This Q&A was originally posted as a blog on March 29, 2016.

I recently had the opportunity to be interviewed by Bill Bishop of Brick Meets Click. We had a wide-ranging conversation that explored formulas for success, where to start a strategic approach, why food retailers need to challenge current practices, how to stay focused on profitability, and the importance of the balance sheet.

Here’s the interview, I hope you’ll come away with a solid framework for the transition to omnichannel retailing.

BISHOP: How has your thinking on what it takes to be successful in food retailing evolved? How do you approach that question today?

BOLTON: I’ve been a big reader, especially in management books and management theory. I think we’ve all heard of or read In Search of Excellence and the Good to Great books. As I was recovering from flunking my retirement, I learned about the book What Really Works, written by Nitin Nohria, who is now currently the dean of the Harvard Business School, and William Joyce and Bruce Robertson.

They came up with a study of 200 different management practices and then studied these practices over ten years at 160 companies. What they developed was basically a formula, a very simple formula: four plus two equals success. I’ve used that article and this criteria to look at and evaluate companies not only in the retail and supermarket sectors, but also other companies and organizations.

BISHOP: What does four plus two equals success mean?

BOLTON: Nohria, Joyce, and Robertson identified eight key management practices from the successful companies – four primary practices and four secondary practices. The four primary practices are strategy, execution, culture and structure, and the four secondary practices are talent (which I like to personalize as “people”), innovation, leadership, and mergers and partnerships.

The premise is that successful companies excel at all four primary practices and two of the secondary practices. Hence, four plus two equals success.

BISHOP: So if you found yourself sitting with a management team that needed to come up with an entirely new strategic approach, where would you start?

BOLTON: I always start with the customer. I believe that’s what you build your strategy and your formula around. The key is to listen to the customer – to not be defensive, and to listen in various forms. I had a vice president that sat down at the customer service desk for two days and listened to the calls from the customers. It was very, very revealing.

Listen through your market research, get regular updates, quarterly updates. Listen to the customer in relation to specific companies, and listen to the customer in general. There’s a lot of talk about Millennials these days, but I believe there are more generations that you need to listen to.

The other key is to observe the customer. One of the practices I’ve done over the years is to just stand in the store for a couple of hours and watch what the customers do. See if the research correlates to what the customer is doing.

In e-commerce you have to analyze the trends, because you obviously can’t observe the customer, but you can see what is going on in the trends and the data. The point is the same – that you really have to understand the customer. Translate the data into information, and then translate the information into knowledge.

That’s the fun part of being a retailer – when you really understand the customer, you can anticipate their needs and you will be successful.

BISHOP: What else do you need to focus on as you translate knowledge into action?

BOLTON: A retailer has to continuously challenge current practices and procedures. It’s really good to be disruptive in your thinking. I encourage people, especially in the supermarket industry, to embrace new thinking.

For example, I think the process of the weekly circular has to be understood or challenged by supermarket operators today. Is it effective? It is worth it? Consider print and social media and look at how your messages get out.

Category management was in vogue 25 years ago, but what is category management today? We need to start to challenge and understand those assumptions. When is it time to make changes to category management?

The supply chain is the other area I would look at. I was struck by the recent announcement that UPS is investing in a start-up called Deliv (based out of San Francisco) because they want to understand the last mile – and especially for e-commerce.

How does the supply chain work for supermarkets? And can we take another look at that?

  •  There’s a company called Modalyst; it’s an e-commerce drop shipper and they basically eliminate the risk of inventory.
  •  An American retailer, a merchandiser actually, went on a trip to India. It was very interesting to see that a prominent retailer would be stretching their minds and looking at the practices in India.
  •  I encourage people to look again at Target. They are doing an awful lot of different thinking, especially in food, and especially in fulfillment of their e-commerce sites.
  •  Just recently there’s been a turnaround at JCPenney, and they’re looking at their inventory terms and their supply chain.

Overall, I think we can learn an awful lot as a supermarket industry by focusing on other industries and viewing the world as a materials handler would, and thinking about reverse engineering and employing industrial engineers. Consider that a checker is very similar in an operation to a factory work station. These are the kinds of places where we need to look for competitive advantage.

BISHOP: How do you factor competition into this process?

BOLTON: I always like competition. I think when a team is developing the strategy, the one big question that they need to ask is: What is the enterprise’s sustainable competitive advantage? They have to lead with that advantage, to demonstrate that advantage, and act as a leader. Even though they might not be the biggest in terms of market share, they need to be biggest in terms of ideas and thoughts, and execute the strategy.

At the same time, however, they should not ignore the competition – which includes any format, whether it’s a supermarket, food store, restaurant, or convenience store. We’ve already been talking about e-commerce. Even health clubs are a threat to share of wallet; they are where a lot of disposable income goes, so I think we need to think about them in terms of competition.

BISHOP: In addition to doing all these things, how do you stay focused on profitability?

BOLTON: I think of this in terms of creating enterprise value. Whether it’s retail or e-commerce, the basic goal is not only to drive sales but to understand sales.

  •  In retail, analyze your trips to the store – per ticket or per capita.
  • In e-commerce, understand it’s going to be a different set of analysis – where the clicks are as opposed to the trips to the store, the size of the order and the complexity of the order or the simplification of the order.

BISHOP: Some retailers are extraordinarily effective at driving the operation statement to ensure that the mix of sales is as rich as it can be, but frequently that depth of expertise doesn’t extend to the balance sheet. Is there a need to ensure that both financial instruments are fine tuned? 

BOLTON: A lot of people with my experience, and people coming up in the industry too, are very knowledgeable on the income statement. The balance sheet, however, is left to accountants who are financial people. I think the balance sheet should be introduced earlier in a lot of operating people’s careers.

When you think in terms of sales and productivity, every cost is manageable, and if people are oriented to the income statement as opposed to the balance sheet, some costs are hidden.

Occupancy, for example. A colleague of mine said that typically we just look at fixed cost and variable expenses – but when you think about occupancy as a cost, you are disruptive in your thinking, and challenging your thinking. I ran across a company in the UK called We Are Popup (it’s now also in NYC). They’re putting different retail concepts into existing retailers and then evaluating them as opposed to committing to a five- or ten-year lease. What an interesting approach to productivity and managing expense.

The cost of capital is also hidden if you focus only on the income statement. If you go out to borrow money, you have to factor that cost of capital into your balance sheet. I’m a believer in self-funding, so I think retained earnings over the years are important.

How you make retail profitable is a broader question that has to include these balance sheet components as well as four plus two thinking.

For ecommerce and omni-channel, just putting a weekly ad on the website won’t do it. You have to think differently about both the enterprise and your investment. I would say you have to develop a new four plus two formula for success.