Eyes on Retail Resilience
While most retailers are looking to 2022 with cautious optimism, challenges remain, and retailers in different revenue segments may not experience success equally. The 2022 BDO Retail CFO Outlook Survey polled 100 retail CFOs to gauge the current state of their business and their expectations for the year ahead.
- Retailers enter 2020 with high confidence, but COVID-19 delivers an unexpected punch
- Retailers rely on digital capabilities such as BOPIS (buy online, pick up in store), mobile ordering and e-commerce to stay afloat amid store closures
- In-person shopping resumes and consumer demand and access is unleashed
- Retailers continue to expand their digital strategies and rethink their business models to anticipate the new normal
- New challenges arise in the form of product and material
- Strain remains, including the labor shortage, supply chain crisis and rising costs
- Some retailers feel equipped to tackle them with the right strategies and investments
- Necessity is the mother of invention. Retailers revaluate
For the purposes of this report, retail CFOs self-assessed their company’s performance as thriving, surviving or struggling:
Looking ahead, with risks weighing heavily, retailers’ approach to growth is largely slow and steady, with almost half (46%) saying they plan to pursue gradual, continuous growth this year. Twenty-one percent say they are taking a big risk, big reward approach to growth, but even this group has tempered revenue expectations:
Overall, 26% of retailers expect revenue decreases in 2022, down from 44% that expected a decline at the beginning of 2021. Retailers are bouncing back from pandemic lows, but their optimism remains tempered against the anxiety of a changing business model of offline and online access that consumers demand. Retailers’ performances also vary depending on company size and vertical: Big-box and discount retailers are more likely to indicate their business is thriving, versus smaller retailers and department stores, which tend to be surviving or struggling. With differing levels of available resources, each category has distinct focus areas and anticipated challenges for 2022.
Defining Characteristics of Thrivers, Survivors and Strugglers
- Taking a gradual, continuous approach to growth
- Holding a minimum 3-6 months of cash
- Expect revenue to increase in 2022
- Investing in user experience (UX) design to improve customer experience
- Prioritizing customer delivery service amid supply chain slow downs
- Using tax strategies to prepare for future disruption
- Taking a big risk, big rewards approach to growth
- Holding less than 3 months of cash
- Expect revenue to increase in 2022
- Investing in logistics and inventory management to limit shipping errors and reduce returns
- Concerned about staffing, particularly at distribution centers
- Looking to renegotiate store leases for the short term to prepare for future disruption
- Taking a gradual, continuous approach to growth
- Holding 3-6 months of cash
- Expect a decrease in revenue in 2022
- Almost two-thirds are pursuing M&A and nearly one quarter are seeking a carve out or divestiture
- Concerned about the costs of attracting and retaining qualified employees
- Considering collaborations or partnerships for greater network value in 2022
A Reevaluation and Rebalancing Act
Retailers’ business strategies in 2022 vary depending on performance category, with Strugglers seeking new paths to success. More than a quarter (26%) of struggling retailers are planning to spin-off non-core assets. A strategic acquisition or divestiture may be a way to explore a new model for revenue generation or bring in needed cash. Those in the surviving category are investing in continued digital adoption of technologies, while those who identify as thriving are pursuing improved customer experience and breakthrough innovation that creates a new market — a move that may create outsized competition for retailers in lower performing categories.
Coming out of the pandemic, even those who describe themselves as stable are reevaluating their business, with a focus on reducing debt levels, restructuring the terms of their lease agreements, and finding the right balance between e-commerce and brick-and-mortar. More than a quarter of thriving retailers (26%), and the same percentage of retailers overall, are planning to restructure or reorganize. In addition to pursuing these business strategies, cash is likely necessary to make any meaningful improvements.
While cash on hand alone does not indicate overall health, 45% of retailers say they have less than three months’ cash on hand. It’s possible these companies recently made significant investments and are waiting to reap the rewards. However, 43% of retailers say they want to keep more cash on hand to mitigate future turmoil. After pandemic disruption, supply chain difficulties and a labor shortage, having excess cash can be a fail-safe not only for emergencies, but also to fund required new investments in technology, ranging from expanded customer access to products and services. Ultimately, these investments will result in new revenue opportunities.
The struggling retailers who say they’re taking a gradual, continuous approach to growth may find themselves further in the red if they do not take a more aggressive path. We urge them to explore all avenues for improvement, including how they execute their business model. Depending on their liquidity, they may be able to look to a partnership or M&A to bring new perspective, technologies, product access or digital marketing opportunities. Regardless of the strategy, now is not the time for incremental change.
Relationship Between Interest Rates and Borrowing
Retailers’ growth, of course, depends not just on conditions in the retail sector, but also on conditions in the market at large. Since the 2008 financial crisis, retailers have turned to borrowing to finance their growth, especially in light of low interest rates. Rates began to tick up again starting in 2015 but remained low compared to pre-2008 rates and plummeted once more at the start of the pandemic. In 2022, retailers expect to continue borrowing heavily. But does rising inflation spell the end of low interest rates?
Last year, debt amounts varied by company size. Retailers with revenue under $500 million took on more debt than their larger peers as their path to recovery proved harder. However, in 2022, companies of all sizes plan to take on more debt as they continue to invest in supply chain management, refine ordering models like BOPIS, and improve instore and e-commerce customer experiences.
At the same time, the retail subsector played a role in borrowing trends. For instance, the e-commerce model lends itself to greater agility and involves fewer significant, recurring payments on companies’ balance sheets such as leases, salaries for store staff, utilities and other brick-and-mortar costs.
The retail industry at large is no longer in the trenches of the pandemic, but some retailers are still clawing their way out, and all are grappling with the ripple effects. A gradual, continuous road to growth may be the right approach for those back on stable ground but struggling retailers may need to take bigger risks as soon as they can, whether or not the economic environment is ideal.
So far, some retailers have passed on rising costs to consumers without significant pushback. With savings and stimulus checks from 2020 and 2021, many consumers have willingly paid higher costs. But as aid is phased out, we are likely approaching a price cliff, beyond which consumer demand may drop off.
Softening consumer demand due to economic uncertainty may be compounded by borrowing uncertainty. For years, retailers have relied on debt to finance their growth and pay off expenses. However, it’s unclear if the era of low interest rates will continue to last much longer. As inflation rises, the federal reserve may raise interest rates, which could make current borrowing levels unsustainable. At the same time, as most retailers use an asset based lending approach, they could find access to borrowing constrained if they have inventory that is not selling. We may see retailers look to other sources of funding and turn to investors.
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BDO’s 2022 Retail CFO Outlook Survey polled 100 retail industry CFOs with revenues ranging from $250 million to $3 billion in October 2021. The survey was conducted by Rabin Research Company, an independent marketing research firm, using Op4G’s panel of executives.