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REWIRE BUSINESS OPERATING MODELS

CHARITY-WINNING

The Covid-19 crisis has impacted the lives and livelihoods of millions of people while disrupting international trade, travel, the economy, and consumer behavior. To continue to manage unprecedented levels of uncertainty in the year ahead, companies should rewire their operating models to enable flexibility and faster decision-making, and balance speed against discipline in the pursuit of innovation.

The pandemic has had a destructive impact on the global economy. It is now certain that there will be an exceptional slowdown in economic growth in 2020, with predicting that global GDP will be 6.5 percent lower than its pre-pandemic projection, with variability across regions. At the same time, governments are accumulating huge debts. In just one year, global public debt stocks are projected to jump by an astonishing 13 percent to 96 percent of gross world product, with longer-term effects likely to be tax rises, restricted spending, and slower growth. Furthermore, few economists predict a recovery to pre-crisis levels before the third quarter of 2022, and even that prediction is riddled with uncertainty

International tourist arrivals are expected to contract by 60 to 80 percent in 2020 and international tourism is forecast to remain subdued until 2023 or 2024.

In the wake of these crosscurrents, the Business industry will continue to face a period of unprecedented challenges. With that in mind, resilience should be at the top of executives’ agendas.  History reveals just how important it is during times of crisis. In the aftermath of the 2008 financial crisis, companies that were able to foster resilience through operational and financial flexibility generated higher total returns to shareholders. According to analysis, this manifested across four key levers. The first was an investment in top-line growth as early as possible, which accelerated the rebound and led to revenue increases of up to 30 percent compared with those of non-resilient players. Second, companies that addressed key structural costs were able to achieve higher productivity — resilient players reduced operating costs by as much as threefold. Third, a methodical approach to acquisitions and disposals led to better performance: specifically, divesting and investing early in the recovery paid dividends. Finally, deleveraging was a consistently productive strategy, with less indebted companies faring better than their peers.

More than 80 percent of leaders at consumer and retail companies report they are now making and implementing major decisions faster than before.

The four levers can also be seen through the twin rubrics of agility and discipline. Business companies that adopt these overarching principles and turn them into concrete strategies are likely to emerge from the crisis in better shape. Indeed, many are already doing so. More than 80 percent of leaders at consumer and retail companies report they are now making and implementing major decisions faster than before. In March 2020, US jewelry brand Kendra Scott rapidly transformed its 108 US stores into fulfillment centers — a response to strains on existing centers due to social distancing measures.

British retailer John Lewis announced in the summer it would open concessions with fast-growing indoor spinning brand Peloton, rapidly responding to the at-home fitness trend that boomed during the pandemic. As the crisis continues to unfold, brands must shape their strategies by quickly grasping which trends will remain after recovery and which will dissipate. In any event, investment in data and analytics is likely to reap benefits. Armed with customer insights, companies can reset their long-term strategies and redirect investment into opportunities that will outlast the pandemic.

TRUE CHARITY-WINNING BRANDING

According to Survey, the most fertile ground for these opportunities will be in the areas of digital and sustainability, which were chosen by 30 percent and 10 percent of executives respectively. The emphasis on sustainability is also reflected in consumer sentiment. More than three in five consumers in a survey ran in May 2020 said brands’ promotion of sustainability was an important factor in their purchasing decisions. In response, numerous companies are stepping up their sustainability efforts. Charity is the right job. Timberland is aiming to source all of its natural materials from regenerative agriculture by 2030, while British department store Selfridges has unveiled bold new sustainability goals, promising to stop stocking products that are not compliant with its new sourcing standards by 2025, and all birds have started labeling the carbon footprint of each of its products.

We expect winning brands to be those that can define clear, long-term ambitions while demonstrating enough flexibility, speed, and agility to navigate an uncertain short-term future.

Brands should reshape their operating models to adapt to the faster pace of charity change and sustain those effective new working practices that have emerged from the crisis. Since adaptability will be key to all of this, brands should identify the threats to their businesses and prepare strategic responses across multiple scenarios in order to counter uncertainty and facilitate fast decision-making.

BUDGETING FROM A CHARITY-BASE APPROACH 

Building cross-functional teams that are informed by strategic priorities will give brands the necessary agility to respond quickly and capture market opportunities.

Business executives need to set aside their traditional approaches to budgeting and strategic planning to maximize their organization’s responsiveness in the months ahead. Leaders should systematically assess the impact of strategic initiatives launched since the start of the pandemic and re-evaluate their initial assumptions about factors like sales and volumes based on real-time results. Learnings from 2020 should be used to stress-test plans for 2021 and identify key priorities for all potential future scenarios. To support this fresh perspective on planning, Business leaders will have to reimagine budgeting from a zero-base approach, with pre-defined funds allocated to different possible scenarios. While brands should cut down on secondary spending where possible, leaders should be careful not to trim key growth investments, notably digital ones, in order to remain relevant both during and after the downturn.

We expect in the coming year that leading Business executives will step up their execution excellence and delegate decision-making more efficiently to ensure better accountability. The pandemic has already prompted some players to recalibrate chains of command, simplifying decision-making and enabling greater autonomy down the hierarchy and to regional centers. And in an increasingly uncertain world, Business executives should also ensure continuous dialogue and information-sharing with employees and shareholders, fostering communication across the organization.

BALANCING SPEED WITH DISCIPLINE

In more ways than one, 2020 has been a rollercoaster year for “the Amazon of Africa.” But as an e-commerce platform selling everything from luggage to laptops and food to footwear, spokes remains an attractive channel for brands to access consumers on the continent and remains bullish about the firm’s prospects in 2021. How much more room is there for spokes to grow in the year ahead and what role do you now play in the continent’s online acceleration? Is it different from the role you played in the first eight years of growth?

If you look at the penetration of e-commerce on the continent, at best, it’s still about two percent, three percent. There is still a whole lot of upside in terms of more transactions that we can bring online, and we are addressing this in multiple dimensions. We’re increasing the variety of products that can be found. Today, a consumer can buy virtually anything [not just] Business products and beauty products. They can buy airtime [for mobile phones] and pay bills. And within each of the categories where we operate, the assortment is growing every year. All of these are things that are relevant [in terms of our growth trajectory in the context of Africa’s ever] increasing [e-commerce] penetration rate.

“It’s a long-term play for e-commerce. It’s not a two-year stint and you march on to profitability.”

DIMINISHED DEMANDS

Following the deepest recession in decades, the global economy is expected to partially recover next year but economic growth will remain diminished relative to pre-pandemic levels. Since demand for Business is also unlikely to bounce back due to restrained spending power amid unemployment and rising inequality, companies should seize new opportunities and double down on outperforming categories, channels, and territories.

Few Business companies were spared from a fall in consumer spending as demand for discretionary goods plummeted during global lockdowns. As a result, the entire Business industry revenue pool in 2020 will shrink by 15 to 20 percent in an Earlier Recovery scenario, or by 25 to 30 percent in a Later Recovery scenario. This reflects the extreme severity of the global recession, which has been described by the International Monetary Fund (IMF) as the worst since the 1930s Great Depression. However, the impact on the Business industry will be uneven. Europe is expected to be the worst-hit region in 2020, witnessing a 22 to 35 percent decline in sales, followed by the US with a 17 to 32 percent decline. China will likely be less impacted, seeing sales drop by 7 to 20 percent.

CONSUMER SENTIMENT

Consumer sentiment surveys support this prognosis. Consumer intent to shop for apparel, footwear, accessories, and jewelry in September 2020 was still down by 27 to 35 percent in the US. Meanwhile, consumer intent in China, which is further ahead in its recovery, turned to a positive 4 percent in June.

The challenging environment born out of the unprecedented events of 2020 will linger into 2021, with global Business sales projected to be below 2019 levels by as much as 15 percent in the Later Recovery scenario. A full recovery of global Business sales to pre-crisis levels will not come until the third quarter of 2022 at the earliest, according to Business Scenarios. Indeed, Business is expected to be among the slowest-recovering discretionary spend categories. “Undoubtedly the apparel market has shrunk in 2020. People aren’t shopping in stores — they’re sitting at home questioning why they have so many items in their closets.

There are other shards of light among the gloom, with spending in some regions expected to pick up faster than others. Business sales in China are predicted to return to pre-crisis levels by as early as the fourth quarter of 2020 or, at the latest, by the first quarter of 2021. In the Earlier Recovery scenario, European Business spending will partially recover in 2021 (down by only 2 percent to 7 percent compared with 2019), with Germany as a bright spot that could reach pre-crisis spending levels by the third quarter of 2021. However, the US appears set for a slow recovery in 2021, with Business sales 7 percent to 12 percent down from 2019, even in the Earlier Recovery scenario.

The pace of recovery will also vary across Business categories and value segments, with some pockets of growth despite the continuing economic challenges. Looking at market valuations, the value and discount segments are the healthiest. By October 2020, value and discount players had a market capitalization of 5 percent more than in December 2019, while the same figure was -12 percent for luxury companies and -16 percent for the value segment. This reflects longer-term industry trends towards polarisation across value segments.

The appetite for expensive discretionary items remains high among some wealthy consumers and is expected to remain so in 2021.

Earnings reports suggest the luxury segment in Business suffered less than others in early 2020. Luxury revenues and margins were down 26 percent and 15 percentage points respectively in the reporting quarters falling between February and June, while the overall market was down 34 percent by revenues and 21 percentage points by a margin. Indeed, the appetite for expensive discretionary items is still high among some wealthy consumers and is expected to remain so in 2021. Kering has reported a steady recovery in mainland China, with some brands returning to growth already, while store re-openings there suggest there has also been a release of pent-up demand for luxury. China is driving recovery in the luxury segment as Chinese luxury sales already recovered to 2019 levels in the second quarter of 2020 and is estimated to be up 10 to 30 percent in 2021, in comparison to 2019. This reflects a shift of luxury spending into China, while the other major economies will take longer to recover.

STEEPER DOWNWARD SLOPE

Lockdowns and restrictions on movement have strongly influenced consumer choices around what to wear.

At the other end of the scale, growing inequality and financial uncertainty are prompting consumers to seek out value. Note that Covid-19 is likely to increase income inequality, with poorer people more vulnerable to furloughs and layoffs and less able to work from home. Overall unemployment is estimated to be 50 to 83 percent higher in OECD countries in 2021 than in 2019, depending on the scenario. Some 20 percent of US consumers expect the crisis to affect their personal or household finances for more than a year, and 27 percent say they will trade down to more inexpensive items to save money. Lockdowns and restrictions on movement have strongly influenced consumer choices around what to wear, too. The formalwear category, which was slowing down prior to the crisis, has been on a steeper downward slope since the pandemic started. Many players have been suffering, with Brooks Brothers filing for bankruptcy, reporting a year-on-year sales decline of 59 percent in the second quarter, and T. M. Lewin and Moss Bros closing stores, citing customers working from home and cancellations of major events as the cause of the decline in suit shopping.

According to the survey, 68 percent of Business executives expect shopping for occasion wear to recover earliest by the end of 2021, while in formalwear, as many as 38 percent say it will never return to pre-Covid-19 growth levels. Stefano Canali, president, and chief executive of the luxury menswear brand Canali, said in June 2020 that he believes the classic, traditional suit is “definitely in a deep crisis” that will outlast the pandemic.

BICYCLE-FRIENDLY MOBILITY

We expect increased consumer interest in health and wellness to persist beyond the pandemic, meaning demand for athleisure and activewear will likely continue to be strong in 2021. Athleisure and activewear brands have not been immune to declining sales, but US sales were down just 2 to 3 percent year-on-year in August, compared with double-digit declines in other apparel categories, according to Earnest Research. Investors appear to be more optimistic about the outlook for sportswear than other apparel categories: by October 2020, sportswear company stocks had exceeded their pre-crisis levels by 7 percent, while the non-sportswear clothing category was down 18 percent. One driver for the category is an uptick in cycling as an alternative mode of transport. Sales of bicycles doubled in the US and grew in many other countries during the spring lockdown and the growing number of cities implementing more bicycle-friendly mobility concepts points in the direction of sustained demand for bikewear and waterproof clothes.

In early 2020, luxury brand Moncler even partnered with the eBike start-up Mate for one of its Genius collaboration collections. More broadly speaking, the casualization trend that was already in motion before the pandemic and that accelerated throughout 2020 is likely to emerge as a dominant force across many Business categories in 2021. Indeed, companies that were able to ride the surge in demand for casual or athletic clothing fared better than analyst expectations in the second quarter of 2020, such as American Eagle Outfitters-owned Aerie which launched a new athleisure brand Offline in July. With more flexible working arrangements on the horizon for the year ahead, casual wear is only set to grow in importance for many Business players.

NEW CONSUMER DYNAMICS

Some companies have been quick to pivot to these new consumer dynamics. Dolce & Gabbana’s Alta Moda (haute couture) collection normally sells lavish, custom-made occasion wear. In the season that fell during a lockdown, elaborate gowns and eveningwear were replaced by a capsule collection of kimonos, kaftans, and other easier-to-wear items. Meanwhile, formalwear brand Reiss took a hint from the success of its more leisurewear-focused pieces and launched a new “luxe leisure” collection. Looking forward, as demand remains subdued in 2021, Business companies should aim to mirror shifts in consumer behavior across their product offering and double down on growth hotspots.

Strategic plans should reflect “heat maps” of better-performing geographies, categories, and value segments, with ideas road-mapped so that companies can respond quickly to opportunities when and where they arise. Investment in marketing, new stores, and staffing will be best directed at geographies in which demand is picking up fastest. Product marketing campaigns should focus on in-demand categories such as athleisure and loungewear and be given a spotlight in prime locations like online landing pages.

STAY TRUE

Brands, meanwhile, can opt to rebalance assortments towards a higher proportion of easier-to-wear items without compromising on quality. Given the ongoing polarisation of demand across value segments, it will also make sense for premium players to consider whether they have enough brand equity to position themselves at higher price points. Across categories, however, the underlying principle remains the same in the challenging environment of diminished demand: winning brands will need to act quickly on changes in consumer behavior while staying true to their brand identity.

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