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June 2023 | By Michael Calamari, Michelle Meyer, John Mooney and Evan Voshell

Financial leaders in retail don’t have it easy these days. You plan for risks connected to the global economic cycle and examine the 2023 economic outlook. You try to anticipate the potential impact of the economy on consumer spending patterns, market swings and retail sales. You consider costs, including labor, real estate, pricing and resource allocation. Focused on what you can control, you aim to protect your company’s margins.

But those decisions can’t be made in a vacuum. Informing those decisions are data.

All too often, retail financial leaders are inundated with data from internal and external reports or forecasts. You receive estimates without a direct prescriptive tie to business performance, making it difficult to steer a path forward. Data can be a significant help, if tied to business performance. And when a financial leader has better retail data insights, it can lead to smarter, faster decisions and better outcomes.

Data can be a significant help, if tied to business performance.

In the highly competitive, fast-paced and complex world of retail, there are no easy, one-size-fits-all answers. Here are five questions for financial leaders to ask to help move their brands forward in the current 2023 economy.

How can we understand our strategic investments in the 2023 economy?

No retailer wants to be treading water while competitors innovate beyond them. But that’s exactly what can happen when the focus is just on the next quarter and not on the next three years.

When considering whether to invest in technology or physical retail stores, financial leaders can ask big picture questions. Which investments will pay off in the long run? In the current economy, there are pockets of risk and pockets of opportunity. Consumer shopping preferences and the shift to digital present an opportunity to invest in technology, social media communication and the online shopping experience. That can be weighed against the retail store experience and competitive investments. Having relevant and timely performance benchmarks for both online conversion and in-store (sales, conversion and traffic) is key to ensuring your investments match and capture the market opportunity now and in the future. Those competitive pressures, along with potential changes in retail markets and customer expectations, must be taken into account.

When it comes to capital expenditures, in an uncertain economy, there may be an expectation that retailers will pull back on large capital investments that aren’t fully committed to focusing on critical infrastructure. But rather than pulling back on or delaying investments that are in the works but without any commitment signed, financial leaders can consider how to prioritize investments based on return on investment (ROI) in whatever time horizon is appropriate. Ensuring that the ROI assessment is done in a consistent way means retailers can make trade-offs between store expansion, major remodels, maintenance and store layout changes.

Key point for retail financial leaders

Compare and prioritize investments based on the one-year, three-year and five-year ROI. Do a sensitivity analysis on those assumptions to understand conservative and aggressive cases.

What are the best ways to bring costs down in this 2023 economic environment?

The retail industry is no stranger to making difficult decisions, especially in the past few years. With revenues for 2023 taking shape, retailers are looking to stay nimble from an expense standpoint while investing in their people and growing their business. If the top line stays healthy, many will continue to invest. Meanwhile, cost management is top of mind and retailers will be looking to improve efficiency of processes.

Testing and measuring incremental returns are essential to guiding the next steps. Having the analytics and evidence to back up decisions helps financial leaders take a more tailored approach based on how initiatives work across markets, stores or customer segments. When the economic outlook is uncertain, if you happen to be mired in a losing proposition, it’s important to make timely decisions; always-on testing helps make the picture clearer. Successful retailers won’t be afraid to walk away from losing ideas.

Successful retailers won’t be afraid to walk away from losing ideas.

Revising past evaluations can help bring down costs when some resources become more expensive and others less so. In the case of real estate, brick and mortar opportunities should be weighed against the cost, demand within a given geography and the price that individuals within a geography are willing to pay. If a retailer was considering purchasing a property, a rental opportunity may now be more advantageous. Or, in the case of technology, while it once appeared that building a technology in-house made the most sense, the cost of outsourcing or using software as a service (SaaS) might be more financially viable now because of labor costs.

The current labor market makes it critical for stores to operate with lean staffing levels, particularly as wage expectations have increased. Understanding how staffing turnover affects store profitability is key to decision making. Which store roles require investment to retain key staff members and protect store operations and effectiveness? What staff hours are needed to maintain store operations and minimize sales and transaction losses? What is the impact of employee turnover on top-line and bottom-line store performance? By analyzing past turnover events at key roles, the impact on revenue, shrink and profitability can be understood. That information can help justify investing in retention initiatives and employee benefits that will yield a return.

Key point for retail financial leaders

Quantify the pros and cons of various tactical changes and what they are expected to deliver. Analyze similar changes made in the past to form an expectation, pilot new ideas and ensure efficiency.

Keeping shifting interest rates and inflation in mind, how do we balance discounting products with protecting margins?

For financial leaders, the cost of capital and availability of credit are top of mind as they manage their balance sheet and make decisions about the business accordingly. While inflationary pressures have come down, the economy still has more inflation today than in 2019. Consumers have inflation on their minds and are more aware than ever of higher prices. Many are seeking value by narrowing down the number of retailers they’re loyal to and actively seeking out promotions and discounts.

The increase in costs has prompted retailers to make price adjustments as a balance – and making price adjustments without negatively impacting consumer demand and while protecting margins is a tightrope walk. Being focused with discounting is key in an uncertain economic environment. Testing the impacts on a regular basis can allow financial leaders to understand the implications for volume and ensure the company is navigating price changes appropriately.

This measuring of the impact of price adjustments must factor in impacts to the products themselves, high affinity products, the customer’s total basket and their revisit rates and lifetime value. Further, there may be more elasticity in some markets and geographies than others across these KPIs. Price elasticity models at a product level won’t provide a comprehensive financial view of the changes, so brands must factor in these secondary impacts from the customer perspective.

Key point for financial leaders

It’s important to be transparent with your customers about the value your business brings to them, but internally it’s key to strategically protect your margins. Mass discounting is hard to turn off, so don’t chase the short-term, cost-conscious customer at the expense of longer-term brand strategy. Those with tight profit and loss plans can be quick to pull back from discounts on a wide scale, when the more strategic solution is often to focus the promotional dollars on targeted customer segments or through levers such as loyalty to more tactfully drive earnings before interest, taxes, depreciation and amortization (EBITDA) in a measurable way.

What can the messaging be in terms of our business outlook?

Financial leaders are said to be the conscience of the business. That’s because finance and accounting take the pulse of a business and its health. This often puts finance teams in a uniquely essential position to influence the overall strategy of the business, providing transparency and the right data points to help senior leaders navigate. That’s why financial leaders are often called upon to frame the outlook for the business for internal and external audiences.

Financial leaders are said to be the conscience of the business

When thinking of your messaging, consider that it can provide a realistic, clear-eyed view of the macro landscape and planning for multiple scenarios, from the base case to the upside and downside. Where do those exist in the business? And what metrics point toward long-term growth and profitability? When considering nominal growth versus real growth, financial leaders can be clear about the sustainability of the trends given the impact of what could be temporary inflation.

When developing talking points, build the narrative around both the short- and long-term outlook. For example, perhaps the company is growing sales and margins due to inflation, but transactions and the number of known and loyal customers is declining – or vice versa. Careful consideration of all metrics can help you share a complete and accurate business story in a complicated or uncertain economic environment.

Key point for financial leaders

Paint a complete picture of the business and its health by considering alternative metrics for success that may point towards long-term growth and profitability, all while providing a realistic, clear-eyed view of the big picture and possibilities for the business.

What additional information can I provide to my team in order to service the business better?

Finance leaders are called upon to play offense (by looking for opportunities) and defense (by protecting against potential downsides). The key to a solid strategy for both offense and defense? Having insightful data at your fingertips.

On the offense, each retailer finds themselves in a different financial position. Depending on the short- and long-term financial position of the brand in terms of working capital and free cash flow, there may be an opportunity to look onto a longer horizon for planning. Financial leaders in companies in a solid financial position, for example, can align with strategy groups to understand where synergies may exist for mergers and acquisitions. For these companies, a rise in interest rates may make the valuation of potential acquisition targets more palatable.

Protecting the business’ downside is helped by data that paints a picture of the broader retail ecosystem. In your team’s efforts to provide forecasting and drivers, consider new sources for data that can answer questions such as, “What are the leading indicators for our business around a potential downturn?” Because sales are a lagging indicator, it helps to dig deeper. Leading indicators are key and your team will want to seek out tools that enable your organization to respond in a timely way -- closer to real time -- as opposed to waiting for data several weeks out.

Having a spend analysis on a local level can help you advise the broader organization on differences in consumer buying trends in various geographies. Comparisons of online and in-store spending can help businesses capitalize on channel shifts in consumer spending. Data around geolocation and foot traffic may be a way to connect in person and offline activity or make decisions around new store locations easier. Whether playing offense or defense, the economy and drivers can hone the financial strategy your brand executes.

Key point for retail financial leaders

Consider ways to play both offense and defense. In a changing economic environment, explore new data tools and leverage those you have to make better decisions and share across the organization in a timely manner.

To understand these strategies in detail, please reach out to your Mastercard representative or contact us. To learn how retail leaders can navigate the economy in 2023, read Five Essential Questions for Retail Marketers to Ask.

Michael Calamari Vice President, Enterprise Strategy, Mastercard Data & Services
michelle meyer
Michelle Meyer Chief Economist, U.S., at the Mastercard Economics Institute
john mooney headshot
John Mooney Senior Managing Consultant, Advisors Client Services, Mastercard Data & Services
Evan Voshell
Evan Voshell Vice President, Segment Management, Mastercard Data & Services