What’s in store? The forecast for global retail

What’s in store?

The forecast for global retail

Š Copyright 2010 The Korn/Ferry Institute

What’s in store?

Executive summary Korn/Ferry International interviewed 66 retail CEOs and board members from around the world to investigate the critical question: how are leadership talent issues impacting on the delivery of the organisation’s strategic business objectives?

The results suggest that those heading many retail companies are overly optimistic about their ability to attract, develop and retain executive talent.

The economic downturn presented a comparatively easy period for recruiting and keeping senior executives. A shift is underway, however.

There is now a mismatch between retailers’ belief that they can continue to meet their leadership talent needs with ease, and market forces combining to make this much more challenging to achieve.

Many retail leaders acknowledged that they expect a larger-than-usual number of their senior and high-potential executives to leave over the next several years. At the same time, they remain surprisingly confident of their ability to find, develop and hold onto “best-in-class” executives.

Their confidence is doubly misplaced. More dynamic market conditions certainly will increase competition for talent and executive mobility — both factors that can impinge on long-term commercial success. At the same time, the survey clearly identifies the ability to innovate as being the skill set most in demand across the retail sector. Yet Korn/Ferry’s extensive research in this area has shown that innovation is one of the competencies most difficult to develop.

In summary, retailers are about to be in fierce competition with one another to secure skills that are in short supply. Putting strategies in place now to retain and develop existing leadership talent is critical to future commercial performance.

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About Korn/Ferry’s Global Retail Survey Between September 2009 and January 2010, Korn/Ferry International interviewed 66 senior executives from retail businesses around the world. All interviewees were CEOs or board members. Almost half of the survey participants were representing a Global 250 retailer1. The remainder of the participants came from a cross-section of established retailers from different sub-sectors and geographical markets, and with diverse ownership structures. Just over half of them were based in the EMEA region (Europe, Middle East and Africa), and just under half in the United States and Asia Pacific. For details of those who took part, please see Appendix on page 12.

Figure 1: Map of participant countries

Sweden

Russia

Norway UK Ireland The Netherlands

Germany France Spain

United States

China United Arab Emirates

India

Taiwan

Australia South Africa

The questions were divided into six sections, each covering a different area: 1. the impact of the economic downturn; 2. the skills gap in the coming upturn; 3. succession planning and leadership development; 4. the influence of the board on talent management; 5. the approach to talent acquisition - “build” or “buy”; and 6. retention strategy and executive turnover.

Results were analysed to find statistically significant correlations between the answers.

1

2

Deloitte, (2010, January). Global Powers of Retailing.

The impact of the recession on retail’s talent agenda The economic downturn undoubtedly shook the retail sector from stockroom to board room. As a non-executive board member of a U.S. department store put it: “Every retailer has faced challenges in the past year that are unheralded.”

Yet a surprisingly large percentage of respondents (33 percent) said they thought that the consumer downturn had had a positive impact on their organisation. “There are benefits to the economic situation,” said Joe Gromek, the CEO of Warnaco (U.S.) “It enabled us to streamline, which is more difficult to do during growth.”

Figure 2: The talent advantage To what extent has talent and leadership been a competitive advantage for your organisation over the past two years?

Concerned by our leadership capabilities No response 2% Slightly 3% behind competition 6% Leadership is strong competitive differentiator 36%

In line with competition 19%

Slightly ahead of competition 34%

Retailers recognised that it had been easier for them to retain senior executives and high potential leaders than in previous years. Some 70 percent said that their talent and leadership capabilities were a competitive advantage for them during this period.

There was, however, widespread consensus that there will be greater mobility of executives between companies as economic conditions stabilise and improve. Over the next two to five years 47 percent of respondents expect more senior executives to leave; 43 percent expect more executives regarded to be “high-potential” to leave.

A surprisingly large percentage of respondents said that they thought the consumer downturn had a positive impact on their organisation.

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Figure 3: Anticipated changes to retention How do you expect retention rates to shift over the next two to five years for senior executives?

This year compared to previous years

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In the next 2-5 years

How do you expect retention rates to shift over the next two to five years for high-potential executives?

This year compared to previous years

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In the next 2-5 years

While these figures may seem high, retailers seem less worried than other business leaders. Another cross-industry survey from 2009 by Forbes Insights found that 65 percent of senior executives were “highly” or “very highly” concerned about high-potentials and leaders leaving once an economic recovery takes hold.

Korn/Ferry’s global retail survey unearthed regional differences in responses as well. In the United States, 72 percent of respondents expect more high-potential employees to leave over the next few years, while only 29 percent have the same expectation in Europe, the Middle East and Africa.

A scramble for candidates The vast majority of respondents expect a return to growth in 2010 or 2011. “2010 is the year to restore certainty,” said John Rishton, CEO of Ahold in the Netherlands. “2011 will be the year of recovery.”

“We should prepare ourselves for a post-recession scramble for good talent,” says Ian Cheshire, CEO of Kingfisher, headquartered in the UK. “We would expect the pool of good candidates to be much more heavily fished.”

Retailers overall remain alarmingly confident about their ability to attract “best-in-class” senior executives in the next few years.

His assessment aside, retailers overall remain alarmingly confident about their ability to attract “best-in-class” senior executives in the coming years. Three-quarters said that they were either “very confident” or “reasonably confident.” Only six percent were concerned.

Figure 4: Confidence in attracting top talent How confident are you that you will be able to attract “best-in-class” senior executives to meet the requirements of your organisation over the next few years?

Not at all No confident response 0% 7% Not particularly confident 6% Moderately confident 13%

Very confident 36%

Reasonably confident 38%

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Retailers may be banking on the widely held view that their attractiveness to potential employees rests in their commercial performance and results. But these organisations have not taken into account the breadth of choices available to “best-in-class” executives, inside or outside the company, and inside and outside the retail sector.

This is especially true in markets where the retail industry is less developed such as China and India.

Most importantly, the skill sets in demand are changing with the evolving economy. Some are in short supply, suggesting that not all retailers will be able to secure the leadership talent they need to manage future growth and development.

The heart of growth: innovation Some retail CEOs discussed how the skills required to lead during a downturn vary drastically from those needed during a period of growth.

“There is a gap between the highly creative, instinct-driven profile that works well in a growth situation versus the more analytical profile that fits today’s [recessionary] business environment,” explained the CEO of a major international fashion brand.

Likewise, the people a company kept on through the recession may not be the ones to lead it forward. “Because of the bunker mentality in the past two years, the company had lost the feel/touch to shift to growth,” said another apparel company CEO. “This muscle did not exist.”

Asked what skills gaps exist in their leadership ranks, the ability to “create the new and different” came up most often among the CEOs and board members.

Figure 5: Wanted: New ideas and innovations As you prepare for the upturn in business, what do you think are the most critical competency gaps among your executive team?

Leadership Architect Competencies2 Creating the new and different Focusing on action and outcomes Understanding the business Inspiring others Dealing with trouble

2

6

Percentage of respondents mentioning it 24% 13% 9% 9% 9%

Lombardo, M.M. & Eichinger, R.W., (2007). The Leadership Machine: Architecture to Develop Leaders for Any Future, 3rd Ed.

In this respect, retailers are ahead of the curve in valuing innovation among their executives. Researchers with Lominger, Korn/Ferry’s leadership and talent consultancy, have found that the “creating new and different” skill set, a type of learning agility, correlates with individual high performance.

The Lominger Leadership Architect Suite, which identifies 67 specific business competencies and sorts them into related clusters, describes the “creating the new and different” cluster this way: Is able to come up with the next great breakthrough thing to do; is creative, a visionary and can manage innovation; is an effective strategist full of ideas and possibilities; sees multiple futures; has broad interests and knowledge; can both create and bring exciting ideas to market; comfortable speculating about alternative futures without all of the data.

The distinct skills in this set are, according to the Lominger research team, rare in the executive population at large, particularly the ability to “manage innovation.” Of the 67 competencies, “innovation management” is among the four most difficult to develop.

Figure 6: Building innovation skills Lominger’s research shows that certain strategic assignments can aid in developing innovation management skills, and make success or failure quickly evident.

Project or task force chair

Change manager

• • • •

• • • •

Leads group with specific goal Must learn on the fly Must get others to co-operate Meet a tight deadline

Implements significant shift Adds something new Deal with inevitable resistance Work across organisational boundaries

Successful organisations have found that strategic assignment management for executives is effective at developing their learning agility and innovation abilities. Still, given high demand for such rare and hard-to-develop skills, retailers who don’t give thoughtful, proactive attention to identifying and nurturing high potential innovators are likely to come up short.

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Constructing a talent pipeline Asked how they intend to fill the skills gaps within their organisations, a majority of retail leaders expressed a preference for an internal talent pipeline: 55 percent favoured developing internal talent. Although 17 percent said that they recruit externally when there is no internal candidate available, no respondent said that their organisation systematically fuels its talent pipeline with external talent.

There are significant differences in the “build vs. buy” debate between regions. Only 33 percent of respondents from the United States said that they primarily grow their talent from within, compared to 59 percent of those in the EMEA region, and nearly all of those in Asia Pacific.

Figure 7: Build vs. buy What is your approach to “build” vs. “buy” strategies for leadership?

Favour growing from within Consider internal and external candidates Favour external talent

8

14%

0%

0% AP AC

0%

33%

33%

5%

13%

33%

U.S .

EM

EA

23%

59%

86%

No response

The CEOs and board members interviewed expressed an appreciation for the benefits of both approaches, of building internally and buying from outside. “People from outside the company … bring a new perspective and help you rethink everything,” said Juan Carlos Escribano, CEO of Spain’s Grupo Cortefiel. “The advantage of internal promotion is that cultural heritage is maintained.”

“We develop internally but will recruit from outside and believe in a healthy balance of both. We do not ever want to become insular, as innovation fuels our business,” said Mindy Grossman, CEO of U.S.-based HSN Inc. Hang on to what you’ve got Retention must be a consistent element of business strategy, not a one-year effort. Executives are savvy enough to differentiate between a fad and a commitment.

At an early stage, people with high potential must be identified (remembering that their performance during the downturn will not necessarily predict success in a time of growth). Then, ask: who is key to executing strategy? Executives with great operating skills or design instincts? Executives with overseas experience? Those with keen financial skills?

Retailers need to do whatever is necessary to keep those they cannot afford to lose. Among other things, this will involve strategic assignment management, market-appropriate reward strategies, recognition of individual contribution, and consistent and regular communication of the company’s vision and values.

Retailers also need to recognise that they can’t simply throw money at their next-generation leaders. Younger executives, from Generation X and Y, are not motivated by the same factors (job security, pension benefits) that drove their parents. “Generation X is harder to retain,” says the CEO of a leading American general merchandise retailer.

Today, more than ever, “money is not the sole motivator. Quality of life and having a fun place to work are also important.”

The most important strand of any retention strategy, regardless of generation, is to make people feel that what they do matters, that their work is being recognised and valued.

In Korn/Ferry’s experience, the most critical strand of any retention strategy, regardless of generation, is to make people feel that what they do matters, that their work is being recognised and valued.

Patrick Ganaye, CEO of Carrefour in Taiwan, advises retailers to “listen to people and they will feel appreciated and stay.”

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Another CEO from a premium brand fashion retailer says, “We will be talking to high-potential people this year to let them know that they are the future.”

It is vital to get that message across before these people leave to become part of another company’s future.

Who’s next in line?

Still, some top-level departures are inevitable, and those organisations that have succession plans in place for their senior ranks will have a competitive advantage.

Whereas it is now routine practice in North America and the more developed parts of EMEA, succession planning has not yet been widely embraced in Asia. Moreover, Korn/Ferry consultants anecdotally report that the retail sector as a whole lags behind other industries.

Korn/Ferry’s global retail survey found boards have placed greater emphasis on succession planning during the recent unfavourable economic climate than in previous years; 48 percent of respondents said they gave it “slightly” or “significantly” more importance.

Figure 8: Succession planning How much importance is given by the board to succession planning?

Significantly less now than in previous years 3% Slightly less now than in previous year 2%

No change from previous years 39%

10

No response 8%

Significantly more now than in previous years 28%

Slightly more now than in previous years 20%

But that improvement is undercut by how few boards focus on talent and leadership development initiatives overall. Among our surveyed retailers, only 17 percent of respondents said they thought that their board was “strongly involved” in such efforts. A greater number (20 percent) felt that talent and leadership matters were “rarely discussed” at the board level. Even when there are discussions they often go no further. “Everybody is forced to talk about it, and the board says you need to develop people,” claimed one respondent. “But,” he added, “there is no real follow-up.”

If leadership talent is critical to the success of a business strategy, why wouldn’t the board and CEO attend to it the way they do product, service or technology initiatives?

In conclusion, there is almost unanimous agreement among CEOs and board members that leadership talent can be a competitive differentiator for retailers. Learning agility and innovation are critical competencies for the achievement of business objectives. Though these skills are in short supply and high demand, they can be identified and nurtured. Those organisations that thoughtfully and proactively identify, assess and develop their leadership talent with focus and consistency will reap the commercial rewards of a powerful and engaged workforce.

“If leadership talent is critical to the success of a business strategy, why wouldn’t the board and CEO attend to it the way they do product, service or technology initiatives?”

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Appendix Korn/Ferry International extends its thanks to all those who gave up their time to be interviewed for this report. Some preferred to remain anonymous but many are recognised below.

Chairman & CEO CEO SVP, Retail Operations CEO CEO & President CEO CEO, Taiwan Group CEO CEO President, Taiwan CEO CEO CEO & President CEO CEO & President CEO & President CEO President CEO Commercial Director CEO CEO Head of Retail Group CHRO SVP, CHRO CEO CHRO CEO Vice Chairman CEO CHRO CEO CHRO CEO President & CEO CEO CEO Executive Chairman CEO & President CEO & Chairman CEO COO, Hardware Business CEO Chairman CEO

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Aigle International Alliance Boots Apple Avis Europe Big Lots C&A France Carrefour Cortefiel Costco Costco Devanlay DSG International Foot Locker Galeries Lafayette Godiva Chocolatier HSN Hermès International Juicy Couture Kenneth Cole Productions Kingfisher Kingfisher Koninklijke Ahold Li & Fung Louis Vuitton Lowe’s Companies Majid Al Futtaim Group Media-Saturn OBI Group OTTO Picard Surgelés Praktiker Reitangruppen REWE Shop Direct Shopper’s Stop SIA St. John Knits International Superquinn The Warnaco Group Tractor Supply Company Wm Morrison Supermarkets Woolworths Woolworths Wumart Stores X5 Retail Group

France UK U.S. UK U.S. France Taiwan Spain U.S. Taiwan France UK U.S. France U.S. U.S. France U.S. U.S. France UK The Netherlands Hong Kong France U.S. UAE Germany Germany Germany France Germany Norway Germany UK India France U.S. Ireland U.S. U.S. UK Australia South Africa China Russia

About Korn/Ferry’s Global Retail Practice Korn/Ferry International is the only international firm with a specialist division dedicated to locating executive talent for retail, wholesale, manufacturing and fashion in which the majority of senior partners have held senior management positions in the industry.

Our retail and apparel team handles hundreds of talent and leadership assignments in all regions each year. We frequently partner with Korn/Ferry’s leadership consultants to support clients on a broad range of strategic talent issues, such as succession planning, onboarding, high-potential identification and coaching.

Korn/Ferry works across all segments of retail, including: grocery, general merchandise, apparel and footwear, sporting goods, fashion and distribution, health and beauty, foodservice, convenience stores, discount stores, department stores, multi-channel and e-commerce retailers.

Key contacts North America Kevin Duffy Caren Fleit Denise Kramp Melanie Kusin Clare Metcalf Brigitte Morel-Curran Patricia Muise Tierney Remick Becky Stein Ellen Williams

kevin.duffy@kornferry.com caren.fleit@kornferry.com denise.kramp@kornferry.com melanie.kusin@kornferry.com clare.metcalf@kornferry.com brigitte.morel-curran@kornferry.com patricia.muise@kornferry.com tierney.remick@kornferry.com becky.stein@kornferry.com ellen.williams@kornferry.com

EMEA Sally Elliott Dominique Finelli Christoph Kleinen Didier Vuchot

sally.elliott@kornferry.com dominique.finelli@kornferry.com christoph.kleinen@kornferry.com didier.vuchot@kornferry.com

Latin America / South America Maria Elena Valdés mariaelena.valdes@kornferry.com Asia Pacific Ashutosh Khanna Roula Rozakeas Marie Silloway

ashutosh.khanna@kornferry.com roula.rozakeas@kornferry.com marie.silloway@kornferry.com

About the Korn/Ferry Institute The Korn/Ferry Institute was founded to serve as a premier global voice on a range of talent management and leadership issues. The Institute commissions and publishes groundbreaking research utilising Korn/Ferry’s unparalleled expertise and preeminent behavioural research library. It also serves as an exclusive destination for executives to convene and hone their leadership skills.

The Institute is dedicated to improving the state of global human capital for organisations of all sizes around the world.

About Korn/Ferry International Korn/Ferry International (NYSE:KFY), with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions celebrating 40 years in business.

Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, develop, retain and sustain their talent.

Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

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