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What

The current Covid-19 pandemic crisis has been a real challenge for retail. The management of this crisis has highlighted the usefulness of having an agile structure, a simplified business model, and a solid e-commerce platform. It also requires specific tools. Do department stores have what it takes? Is it really a challenge for the industry as a whole, or, more “traditionally”, for companies?

Why is it important

While reviewing the actions taken on the market, it appears that some are moving in the right direction. It is not only a matter of weathering the storm, but also of preparing the future: in every crisis lies an opportunity to showcase a company’s character, its commitment to its brand promise and its institutional values, in other words, all the components of a company’s culture.

Could do better

If there is one thing which the Covid-19 pandemic has taught retail, it is that we, and many other sectors, were on the whole unprepared to manage external risks. Even LVMH, a notoriously risk-averse, scenario-planning giant, was caught totally off-guard by a total closure of all its stores worldwide, as candidly explained by Ian Rogers last month.  Retail was hit hard (although not as hard as hospitality and restaurants, sports, arts and entertainment) and department stores particularly so. In the language of risk management, “external risks”, unlike “preventable risks”, or “strategy risks”, cannot be reduced or avoided since they lie largely outside the company’s control (see HBR, 2012). The financial crisis of 2008-2009, the 2010 Iceland Eyjafjellajokull volcano eruption, various hurricanes, earthquakes are examples from the past just as solar flares, effects of climate change, or cyber-enabled information warfare may be examples of what the future holds. All of these have had or would have effects on our businesses, just as Covid-19 has dramatically reduced the activity of department stores, sometimes indeed dealing a fatal blow. Every one of these events has been mentioned or discussed and warnings published. For example, the possibility of a viral pandemic was raised up to 30 years ago (see National Geographic, April 2020, which mentions not only AIDS but also Sars, Mers, and Ebola, the last three of which remained fairly regional).

Can we do crisis management?

However, all these factors do not mean that we cannot alleviate the effects of such a crisis in the future. Most of our companies will probably (hopefully) have risk management tools in place such as check lists, hazard analysis, assessment tools, “what if”, scenario analysis, such as Magasin du Nord which was exploring scenarios for stores and staff before the lockdown. However, three elements are specific to a crisis as opposed to a general risk: a) a threat to the organisation, b) the element of surprise, and c) a short decision time; and crisis management is the process by which an organisation deals with a disruptive and unexpected event that threatens to harm the organisation or its stakeholders.

In contrast to risk management, which involves assessing potential threats and finding the best ways to avoid those threats, crisis management involves dealing with threats before, during, and after they have occurred. It is a discipline within the broader context of management consisting of skills and techniques required to identify, assess, understand, and cope with a serious situation, especially from the moment it first occurs to the point that recovery procedures start. Three tools are often mentioned in this regard: stress tests such as those conducted by banks (as occurred after the recent financial crisis); scenario planning which selects drivers which have most impact on the company as often used by oil companies (well documented for Shell by Arie de Geus in The Living Company); and war-gaming, most appropriate to prepare for disruptions such as tech or competitors (HBR, 2012). Another component of crisis management is business continuity planning and its associated training. Crisis management requires supreme flexibility and agility since it involves keeping the business running at the same time as fixing problems.

Repeat the crisis or something different?

It is of course very likely that the next big event will be a repeat (or a continuation) of a Covid-19 outbreak. According to WWD, August 2020, Covid-19 has companies of all sorts such as John Lewis in the UK looking hard at their operations and their reason for being, a self-examination that could help prepare them for other shocks down the line. Fashion seasons are being consolidated (see Virgil Abloh at Louis Vuitton men’s “seasonless” collections, Saint Laurent and Gucci exiting the fashion calendars), underperforming stores are being closed (see Nordstrom which is closing 16 of its 116 full-line stores including three Jeffery boutiques), and Macy’s has abandoned the innovations by Rachel Schechtman the founder of Story, the concept shop it acquired in 2018 in order to concentrate on existing operations.

One of the weak points of fashion retail and brands was undoubtedly their supply chains. These have been running longer and longer, reaching Asia for many, with very little excess capacity. But whatever the crisis, the key remains “how to anticipate your customers’ reaction to unanticipated events” (Barbara Kahn, Wharton). This is also a key statement we learnt at the IADS Merchandising Meeting of 21 September, 2020. (See takeaways report circulated recently.)

Resilient, simple and convenient

When supply chains are fairly dependable, then such a fragile structure can be maintained and even achieve a degree of success in terms of lowering costs. With a return to uncertainty (already anticipated before the outbreak of Covid-19), a tight just-in-time supply chain lost out to a more resilient model. According to Roger L. Martin (When more is not better, 2020), the machine metaphor to achieve maximum efficiency through the efficient engineering of each component part is no longer appropriate. What is needed is something more like a natural system designed for complexity, adaptability and integrative thinking. Crises cannot be avoided, but some structures are better suited to deal with crisis than others. We believe the following three elements are necessary to weather any crisis including the current pandemic:

a) Resilience: as we have argued before in “The curse of efficiency”, resilience which Roger Martin calls “slack”, is a characteristic of future success. He is backed up by Margaret Heffernan (Uncharted, 2020) and Zeynep Ton of MIT who has studied retailers such as Mercadona, Trader Joe’s and Costco. Resilience requires systematically gathering and sharing critical information to anticipate change; building flexible structures and processes; maximising value by deciding which activities can be outsourced and which should be kept in-house; and the willingness to interrogate reality and overhaul the company identity (see MIT Sloan, Fall, 2020).

b) Simplification: department stores are already complex structures with a long history of different models being superimposed upon one another and, most importantly, a siloed structure making it almost impossible to cross the boundaries between functional empires. Yves Morieux of BCG has argued persuasively in favour of eliminating complicatedness and the old-fashioned KPIs which, according to him, are “poor proxies” for reality. This is what Manor for instance went through during the lockdown, and noted that it allowed greater flexibility in action. Such conclusions led to a company-wide transformative plan announced in August 2020, focusing on a simplification of the company as a whole.

c) Accelerate e-commerce: underlying e-commerce is the central requirement of convenience for the customers, even in the luxury world. Furthermore, it has become the only channel to conduct retail when stores are shut, at the same time that questions are being posed about overstoring and excessive square metres per head of population.

![IADS Exclusive - Navigating the Covid crisis graph

From Ben Evans, 2020

The US is a particularly obvious example of this.

Falabella of Chile, while operating many formats, is also clear that it defines itself as “a digital company with stores”. That part of the business is undergoing acceleration.

In the meantime, the digitalisation of physical stores is also taking place: self- checkout, remote or mobile payment systems etc. For instance, Apple Express has been noted as a “post-pandemic” store model and many of our members have already implemented similar measures.

How to use the opportunity

As a sub-chapter of risk management, crisis management has tools which we need to put in place to minimise the damage of a repeat Covid-19 episode or any of the other crises which may or may not hit us at any moment. Perhaps one of the most urgent measures which need to be taken by department stores concerns their structure which too often belongs to a past “industrial” machine-based model, and which needs to shift to something more agile, or perhaps more “organic”. Certainly, the efforts in that direction by Breuninger in “delayering” the company to increase empowerment and agility is a move in the right direction. Similarly, Falabella’s “flattening” plans, combined, interestingly with a measure of automation, as well as Manor’s re-organisation, show that department stores are tackling some big questions which should carry them forward. The accelerated development of e-commerce has sometimes been a catalyst to these changes.

The IADS Academy 2020 has been working on some of these related issues and will be part of the creation of a White Paper on Covid-19.

Credits: IADS (Dr Christopher Knee)