More than a few years back, I had the very special privilege of being a part of a strategic discussion with Feargal Quinn, the iconic Irish grocery retailer. During that discussion, the question was raised as to how Quinn prioritized his day. Without hesitation he noted that the very first thing he did each morning was to look at how many customers he had the previous day. He would then look at them in the context of last week, last year. For him, it was not about sales but rather answering the question, “Are my customers coming back to shop with us.”
Certainly he eventually looked at sales and other metrics, but his personal prioritization of “Customers” set the tone for how he ran his business, knowing if the customer is returning, sales, profit and even EBITDA will likely follow. They did. The resulting customer-driven culture was contagious. His associates were consistently rated the best and his stores as well.
The learning here is not necessarily we should all run our stores as Feargal did, but rather we should be aware that prioritizing certain success metrics often have unintended consequences. For example, those that dwell on a metric like “gross margin rate” often elevate “hitting a specific number” to such a level of importance they often forget that if it is the “wrong” gross margin number and it negatively impacts sales and customer count, then the selection and prioritization of metrics is flawed. (Unless your plan was to lose sales and customers).
Unfortunately, many retailers allow their finance department determine the metrics and goals for the enterprise. The danger here lies in the context of choosing the right metrics to achieve corporate goals. In my career, I have met two, maybe three finance people who actually understood the importance of the customer and the intangibles that drive shopper loyalty and sales. Most do not. They assume that their set of financial metrics live in a purely linear relationship with each other.
Breaking News! Raising prices and margin rate rarely result in a corresponding rise in sales. None-the-less, many business plans are built upon these flawed assumptions, totally ignoring the impact on shoppers and their wallets when labor reductions or margin rate increases are implemented.
There is a better way and it starts with an acknowledgment of shoppers and the competitive environment. From there, building a financial plan in the context of the specific investments in margin, capital and labor needed to delight shoppers and effectively compete to take market share provides more thoughtful and useful goals.
It’s not a coincidence that companies that think about the customer first are generally growing and healthy while those who begin the planning process with EBITDA and gross margin rate mandates are steadily find themselves measuring declining sales and margins in the ensuing year.