The perils of short-term reward

The blindingly obvious statement that many established retailers have failed to react decisively enough to structural shifts in the industry risks overlooking a more profound question.

Not a single retail executive can have doubted that a structural shift was underway, but the vast majority have failed to steer their businesses on the transformational journey needed to profit from these changes.

There are a number of possible explanations – but the most significant contributory factor seems to be the mismatch between the timescale over which executive pay and bonuses play out and the time taken for digital transformation to pay back.

Put simply in the balance between invest now for success in 5-10 years versus maximise profits to drive bonus in 0-3 years the short-term has consistently won.

The difficulty here is exaggerated by new businesses being held to deliver different metrics to established ones. For one set, driving market share growth and revenue is all that is needed to satisfy shareholders – while established retailers wrestle with the challenge of investing in infrastructure to drive growth into lower profitability channels, often to howls of derision from cash hungry shareholders.

Finally, scale is an important factor here too. A source of great historical advantage – now becomes one of potentially profound disadvantage. In a world where rapid direction change is required then scale = momentum, and without a tremendous collective effort it becomes very difficult to course correct as quickly as needed.

These conditions have added up to a collective failure for much of the retail ‘establishment’ in the UK. For many this has brought a moment of crisis that can create the conditions to act decisively – but the degrees of freedom to act have narrowed dramatically by this point.

The resolution of this critical dilemma must sit with The Board. As custodians of the long term interests of all Stakeholders they must look to growth over the next decade not the next 3 years. For retailers it has never been more important to have a strategic direction that delivers over the long term and is committed and decisive not myopic and hopeful.