The Transformation Trap

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\"\"Ever-emerging new technologies and new financial realities, constantly changing consumer preferences and ruthless competitive challenges make effective transformational leadership a retailing management imperative. While maintenance of the status quo may have worked in the past it’s a deadly practice now. Even highly successful retailers must recognize that the firm ground they stand on today can easily become quicksand tomorrow. But recognition for the need for change isn’t good enough. Devotion to change management isn’t good enough. Without tremendous forethought, skill, discipline, proper investment and investor support, change efforts can lead to disaster. I’m calling this the “Transformation Trap.”

The Power of Forethought

Transformation requires tremendous powers of forethought. No one can know the future, but successful retail leaders must be willing and able to consider what the future may hold. A profound power of acknowledgment of all things visible and things yet to be fully revealed is vital. This demonstration of leadership requires intellectual capacity and curiosity. Transformational retail leaders must exhibit and foster contact with their company’s people at all levels, their customers at all touch points, their competition, and the world at large. A retail CEO who is not intellectually curious, does not read, visit stores and other company facilities and competition on a regular basis, and who does not travel the world is a failure waiting to be unmasked. Additionally, transformative behavior must be widely supported throughout an organization. This corporate cultural bias enables change management to be effective. Consultants can be powerful facilitators in all of this but they should not be called upon to do any of the heavy lifting in looking out into the future. A retailer that doesn’t constantly consider what the future may hold isn’t likely to have one.

Remember Borders’ famously foolish decision to ignore the onset of digital technology in the name of protecting the viability of the physical book and its brick-and-mortar marketplace? If only their self-described avid reader CEO had observed and then properly acted upon the wholesale migration of customers over to the and Kindle platforms.

A Need for Expertise

Transformation requires tremendous skill in both conceptualization and implementation. Retail leaders need to be able to envision the future in the form of strategic plans. But they must also be able to provide their organization with road maps to enable them to navigate by to achieve those plans. For virtually all organizations, transformation must take place while business as usual goes on. This is analogous to changing a tire on a car while it hurtles down the highway. This is no easy task and, in and of itself, represents tremendous jeopardy. You cannot change your assortments and pricing regimes abruptly without running the risk of wholesale customer upheaval, as JC Penney discovered with near fatal consequences. The right answer for them would have been to create a gradual and tested transformation path from where they were, which was essentially nowhere, to where they wanted to be. The wrong answer was to assume their vision for the future would be immediately adopted, which it obviously was not.

Transformation requires knowledge of, and insight into, both intended and unintended consequences. When Sears Roebuck abruptly exited the cosmetics business, it unwittingly signaled a lack of devotion to the very core female customer that had led the company out of the darkness years earlier. This was a $350 million effort that the company had painstakingly created as a capstone to its RTW business. It must be said that cosmetics was not profit-positive at that time at Sears, but it was about to become so. To further compound this decision (made in the name of transformation but, in fact just a financial Band-Aid), the company had no idea what to do with the real estate the business occupied in the main mall entryway of 800+ of its stores.

Discipline in an Age of Chaos and Confusion

Successful transformation of an organization from where it is now to where it feels it must go tomorrow requires enormous discipline. The general gives the order, but the troops must be in lockstep for the army to reach its destination. There must be a willingness to support trial before a headlong action is taken. There also must be a devil’s advocate presence in residence lest an organization become drunk on its own view of the future without regard to the consequences of failure.

In the early 1980s a group of young Turk executives at Target, then a rapidly growing but still regional discounter, advocated strongly for mounting a price war against Walmart. Walmart, though larger than Target, was also still a regional discounter. They were incensed that an organization based in Bentonville,Arkansas could express itself as the everyday low-priced retail leader. Fortunately, Target’s CEO was disciplined enough to slow down his team and insist that they try their strategy to undercut Walmart in price in a test before jumping in, full tilt. The test covered several hundred branded items and ran in a handful of Target stores managed from their Dallas regional headquarters. It was an abysmal failure.

Walmart immediately noticed the test and responded to it vigorously—not just meeting but successively beating Target’s prices. Not only that, Walmart loaded its stores with enormous amounts of inventory and encouraged customers to have at it. All this while Target was limiting customers to the quantities they could purchase of these signaling items. Recognizing the need for strategic differentiation, but also recognizing their inability to beat Walmart consistently in price, Target adopted a strategy of price parity and a companywide focus on trend merchandising. Thus was born “Tarjay” —an enterprise-wide point of view that served the company well for quite a few years until the company lost the discipline necessary to sustain it.

Transformation: It’s Not Quick, It’s Not Cheap

It takes two to five years to successfully transform a retail company, especially a long-established retailer of any appreciable size. There, I’ve said it, and I’m sticking to it. Two to five years. This reality flies in the face of today’s activist investors who claim to have a long view but in fact, in many cases, absolutely do not. In light of these short-fuse expectations, retailers who try to move too quickly take on enormous strategic and operational risk. Target’s attempt to transform itself into a global retailer, in one fell swoop in Canada, turned out to be a $7+ billion catastrophe. Target could have successfully entered Canada if only they had taken the time to get it right. JC Penney’s attempt to quickly pander to a duo of well-heeled but mindless investors seeking immediate transformation resulted in a $3.2 billion loss in sales in just a year—and a cascade of horrific losses that continue today.

And then there is the transformation trap that retailer’s like Macy’s find themselves in, facing poor sales, sagging profitability and lagging stock prices. To further underscore Macy’s dilemma, the company can’t seem to articulate a transformational strategy that anyone believes in. It must be said that becoming a retail REIT, which is a path a retailer under pressure like Macy’s may be on, only works if a retail tenant can afford to pay its rent. Merging with HBC is not a transformational event. It’s merely Federated/Allied/Campeau Corp. redux. It’s an ill-advised financial play that does nothing to remediate the fundamental issues these companies face.

When a retailer is merged into, or acquired by, either another retailer or a private-equity group, the transaction is usually called transformational. Unfortunately, the new debt load that’s taken on along with the strategic and operational burdens, net of so-called synergy savings, is more a trap than anything else. Since a majority of mergers and acquisitions fail, it’s easy to understand why many describe “synergy” as a four-letter word.

Bankruptcy—The Ultimate Transformation Trap

U.S. bankruptcy laws were originally created to enable an enterprise (or an individual) unable to conduct its business normally to remediate its financial woes. Thus, lenders or suppliers would be encouraged to work with clients or customers to preserve their relationship for the future. Though original owners would likely lose their prepetition equity, creditors would be granted new equity in a reorganized company in return for their forbearance. Well intended, but for medium-to-large retailers this process does not work. Most retailers that fail to transform themselves in the normal course to remain viable, and that voluntarily or involuntarily enter Chapter 11 proceedings, never recover. If they do emerge from Chapter 11, they often quickly return to bankruptcy (sometimes referred to as Chapter 22) and then go into a final liquidation. The reason is very simple—the professionals involved are driven by fees, not by the success of their efforts, and creditors are typically investors in a company’s distressed debt whose only interest is a return on their investment. Companies that emerge from Chapter 11 are typically no better off than they were when they went into restructure. Their new balance sheet, in place of the broken one it replaced, is often just as unworkable.

A Bold Stroke of the Obvious

Long-term success in retail requires successful business transformation that is considered an organizational imperative. Poorly executed transformative efforts, however, can easily become a trap from which there may be no escape.



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