How retailers can tackle supply chain, talent & ESG

With the Labor Department’s February 2022 jobs report showing a 678,000 increase in nonfarm payrolls, the retail industry, so impacted by COVID-19, seems to be in the midst of a rebound. This data shows retail employment rising by 37,000 jobs in February and an addition of 104,000 more jobs from a year ago.

The unprecedented level of employee turnover is having a mixed effect on the retail industry’s performance. In addition, global supply chain issues, an unusual holiday season, rising freight costs and intensifying ESG expectations all complicate the outlook for leaders of the retail industry.

Holiday season wrap-up

The holiday shopping volume is a crucial statistic every year for the retail industry. Kevin Kelly, Retail National Managing Partner at Grant Thornton, said holiday purchases showed an atypical pattern last season of a strong early charge followed by a slowdown just before the end of the year — contradictory to the typical pattern. Kelly said this was likely driven by consumer awareness of the supply chain issues — many people ordered items online early to afford time for alternate purchases if those items weren’t available.

“They did their shopping a little bit earlier because news was prevalent that shipping issues could delay package deliveries,” Kelly said. “This resulted in greater full price sell-through, but on the flip side, many retailers paid extra for either air freight or ocean freight to bring in products in time for the holiday season. That was a downside for retailers’ gross margin.”

In addition, port tie-ups and congestion, particularly in the West Coast ports, still did cause widespread delays and resulted in retailers receiving some shipments after the holidays.

“Consumers are becoming more educated about supply chain and the impacts of COVID-19 on every part of the chain,” said Sarah Balabanov, Grant Thornton National Sourcing & Supply Chain Transformation manager. “Though bottlenecks at ports are increasingly visible in the news, these challenges actually start back at the beginning of the supply chain, where production and material supply at the point of origin have been disrupted or delayed by COVID-19 labor absences, restrictions, and shutdowns.

“Additionally, shifts in consumer behavior throughout this pandemic have drastically impacted buying patterns, channel behaviors and the supply chain bringing product to market, forcing retailers to consider building flexibility into their supply chain operations to rapidly respond,” Balabanov said.

At the same time, the slowing of the Omicron variant spread has been driving a renewed uptick in demand for consumer goods as the economy has been opening back up despite rising inflationary pressure, which is favoring the retailers who planned for a return to scale. That planning can involve gaining a clearer assessment of projected inventory requirements, and tightening relationships with transportation partners and suppliers, Balabanov said. Future planning means rebuilding supply chains that have more flexibility and resilience to the effects of natural disasters, economic disruptions or even geopolitical conflicts.

Besides these supply chain disruptions, an unprecedented level of job turnover also created operational difficulties for retailers during the holiday season. The continuation of 2021’s Great Resignation had an outsized impact on retail during the holiday season as the number of people quitting their jobs during November reached a high of 4.53 million. Staffing shortages were widespread due both to this employee turnover and absences, particularly from COVID-19 illnesses; these created huge challenges for stores to serve customers in December.

As noted by Grant Thornton Chief Economist Diane Swonk, labor market conditions are tighter than they were in the past. There were 1.7 job openings for every person seeking work in December 2021, and consequently, employers held onto holiday hires longer than in past years. This is a trend that significantly impacts retailers who heavily rely on holiday seasonal employees.

Changing work conditions

One common complaint was how various COVID variants continually created staffing issues where positively tested workers had to isolate and consequently miss work. On a larger scale, these absences sometimes required stores to modify or reduce their operating hours, a detriment during the holiday buying boom, or to even lead companies to selectively close certain stores, Kelly said. Finding, attracting and retaining workers continue to be challenges for retailers. Retailers that were already struggling to attract and retain employees can consider a variety of tactics across the lifecycle of an employee — from attracting to offboarding — such as “allowing flexibility in work schedules, rewarding performance through incentives, re-evaluating their compensation and total rewards strategy, and focusing on career development and training,” said Angela Nalwa, Grant Thornton Managing Director, HR Transformation Solution Leader.

One response to the effect of COVID is the further adoption of omnichannel customer experiences, a trend that had already started before the pandemic and was greatly accelerated by it. Retailers that made decisions quickly early on to adopt the integration of digital and physical sales methods were the ones that tended to be better positioned to survive the overall loss of store revenue. In some cases, the accelerated implementation of omnichannel strategies helped retailers to refine and take actions on their store optimization plans.

The improved inventory accounting and visibility required for omnichannel success can help better address supply chain challenges. “I think many retailers have more efficiently managed their inventory and bring higher productivity with less inventory that they can sell quickly and therefore with less markdowns,” said Kelly.

The most recent threat to profitability now is inflation. Consumer Price Index data for January, released Feb. 10, showed that prices are climbing at the fastest pace in the last 40 years. Prices are up 7.5% overall compared to January 2021. Of course, Kelly said, inflation is a mixed bag for retailers — it’s a way to quickly recoup costs produced by increased freight expenses by passing on certain price increases to the end consumer. But continued inflation threatens to spur higher wages and other costs, and given the outsized pace of inflation, it could certainly impact profitability.

Focus narrows on ESG priorities

Environmental, social and governance (ESG) goals continue to be an item of focus for retailers given their relationship with consumers. “We’re continuing to see more retailers talk about their efforts related to ESG. They’re publicizing those details on their websites as well as through other published financial information. Retailers are making sure that their consumer base knows the actions they are taking because it can impact consumer behavior,” Kelly said.

Retail industry leaders have also tied the communication of a company’s ESG goals and progress to goals targeting the need to satisfy shareholder activism. Public disclosures about company activism on its own climate impact, its emissions and resources use were deemed a long-term value creator.

“Some companies may think they have some flexibility in what they say about ESG,” Kelly said, “but the consumers and investors both expect adherence to certain standards. Consumers, in particular, want to associate themselves with brands that are authentic, transparent, and socially aware, and consider how they’re impacting the environment. That is very much ‘top of mind’ for executives making sure they’re doing things responsibly to grow shareholder value.”

Jessica Feeley, an ESG and Sustainability manager for Grant Thornton, said stakeholder expectations have matured. At first, stakeholders simply wanted retailers to talk about responsibility, but now they increasingly expect that they authentically exemplify it.

“With more robust ESG reporting, such as illustrating how ESG principles tie to core business functions and decision-making processes, retailers can demonstrate that ESG is effectively integrated into their strategy and risk management efforts,” Feeley said.

In addition, a shifting regulatory climate will likely mean that ESG reporting will further evolve from an expectation to a requirement. Retailers that are proactive at managing their ESG impact and establishing appropriate ESG reporting capabilities and initiatives will now be prepared to meet this challenge.