What organizational design challenges will retailers face in 2021?

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There’s no hiding the fact this has been a devastating year for the retail industry, with many household names falling into administration. In the UK, some of the biggest brand names including Debenhams, Top Shop, Dorothy Perkins, Laura Ashley, Monsoon and TM Lewin may disappear from our high streets for good. In the US, so far 27 retailers have gone out of business, with another 17 on the brink of collapse[1], including huge brands like Lord & Taylor, Century 21, G-Star Raw, Brookes Brothers and J.C. Penney.

Yet this is a story of mixed fortunes. For online-only retailers, business is booming. Amazon’s profits are up 37%, worth an extra $26.1bn[2]. Similarly, revenue for luxury online retailer Farfetch has soared 73%[3]. Even some high street retailers have benefitted from changes in customer behavior. Lululemon, for example, has seen a surge in demand as home workers ditch formal attire for comfortable loungewear, with sales up 22% compared to last year[4].

Still, many know they’ll face more disruption and adversity in 2021 as punishing market conditions caused by government restrictions and economic recession persist. That said, slow decision making and being unable to adapt quickly because of sluggish planning processes and poor data availability have also contributed to the plight of the retail sector this year.

Retail trends affecting organizational design in 2021

What’s apparent is there’s zero margin for error in how retailers run their business from now on. Organizational design, workforce planning and scenario modeling will have to be spot on and done fast. As much as the market and economic conditions may test them, in 2021 retailers will need to get the business side right or the administrators will come knocking.

So, from an organizational design perspective, we see 3 major trends that will affect how retailers respond to extreme business challenges to give themselves the best chance of survival.

Digitalization

It’s abundantly clear that consumer behavior has changed. Thanks to the Coronavirus pandemic, more people are shopping online than ever before. In 2020, many retailers rapidly scaled their digital operations to bring in online revenue and offset big losses from stores. In 2021, as expectations for personalized service grows, retailers will need to reorganize so they can provide agile, responsive customer service.

Adaptability and resilience

Only those retailers with a test-learn-iterate approach to business planning will be able to respond quickly enough to market disruption, making them more resilient in the face of uncertainty. Ultimately, this is an organizational design challenge grounded in a willingness to reconsider entrenched business principles.

Future of work

There’ll be an opportunity for retailers to re-engage, retrain and redeploy their workforce to support new organizational priorities in the coming year and beyond. As companies automate more routine, repetitive tasks, a continuous cycle of upskilling will better prepare them for a workforce that pairs people and automation in a balanced partnership.

What retailers are doing to meet these organizational design challenges

In 2020, we’ve seen 3 main responses to the circumstances that retailers have found themselves in, whether that be an existential drop in demand or explosive revenue growth.

Essentially, businesses have had to dramatically cut costs to stay afloat, change their business model on the fly or reorganize to capitalize on rapidly rising demand for their goods and services. Let’s look at some examples of each.

Cut costs and redeploy

Department store retailers like John Lewis and Marks & Spencer are under immense pressure to cut costs. In October, John Lewis announced plans to turn 45% of its flagship store in London into office space[5] and will cut 1,500 jobs at its head office[6]. Meanwhile, M&S has already cut some 7,000 jobs to lower its cost base[7].

Both companies face similar issues, with fashion and homeware sales declining as food sales rise. Consequently, they’re looking to reduce non-food investments and redeploy on the food business.

Change their operating model

Some high street retailers have managed to optimize their store footprint, combining shop floor space with partitioned areas for stock prep and click-and-collect order management. By adapting to changing customer behavior, these retailers have been able to claw their way back.

British supermarket Tesco set the standard for operational changes during the first lockdown. Using data on rising customer demand and capacity to meet it, the company changed store opening hours and quickly added 47,000 more staff to enable more online orders to be picked overnight. Subsequently, it was able to increase home delivery slots to a massive 1.2 million a week almost overnight[8].

This responsiveness shows Tesco is taking a new approach to organizational planning that others can learn from. When you don’t know what the future holds, even a few months out, how do you plan? Chief executive Dave Lewis knows how quickly you can respond to market changes is all in the data.

Focus on growth through digital channels

For those retailers that have suffered huge store losses, taking an omnichannel approach has helped them sustain customer engagement and level out revenue.

While there’s some evidence that in-store experiences will remain important in building brand awareness[9], many consumers will continue to buy online. What retailers do to integrate these touch points through strategies like BOPIS and Curbside[10] will be critical to growth and profitability.

Overcoming the organizational design challenges facing retailers

As with everything, there’s a right and a wrong way to do things. We’ve seen some success from retailers that have taken on these challenges in 2020, but in 2021 they’ll need to consider whether the approach they’ve taken will stand the test of time.

Here we present some thoughts on how organizations can tackle the organizational design challenges they face to improve their longer-term prospects.

Cost reduction can harm long-term organizational growth

Cost-cutting has long been a standard but troublesome organizational strategy. When performed using a ‘spans and layers’ approach, the results are fast but the risk of losing critical capability is high. This leads to even higher costs in the long run. Instead, businesses could start with a skills analysis that aims to reduce costs through redeployment first.

As skills and job definitions change, organizations will be more focused on redeploying, reskilling and upskilling people. In the current climate, many retailers have little choice but to cut costs to survive. However, they can still ask the question, “how do we achieve cost savings through headcount reduction but minimize the damage to the organization in the process?

Being adaptable and responsive to change

Adapting to disruption and continuous change will become cemented in the way companies organize and run themselves in the future. Today, the customer is at the center of everything. It’s the speed of changes in consumer behavior that require organizations to be so responsive.

A key part of organizational responsiveness in today’s business environment is making quick decisions based on data, not gut feel. We recently commissioned research that revealed most companies still don’t have a good grip on their business information and it’s slowing down decision making by 30%[11]. In 2021, retailers that can use their data to make fast operating changes will be more able to last the distance and outpace others on their path to recovery.

Managing hyper-growth organizations

For many online retailers that have seen explosive growth, they’re likely to face organizational challenges in the months ahead. They’ll need to scale quickly to take on new business but maintain control of their inflating organizational structure at the same time.

By managing the organization continuously, these hyper-growth companies will be better positioned to scale quickly but also pivot as new opportunities arise. To enable agile resource allocation, they’ll need to know which parts of the business are seeing demand rise rapidly and which are growing more slowly, so they can reorganize and redeploy based on data.

A good example of not doing this is Peloton. Demand for their connected exercise bikes exploded during the first lockdown, but the company failed to capitalize on it because of its organizational structure and unresponsive supply chain[12].

The way ahead for retailers in 2021

In summary, perhaps the main challenge for retailers in the coming year will be adapting to continued changes in consumer behavior, whether that means cost-cutting, reorganizing or managing growth. For those having to adapt, it’s about understanding what’s going on in the market and being able to translate that into an integrated organizational design that doesn’t overburden the management structure.

The key to organizational planning, for high street retailers in particular, will be fast decision-making based on data. Guessing at headcount requirements using footfall forecasts at a time when margins are so thin could have severe business implications. With the world as it now is, getting retail right has never been more important than it is now. And getting organizational design right will give retailers a firm foundation to make it through to the other side.

[1] Retail Dive (2020) Retailers brace for more pandemic trouble, 9 Oct, https://www.retaildive.com/news/retailers-brace-for-more-trouble-from-the-pandemic/586703/

[2] Venture Beat (2020) Amazon reports $96.1 billion in Q3 2020 revenue, 29 Oct, https://venturebeat.com/2020/10/29/amazon-earnings-q3-2020/#:~:text=Amazon%20today%20reported%20earnings%20for,of%20%244.23%20in%20Q3%202019)

[3] Retail Sector (2020) Farfetch revenue soars 73% in Q3, 13 Nov, https://www.retailsector.co.uk/443613-farfetch-revenue-soars-73-in-q3/

[4] Forbes (2020) Lululemon looks unstoppable as it delivers 22% revenue increase in Q3, 10 Dec, https://www.forbes.com/sites/shelleykohan/2020/12/10/lululemon-looks-unstoppable-as-it-delivers-22-revenue-increase-in-q3/?sh=1e18ac3e2b03

[5] Retail Gazette (2020) John Lewis to begin converting 45% of London flagship into office space, 28 Oct, https://www.retailgazette.co.uk/blog/2020/10/john-lewis-begins-converting-45-of-london-flagship-into-office-space/

[6] The Guardian (2020) John Lewis to cut 1,500 head office jobs as part of £300m cost savings, 4 Nov, https://www.theguardian.com/business/2020/nov/04/john-lewis-to-cut-1500-head-office-jobs-as-part-of-300m-cost-savings#:~:text=John%20Lewis%20is%20cutting%201%2C500,savings%20and%20return%20to%20profitability

[7] The Guardian (2020) Marks & Spencer to cut 7,000 jobs over three months, 18 Aug, https://www.theguardian.com/business/2020/aug/18/coronavirus-marks-spencer-to-cut-7000-jobs-over-three-months#:~:text=Marks%20%26%20Spencer%20is%20to%20cut,run%20during%20the%20coronavirus%20pandemic

[8] The Guardian (2020) How Tesco’s ‘doomsday exercise’ helped it cope with the coronavirus, 3 May, https://www.theguardian.com/business/2020/may/03/how-tesco-doomsday-exercise-helped-it-cope-with-the-coronavirus?CMP=Share_iOSApp_Other

[9] Tinuiti (2020) 10 Innovative Retail Trends to Watch in 2021, 18 Dec https://tinuiti.com/blog/ecommerce/retail-trends-emerging/

[10] Forbes (2020) Top Predictions For Retail 2021, 20 Dec, https://www.forbes.com/sites/gregpetro/2020/12/20/top-predictions-for-retail-2021/?sh=1db772353dc6

[11] Orgvue (2020) Organizations need to take control, 17 Dec, https://www.Orgvue.com/resources/articles/organizations-need-to-take-control/

[12] Connect the Watts (2020) Peloton is missing an opportunity with merchandise, 17 Jul, https://connectthewatts.com/2020/07/17/comment-peloton-is-missing-an-opportunity-with-merchandise/