Search
Select region
Close filter
Economic Uncertainty, Tighter Consumer Budgets and Labor Shortage
CFO & Audit Chair

Economic Uncertainty, Tighter Consumer Budgets and Labor Shortage

CFOs on What’s in Store for Retail

With the holiday season near or upon us—depending on whom you ask—we wanted to find out how retailers were preparing for the final quarter of the year with the shadow of a recession looming over them. Egon Zehnder gathered a group of eight CFOs and NEDs from public retail companies to share how they are planning for the end of this year into 2023 as they tackle inflation, a sporadic supply chain and a labor shortage.

Top Concerns: Restructuring, Inflation and Supply Chain

Expense reductions were top of mind for many of the CFOs at our gathering, and most of their planning involved a mix of SKU rationalization, reducing headcount, and finding supply chain efficiencies. “We’re not trying to burn the furniture to make a number, but we want to set ourselves up for a lower cost structure next year,” explained one CFO.

Brands over-ordered based on last year, but the demand is very different now. Even if consumers buy well, there will still be a glut, which will create some interesting price pressure.

--Retail CFO

Several CFOs noted that they had recently gone through a restructuring or were in the midst of a transformation, which put them in slightly more stable positions compared to some of their industry peers. “We’ve already gone through a restructuring plan, and now we’re nimbler than before,” said a CFO. He added that his company has expanded its gross margin committee, which focuses on areas of opportunity in sourcing and product costs, to an inflation committee—the other big topic on CFOs’ minds.

While some retailers have been able to pass some of their rising costs on to customers or find expense reduction offsets, many believe their customers are approaching, or have reached, their limits. “For the last year to year-and-a-half, you could pass through some of these price increases,” one retail CFO said. “Now some companies have to bear them, and they’re trying to be creative about how to reduce costs, but it’s becoming
more surgical.”

In addition to inflated pricing, companies also have to contend with a 180-degree turn in supply and demand from the 2021 holiday season to 2022. With rumors swirling that there are containers of merchandise sitting in shipping yards because retailers don’t have room in their distribution centers, it’s less likely that demand will exceed supply this year. “Our market has a ton of inbound product coming in,” one CFO said. “Brands over-ordered based on last year, but the demand is very different now. Even if consumers buy well, there will still be a glut, which will create some interesting price pressure.”

For discount retailers, this extra product could create favorable conditions. One such company CFO noted that there have been good buys from an inventory perspective, but they have also seen a spectrum of resilience and willingness to spend across their brands. “For our lower-income consumers, with higher gas prices and the highly promotional environment, we are not able to increase prices,” a CFO explains. “Instead, we’re focusing on gaining market share.”

Part of the reason for the abundance of product this quarter is that many companies over-ordered due to sporadic supply chains that left demand high and inventory low last holiday season. To combat that, a retail CFO shared his company moved up their production calendar by 10 weeks, which they enacted 18 months ago. This enabled them to get ahead of any delays in the supply chain and to catch a tailwind from air to ocean transport. Other CFOs noted they are still waiting to catch those supply chain
tailwinds—many retailers have fixed contracts so they will need to await renewal to realize those benefits.

Other retailers don’t have the same urgency to move product by the end of the year. One CFO shared that her company is still digging out of demand. “It’s not a bad problem to have but affordability is a factor for people trying to buy used vehicles,” she says.

Planning Amid a Looming Recession

With mixed signals about a recession and the accompanying scale of related repercussions, planning is complicated, to put it mildly. A CFO and board member shared that she was part of a recent gathering of compensation committee chairs where several discussed having both first half and second-half plans for the year. “Boards are showing a willingness to use discretion,” she explained. Another CFO added that it’s difficult to go to the board saying you want to plan in six-month cycles without seeing the major signs of a recession. “It could be the steepest recession we’ve seen since 2009, or we could be pulling through cyclically,” he shared.

Things are changing so quickly—in 2009, you could see the fundamentals of the economy coming down, but now, employment rates are high, and people are still spending—the question is when does it drop out?

--Retail CFO

Despite the concerns for the next year, expanding footprints and rethinking the future store experience were two areas of focus for many of the CFOs at our gathering. “We have to expand our footprint,” explained a CFO. “Our ability to serve small to large fleets requires as many dots on the map as possible.”

Another footprint consideration is rethinking the purpose of and experience in stores. “The optimal number of stores to have and the interior format of your store—now is a time to see if you can revamp if you can do it in a capital-lite way,” a CFO said. “Companies will be more innovative about product and consumer experience where they can without spending a lot.”

A Hole in the Labor Force

An ongoing struggle for retail companies has been the labor shortage for stores and distribution centers. Companies have had to get more creative about how to displace labor and lower requirements for employment. “We need to be thoughtful in the interview and vetting process,” a CFO said. “We want good workers who lean into the brand and have strong customer engagement skills and so we need to build labor inflation into our P&L.”

Another CFO added that her company is working to leverage automation investments in stores to deal with the labor shortage, including more self-service options. “Anything we can do to become more efficient,” she explains.

Retail Revolution

Just as retailers had to adapt during the height of the Covid-19 pandemic, the pressure is on to find continuous ways to evolve and mitigate the impacts of a potential recession and other looming crises. No one pretends to know exactly what 2023 has in store, but there is general consensus there will be multiple challenges to navigate, including what companies are already dealing with—rapid inflation, labor shortages and inconsistent supply chains. With 2022 looking to wrap up as a relatively lackluster holiday season, the CFOs on our call agreed that taking proactive steps to prepare for an extended period of inflationary pressure and softer customer demand in 2023 is key.

Topics Related to this Article

Related content

The Future of Retail

The Future of Retail

CFO & Audit Chair

Retail companies have been permanently changed by the Covid-19 pandemic. Consumer behaviors have shifted, employees have embraced different ways of working and investors continue… Read more

The Changing Role of Today’s CFO

The Changing Role of Today’s CFO

Leadership Advisory

Egon Zehnder recently organized a forum to discuss the role and responsibilities of the CFO in dynamic environments. The global financial crisis put the… Read more

Guts & Data: The Talent Retail Needs to Serve the Post-Pandemic Consumer

Guts & Data: The Talent Retail Needs to Serve the Post-Pandemic Consumer

Retail, Apparel and Luxury Goods

Post-pandemic Retail is emerging to be a noisy place, and product relevancy has never been more critical, or more difficult, to achieve. Is your… Read more

Changing language
Close icon

You are switching to an alternate language version of the Egon Zehnder website. The page you are currently on does not have a translated version. If you continue, you will be taken to the alternate language home page.

Continue to the website

Back to top