. You have more chances to impress and convince the weekly shopper to buy more than someone who has a list and other places to go.
I absolutely agree, the finance and IT departments are missing what really drives a business. Finance can tell a business if it is on track to meet goals. But it is what happens up front where the customers are that makes a business successful.
The role in retail of the finance and IT functions is to create a financial model and the systems to support the retail model – which should be to deliver unique and memorable experiences to the target consumer. Yet, in order to satisfy shareholders, most retailers are now driven by short-term, quarterly results-oriented metrics that ultimately lead to decisions that hurt the customer experience and thus the long-term viability of the retailer.
I think a focus on traffic is a very important metric. That and average ticket are the starting point when reviewing business performance with my clients.
To me, the larger point regarding traffic, however, is that too many retailers think the only way to drive it is with price promotions and sales, which may make traffic look good, but completely undermines the key downstream financial metrics.
Mark, I am frequently asked this question. More often, I have to address this very issue with a client. While I agree that establishing metrics is critical, I would add the following.
Establishing the correct Key Performance Indicators (KPIs) AND rewarding the correct behavior is critical to designing, and executing the winning strategy and improving stock holder equity. When all is said and done, this is the ultimate metric for CEOs.
How can leaders know if they have the correct KPIs? Management should understand where they want to go. Let’s say they wish to be the most profitable, most efficient retailer. Usually they stop at sales and profits, sometimes consider turns and inventory. However, these are LAGGING indicators. What LEADING indicators might help me know if I can achieve the sale and profits I desire? I encourage clients to consider market share, share of wallet, visits, trips, basket size, conversions (trips that convert to sales in various departments), consumer experience scores, net promoter scores, etc.
The other problem I see is that many companies fail to REWARD the right behavior, or they reward conflicting behavior. It is management’s responsibility to align rewards with the correct behaviors so that the organization can achieve the vision/goal.
BRINGING IT HOME: I have seen retailers fire merchants because sales or profits were low, only to see that that same merchant or buyer was in a deflationary category and share was actually growing. Conversely, I have seen others rewarded because sales and profits were up. A closer examination, showed the category was losing share and simply looked good because of price hikes and inflation. I have seen management reward membership for growing the number of members, only to fail to ask at what cost, or compare whole year memberships with partial year memberships.
Failing to 1) set a vision (setting and getting buy-in for where we are going), 2) define the correct KPIs and 3) reward the RIGHT behavior are three of the five fatal flaws of management!
Well done, Mark. (And great comments, Chris!) Beware of summary metrics that seem simple to define, but are the outcome of multiple causal influences.
I too am an advocate of balanced scorecards (and “storecards”) that reflect retail’s financial, operational, and customer equity goals.
I always think it’s a mistake to put CFOs in charge of companies for exactly this reason; lack of EQ. EBITDA is short term thinking IMO, which fuels long term disaster, and a “money person” just can’t help but look at data to make decisions vs more emotional elements like customers, managers and vendors.
To the grocer’s point, being out in stores (that’s plural) and actually talking to customers can provide much more information than any stat sheet or all the Big Data in the world. That EQ level needs to be at least as high as the IQ, for starters.
Financial metrics, like EBITDA are critical to measure. However, I have always agreed that customer measures should be analyzed, in addition. My favorite one for any retail store with multiple departments is not “percent revenue compared to total store,” but “percent of total customers shopping each department.” The % to total revenue can only increase for one department if it goes down for another one.
If the store has 1,000 customers per week making a purchase, using the second metric will identify how many of those customers shopped each department. The goal is to have 1,000 customers purchasing in each department. That may not ever happen, but it drives the total store revenue higher.
Great article. Of course finance and IT development are essential to running a business – understanding the costs of doing business, of attracting customers, are givens. But what matters most in keeping a retail business viable is its core vision and values that bring customers in the door and how often they return. Most businesses grow organically, building, retaining and growing the customer base. Not understanding the value proposition that resonates with core customers will drain the company of the energy for growth.
Yes. As I see it, finance departments are looking at the situation through a different set of lenses. When you consider the potential reach of the center of influence for each one of your customers, it is not as easily measured. Remember, people do business with who they like, know and trust. It is hard to be likeable when you treat your customers like a number.
A friend of mine is fond of saying, “You can spend dollars, but you can’t spend percentages.” And how right he is. Hitchhiking on Bill Davis’s comments, it’s unfortunate that CFOs frequently ascend to CEO positions.
There are different types of measurement. You can look at financials, but they only tell you a big picture. I want to know how often a customer buys, how much the average ticket is and more. I also don’t just want to measure repeat business, but also how much of what we have to offer does the customer buy from us versus a competitor. It’s one thing to have “loyalty” in that the shopper returns. The shopper may still visit our competitor, and maybe even more often than they visit and buy from us. So, don’t think that a repeat customer is anymore than just that – a repeat customer. It’s another story if they are 100% loyal to us. That’s the difference between market share and wallet share.
The best companies understand their financials AND the details of what drives those financials.
Chalk and cheese, apples and oranges, I would expect most companies don’t expect financial-types to think about the customer!
There are different metrics for different purposes.
Companies need financial plans with measures such as EBITDA and GM, as well as productivity measures that measure margins per square foot. Businesses can’t operate without understanding the costs they can absorb and the cash they generate. Finance departments exist for this purpose.
Companies need growth plans to understand shopper metrics such as trips and basket size. Further, managers need an understanding of customer segments — especially how to identify most valuable shopper segments. Marketing departments exist for this purpose.
The problem lies in the lack of balance in the disciplines, and Chris Petersen’s point about Balanced Scorecard is spot on.