With increasing customer expectations, retailers are struggling to provide omnichannel services while also keeping costs down. Kurt Grichel, a partner with Bain’s Retail practice, shares how retailers can use zero-based budgeting and zero-based redesign to transform their cost structures.
Read the transcript below.
KURT GRICHEL: For years now, retailers have been grappling with omnichannel. And for many, winning is defined by bringing customers the very best of both digital and physical capabilities. But this requires massive investment. And it comes at a time when margins are under pressure, customer expectations are rapidly evolving, and innovative players such as Amazon and others are providing unprecedented competitive pressure. Most retailers have responded with some degree of cost cutting. And that means the low-hanging fruit is gone.
But retailers need to do more. They don't just need to tweak their cost structure. They need to truly transform it. However, cost reduction in retail is particularly tricky. For most retailers, the largest cost bucket is store labor, and therefore this is where they instinctively start. However, this can create a doom loop, where reduced store labor leads to diminished customer experience, and therefore poor sales and financial performance, and then the need to reduce store labor further.
The other approach that we sometimes see is retailers doing a big push in a one-time cost takeout, only to see those costs creep back in over time. Only those retailers that truly transform their cost structure, often using zero-based approaches, are able to make the investments required and sustain them over time. Zero-based budgeting, or often called ZBB, is an approach that attacks costs from the customer backwards. The key here is to understand what customers value and what they don't, and what differentiates you as a retailer. Then use those principles to guide every dollar that is spent.
Often we see winners combine zero-based budgeting with a simplification approach we call zero-based redesign, which is a reset of the work and headcount required across functions. When linked with the right strategic priorities and a broader cultural change, zero-based budgeting and zero-based redesign can unlock the dollars necessary to make the investments to delight customers and keep retailers competitive over the long haul.