Accelerating Adaptation At Pandemic Pace

Gaston Bottazzini is Chief Executive Officer at Falabella S.A., one of the largest South American omnichannel retailers. Jim Bacos, a senior partner with Oliver Wyman, sat down with him to discuss the impact of COVID-19 on Falabella and the economies where it operates – and lessons Gaston has learned from the experience.

Jim Bacos: Falabella is a diversified food and non-food retail organization, operating in major Latin American economies. How has COVID-19 affected retail in Latin America? Have you seen customer needs evolve? Has the effect been across-the-board, or has it varied by segment and country for you? How has food versus non-food been affected? 

Gaston Bottazzini: The impact has been very different by market, and also by the sequence of events. But there are some common denominators: First is the effort that we’ve had to make to keep operations going. And given that we operate in very different segments – from food to home improvement, electronics, and fashion – we’ve seen each of these segments impacted differently. Second, there was a permanent focus on how to maximize innovation while minimizing the level of risk for our team.

Initially, we focused on securing supply: Our main concern in February was not whether we would be able to operate, but whether our supply chain from China would be interrupted throughout the year. 

Another area of focus was to ensure liquidity in all our operations. We prioritized this when it became clear that this coronavirus was a global pandemic and not something that would remain within Asia, as was the case with previous coronaviruses.

The third area of focus was how to implement the right safety protocols so that the authorities felt comfortable with us continuing operations in our distribution centers.

And the final challenge was to find a way to shift all of our efforts to a demand that was moving away from the stores to the digital channels.

Those were the four major areas of impact. Initially, most of our stores were closed, which meant that the volume of home deliveries really exploded. So while until the beginning of 2020, home delivery was something we mostly did internally with our resources – our own distribution centers and contracts with independent transport companies – we now had to adapt ourselves to work with third-party logistics companies to carry out this operation.

To circle back on the split between the food and non-food business: In Europe, we saw a major difference in the impact of COVID-19 on the economics of grocers and non-grocers. Grocers actually did very well, once the issue of the supply chain was settled. We saw a shift towards major “shopping mission” shops, rather than everyday convenience stores. Within weeks, a new model had emerged for in-store shopping that seemed to work.

On the other hand, non-food consumer electronics, DIY and fashion in particular were hit with downturns of 90 percent, and many non-food retailers were forced to close for long periods. Was that mirrored in Latin America?

Again, it was an evolving story. For food, we had a shift in channels, not a decrease in demand. Quite the contrary, sales in general were above prior years, as consumers no longer had the alternative of going out to restaurants.

As for non-food segments, it’s hard to generalize. Fashion was hit very hard and continues to struggle. People reverted to basics, such as underwear and shoes, and felt less comfortable buying higher-ticket fashion items online, such as dresses or fashionable shirts.

In electronics, the demand contracted initially, but then expanded due to home-office needs, entertainment, and communications. In this segment, good online channels sustained themselves very well. However, if your business was very dependent on physical stores, it didn't do well because people were uncomfortable going into stores and interacting with other people. 

Another of our strong segments is health and beauty. Sales in that business decreased and were hit, particularly in beauty.

And finally, home improvement, where we command a high market share, was a line of business that did extremely well. People allocated more of their incomes to improving and renovating their homes, partly because they're spending more time in them, which made them more aware of the wear and tear that’s happened over time. The combination of seeing the issues and having a lot of time at home to take care of them created substantial demand for home improvement. So that's one sector where we saw online demand and home-improvement needs creating activity in our stores. 

What happened to the share of online purchases in your businesses – did it explode?

To generalize, online sales represented about 1­­­­2 percent of total sales in the previous year. This increased to almost 40 percent in the second quarter of 2020. So in terms of sales, the online channel almost completely replaced the offline channels. That led to a major explosion in home delivery volumes.

In terms of margin, the story is very different, though again it differs by segment. In food, the margin was stable. In home improvement, margins varied.

Department stores is where we were impacted the most in terms of margins, because demand shifted to electronics and away from fashion.

There was the increased cost of delivery, which placed major pressure on margins. This meant we saw stable sales, but our results and margins were greatly affected.

Did you cover a lot of the increased online volume through third-party logistics (3PLs) providers?

We had to increase capacity fast. So to supplement our delivery capabilities, we had to integrate two or three major 3PLs in the countries where we operate. That will shape our thinking on direct-to-consumer logistics going forward, allowing us to mix our own solution and 3PLs.

And if we look at the food side: was that home delivery or was that mostly click-and-collect?

Food – which was both click-and-collect and home delivery – is the one segment where stores remained open throughout the pandemic. Stores continued to present a large proportion of total sales and online also grew substantially. Another distribution system that saw rapid growth was on-demand delivery. On-demand delivery had already been emerging in these markets even before COVID-19. But the pandemic gave a huge boost to on-demand delivery: demand for delivery of food orders within 45 to 90 minutes grew substantially in all of these markets. We had a very fast rate of adoption by our consumers: we went from zero to 10,000 orders per month in Chile in a matter of months.

A colleague of yours in North America said that one of the overlooked benefits of COVID-19 was that it provided volume for direct delivery. However, the problem with direct delivery traditionally has been that it costs too much money per unit to be delivered. But with rates of adoption having now doubled or tripled, he’s of the opinion that the economics of delivery have fundamentally changed. Do you see that happening?

The efficiency of on-demand delivery is driven both by the delivery and the picking economics. We are not seeing delivery economics improving much as a result of volume. But the picking economics have really improved as a result of the spike in volume, which has allowed for the construction of dark stores. Without the volume, you cannot build dark stores.

How different do you think your channel structure will be in three years compared to what it was in the past three years—and how far and fast will it be changed?

We feel the need to move at a fast pace, and not just as a result of the pandemic. What is happening is that as the whole market is moving toward better solutions from a technological and logistics point of view. The consumer has become more willing to adopt these solutions.

But the most relevant driver is the improvement of the solutions. I see the solutions growing at a very fast rate and the competition becoming more efficient, aiming to make shopping more consumer friendly. Any players who are not moving at this pace will be left behind.

In my own experience, one of the challenges that retail organizations struggle with most as they move in the direction of data analytics and digitization is the profile of their workforce talent. Do you see a talent issue developing?

There are two things at work here. It's a talent issue, of course, but it’s also a cultural issue that you’re trying to overcome.

Thinking about talent: There’s a shift in the profile of the talent, you need to create engines of growth, such as app development, direct marketing tools, and business intelligence. We’re in the process of recruiting those types of talent. In some cases, a region like ours has a limited number of people that have that type of training. So, for example, we created a development hub in Bangalore, India, which complements our technology organization in Chile, and helps us move much faster in terms of developing technology solutions.

But that's only one capability profile where we have been able to recruit the right type of talent. The other is cultural: the whole organization needs to be on board with these shifts. Therefore, people need to be aware of how the online and physical channels complement each other and how this is not a channel competition, but rather a set of solutions that will make the customer’s life easier. We’re making a great effort to train people in how these solutions work together. We have the Falabella Academy, where hundreds of associates learn about technology and logistics, BI, data analytics, and how all those capabilities help improve the business. 

If you look at China, there are retail ecosystems that are built up around the entire portfolio of what people buy and do and how they entertain themselves. And then on the other side is classic retail, for example the Amazon purchase of Whole Foods, a relationship where each can learn and profit from each other. Do you see that evolving in either your company or in your continent?

We are moving in that direction. It is not clear whether it will be through partnerships. But if you think about our acquisition of Linio a couple of years ago, an online marketplace, it meets our main objective. We aim to complement our retail business with a marketplace platform and as a result, have a more attractive assortment and better customer experience.

Another example is the development of our financial services business. We concentrated on financing initially, but then it became focused on the transactional relationship and payment solutions. Now it's aimed at the payment experience both in-store and online, ultimately complementing our retail offerings.

Another example is when we look at the countries where we don't have all the pieces of our ecosystem, for example in Brazil, where we’re working with third-party marketplaces. So, depending on the market, we will build different types of partnerships to complement our ecosystem, but our main focus is on enhancing the businesses we operate.

One more question about people. The biggest surprise for many business leaders has been just how well they could operate with fewer associates in the stores than ever before. Going forward, many plan to have a dramatically leaner number of associates in stores. Do you see that happening in Latin America?

In Latin America, we went through a very drastic reduction in overhead and then simplified our organizational structure. I think that same mentality of simplification is taking place in the stores, taking advantage of technology to automate. That also means people’s efforts can be invested to really add value to the customer.

What has been most surprising for you about the past six months?

The biggest surprise for me was the ability of a whole organization to work remotely, and to see remote work actually help break some of the hierarchical and organizational barriers across our businesses. It made us more horizontal in our interactions and helped to boost some of the cultural changes that we were seeking.

Can we assume that this is going to be a permanent change?

I think one of the challenges ahead is to find out whether we can project the reality that we are seeing now into the future. It's like when you build a dam in a river. You know the river will change direction – and that once you remove the dam, the river will return to its previous path.

We've seen very drastic shifts over the last six months. However, once we bring the COVID-19 barriers down, we will go to a new balance. But we will not go back to where we were.

What is the one thing that keeps you up at night?

The main thing that keeps me up at night is the need to increase the speed of execution. What happened over the last six months brought a great deal of pressure to rapidly react to shifts in customer behaviour. That pressure will not ease up as we move forward. We have very ambitious plans of putting our e-commerce under a common umbrella. So if there is one thing that keeps me up at night, it is the question how fast we can execute on all the different initiatives and if they can truly improve the customer experience.

What did you learn earlier in your career that helped you to navigate these dangerous waters?

I actually began in the agriculture sector. From that experience, I learned that you have to stay on the course and not overreact to very short term shifts. It's a bad idea to keep changing your actions because it rained yesterday or because something is happening with your next-door neighbour.

The pandemic has brought on a lot of changes, some of them long-term, while others may pass us by. Of course, you have to act in the short-term, but you also have to make sure you hold steady on your future plans. Constantly changing strategy is a very bad idea.

The other big takeaway for me, is the notion that you'd better be prepared to confront the long term trends quickly, because events like the pandemic can accelerate those trends in a way that you could never have imagined. Had we moved faster in building out a digital ecosystem and creating digital capabilities for our business, we would have been in a much better position during the pandemic.

What lessons do you hope to take with you moving forward, having gone through this very difficult time?

I think the one thing that helped us, and that I’d like to continue moving forward, is that intensive levels of communication are very important. As organizations, we tend to underestimate the importance of communication, we often feel like we are repeating ourselves and get bored of our own message.

The reality is that organizations and markets take a long time to digest those messages. So you need to keep repeating them again and again, even when you feel like you are getting tired.

Is there anything else you’d like to add?

Going forward, we will see an acceleration of greater cooperation between larger companies like Falabella and the rest of the retail and financing ecosystem. Our move toward creating a marketplace – of doing it not just with a view of improving assortment, but of opening up our platform to entrepreneurs and small businesses – is an example of how we can become a more useful player in the overall ecosystem.

The issue of cooperation is something that is not often mentioned, because every company is more focused on its own survival. But I think cooperation between smaller and bigger companies can create a better offer for the customer. We have a lot of small businesses that wouldn't have survived if not for the marketplace business model, because they don't have an online channel. I think that the larger players becoming a channel for everyone is extremely influential and important moving forward.