This article first appeared August 4, 2011.
You think times are tough? Kmart's managing director Guy Russo has seen tougher, particularly when the GST was introduced.
Russo argues that the constant discounting by the retail sector over the past couple of years has managed to confuse customers rather than delight them. The secret to retail success, he says, is honest pricing and lower margins.
He also details how Australian retailers can learn from retailers in Hong Kong, and the many lessons he learned heading up McDonald’s Australia. Everyone, even the CEO, has to be ready to roll up their sleeves and clean the toilet.
Premier Investments (Solomon Lew’s retail empire) last week downgraded their guidance and announced the closure of 50 stores. Are you finding that the times are suiting you better?
That’s an interesting question. One, we’re a little different to his [Mark McInnes, CEO Premier Retail] situation because when we picked up the business a few years ago maybe we were similar to whatever group he’s running today, because the model was really broken.
So we’re kind of in a reset mode for our business model. I think that last 12 months for us we say there were 10 steps to get this whole thing right and we’re in step three of it and in the last 12 months refining product and prices and the customer service we offer the consumers.
So how many years will this take?
Well, we’ll be here forever [laughs]. We’re a totally different Kmart to what we ever were in the past. But I think this next 12 months will be the final correction that we’ve done in regards to moving from a model that was a high/low model to an everyday low-price model.
When you were resetting, so to speak, did you expect conditions to be as they are now?
I hadn’t really forecasted conditions at all because from my experience, in the 20-odd years that I’ve been in leadership, although I was with McDonald’s for 30, there are cycles of highs and lows all the time with recessions, GFCs and all those other noises that happen in a business model.
The point for us was to reset Kmart to ensure that we were a fierce competitor in the area of GM [general merchandise] and apparel.
I don’t know whether conditions are as tough as I’ve been through in my last 10 years, though. I found the GST year to be a lot more volatile.
We’ve had some high profile people in the last couple of days, including Charlie Aitken and Matthew Sherwood from Perpetual, saying there is a recession on, or at least a household recession. Are you surprised that that’s the commentary around at the moment?
No, not at all, because I follow the macro-economics pretty closely.
The statistics that are coming out are saying that people are reducing debt and increasing their savings so for discretionary spending that would make it a lot more competitive out there for all of us, right?
Except for maybe those that are in the food industry where people still have to eat.
When I look at the last decade, it doesn’t feel to me as tough as the GFC era was for sure, nor was it as volatile or fragile as the GST changeover in 2000.
I mean, it’s challenging and I put it up there in the top five, but I wouldn’t put it up there as the worst thing I’ve confronted.
So it sounds like when you were repositioning the business you were more focused on the company’s specific issues than trying to forecast years down the track how the economy would be tracking.
Yes, you’re right, because if you get your model right… We’ve all got different models, and our old model was pretty confusing to consumers, the high-low model.
So my view of that pricing model was that regardless of whether I was in high-end retail or at more competitive pricing such as Kmart and Target and Big W, I definitely wanted to go to an everyday low-price model.
The actual product offer itself, that was the part that required also a large reset, because we were trying to play to high-end merchandise, so high-quality brands. I always described it on the general merchandise side, we’re trying to be Villeroy & Boch at one end and then we’re trying to be lower-end products as well. We were trying to be somewhere between The Reject Shop and David Jones, or in some cases even Harrod’s.
And that’s very, very difficult when you’re really seen by consumers as being a discount department store and you’re trying to sell high-end goods; we never sold them and made money out of them.
So you’re right, I was mainly focusing on getting the company strategy right, so today we’re focusing on products mum needs for home everyday versus things she might use once a year or once every six months.
There’s another argument that volumes are actually quite good but margins are low. Do you think that retailers should prepare themselves for lower margins in the future?
I don’t really look at the margin game so much. Kmart used to focus on its percentage margins, but I think if you focus on customers and not margins, you’ll end up with a better result.
Manipulating margins around to work out how your profit is going to be is really short-term, so my main focus with our team is focusing on delivering the lowest prices you can and delivering on high quality.
So I’m actually happier to run lower percentage margins than we’ve ever had in the past to get the customer the benefit of the lowest price, which means that your penny profits lower. However, the equation that I’m working on from a profitability point of view is if you’re best in price then volume will go up, and then you’ll make a lot more profit.
I worked at McDonald’s as a teenager and I learnt some really fantastic sayings like “time to lean, time to clean.”
Obviously that’s a well-run business, what lessons did you learn from McDonald’s and what have you carried on to Kmart?
The main lessons I learnt was definitely the customer piece, is that all you do, whether it’s internally in your office or your stores, has to be with the customer in mind.
And this whole piece of us focusing on prices and the right products and who we want to be was definitely something I got out of McDonald’s, because the same thing could be said about food.
If you don’t know what industry you’re in, you could end up being anywhere between Harrod’s and The Reject Shop. In food, you could be anywhere between fine dining and frozen foods that supermarkets sell, so in our model there it was always to be remembered that we were about fast food, selling it at lowest prices.
Aren’t they selling coffee and Angus beef now?
Yes sure, at lower prices and quality.
So with fast food, when we added chicken back in those days in the ‘70s – which in most kitchens took up to 30 minutes to cook – McDonald’s recognised one of its core recipes for success in that whatever it sold had to be sold fast. Our chefs had worked out how to cook it in three minutes and back in those days Kentucky Fried Chicken were taking at least 10 minutes to fry their chicken.
So if you added something to the menu it had to be fast, it had to be lowest price and it always had to have quality as a denominator. So that I definitely picked up and that’s why focusing I’m on who Kmart wants to be.
That fine dinner set that gets used once a year for special occasions is “if you want that, go to David Jones”. But if you want to replenish your kitchen drawers and your kitchen cupboards with pots and pans and plates and coffee mugs, then they are the types of products that we’re aiming to sell.
With that strategy in mind we removed about 40,000 items that were in our stores in Kmart and got rid of all those products, whether it was on the clothing side or the general merchandising side that were very rarely used by consumers.
Cleanliness was something that I learnt from McDonald’s and fast service, and always staying close to what the customer’s view of you was.
And how do you compare the Australian retailing scene versus retailing in Hong Kong?
That’s an interesting question. So I worked in Hong Kong and China, and I just admire their focus on customer service – that’s the first thing that comes to my mind, and that’s outside the DDS boxes [discount department store] where I play in. Their attention to customers when they walk into the door is pretty high, I’d say a lot higher than even any sector in Australia.
I think even when I compare – and I use this analogy with my staff – even when you enter Hong Kong through customs, the way they even process you fast and with a smile in comparison to our entry into Australia is just chalk and cheese.
The whole mentality and latitude to customer service is pretty impressive.
And quite efficient I would say.
Yes, their way of processing is amazing. I mean, China’s got multiple airports at the moment and they’re about to build another 65 international airports to accommodate their local population and also the influx of tourists.
And every time you go through customs, they’ve got a little counter at the front asking you to push whether you’re happy with the service with customs, you know that little smiley face or that smiley face upside down if you were dissatisfied.
It’s quite interesting for a place like China to be interested in knowing what you thought of the service through an airport.
Well when you come to Australia you get to go on ‘Border Security’.
Hong Kong is about the size of Sydney and yet their approach is quite incredible if you think about their levels of income. It’s not wealth generation that creates the incentive or the motivation to serve people. It’s just the way it is.
Every shop that I go into China and in Hong Kong you see the little gathering of staff before the doors open up telling them customers are about to come in. I love all that stuff because I think it’s so important, because if the boss didn’t walk that talk, then you don’t expect it.
That was the other thing at McDonald’s was getting your hands dirty; I mean, the amount of times even when I was CEO that I would go into a toilet and mop the floor and freshen up the toilets with some sanitiser or for that matter just wiping down dining room tables.
When you lead the way you want your people to be, they can’t help but follow, right?
Definitely. Finally, I want to touch on the state of retail. You’ve mentioned that discounting has been going on for several years now and it’s making people a bit suspicious about pricing and how much they actually should be paying for items.
What do you think the higher-end retailers in particular can do to get people in stores if discounts aren’t the answer?
Charge honest pricing from the outset.
I’m of a firm belief that right across retail – and I preface this by saying I’ve only been in the industry for three years compared with the guys that run Myer and David Jones who’ve done it for decades – but the research I get from consumers is I think they’re fed up and suspicious of percentage-offs.
And from an insider’s point of view, I’m trying to work out how that all works from a trust point of view. If you put customers first in your strategy, how can you give something a 50% discount and then the following week double its price back again? It’s got so many things that are wrong with it.
You’re dictating the time mum has to buy when she doesn’t necessarily need to buy it. You’re forcing her at a point, “Come in on a Saturday, we’ll give you a Thursday to Sunday 30% off.”
I think it’s confusing because a lot of the language around this percentage off is up to 60% off. Walk into any retail shop and ask the staff member which thing is 60% off and 40%, because the big signs are on the walls.
I was in Chadstone this morning just near the Apple shop and there was a sign across there which I took a photo of and sent it to my team which said up to 65% off.
I want to remind my team this is not what we’re doing. So it says here, I quote “Sale up to 80% off”. That’s the big sign and then I watched a merchandiser putting a sticker across that sign saying further reductions.
So you’re asking me what do I think retailers are doing? There is something wrong with this and it’s not a sale.
I have a high respect for David Jones, I grew up in Sydney and they were the stronger retailer in Sydney at the high-end. And while I didn’t understand the mechanics of retail, when I was in my 20s and 30s I knew they did two sales a year.
And on Boxing Day I can still recall my friend who was the CEO of McDonald’s just before me, Charlie Bell saying, “We’ve got to go in on the Boxing Day, David Jones have got a special on and they will run out.” They will run out of that stock, it will be just on half yearly and end of year sale.
I think there is a place for sales is what I’m saying, but to get to the point of what everyone’s doing at the moment it must make mums question what’s really going on.
So for Kmart the strong message I’ve got say to all my team is whatever you’re selling, I want you to sell it at the lowest price so that then puts a real focus on customers, and make sure you guarantee the quality and it also puts a focus on the rest of the organisation.
If you have to sell at the lowest prices then you have to strip out costs that are adding. The only reason prices are marked up in retail stores is because they’ve got high costs and we’ve stripped out a lot of costs and most of it has been done sourcing all of the products that we used to sell but sourcing them direct. So while a lot of people say, “Guy’s buying lot more from China and Bangladesh,” I’m buying the same amount of product from Asia except I’m buying it with my team instead of three people in between who all add to the price.