Transformations: Wrapping an Old Fish in a Piece of Paper Called Change
Note: size of bubble represents FY 2017 company revenue
In recent years, companies in the retail and consumer goods space have touted “business transformations” – a cue to analysts and Wall Street that they were launching innovative products and services or becoming more digital, to name a few themes. To understand the success rate of transformations in the retail and consumer good markets, The Navio Group partnered with Loup Ventures to identify a basket of companies and analyze key performance metrics over the last five years.
The results were surprising: companies that frequently touted a transformation on their earnings calls were less likely to succeed in driving long-term revenue lifts and generating growth.
More often, companies with executives that were eager to publicize transformation efforts were either a) unsuccessful driving top-line and bottom-line improvements or b) only succeeded in cost-cutting to improve margins, despite stagnant or declining revenue. In effect, transformations touted by executives at these companies resulted in operational restructuring.
One notable exception stood out amongst the list of companies: Domino’s. Between 2013 and 2017, its executives never mentioned a transformation and instead took a workmanlike approach to change their company to drive outsized results. Domino’s drove a staggering 30% revenue growth and increased its operating income by more than 40% over the five-year period.
We believe the genesis can be traced back to the CEO, Patrick Doyle’s, early declaration on Jim Cramer’s show that “Our pizza tastes worse than the box…I’m gonna tell people.” Rather than dust off the traditional turnaround playbook, the management team came out and exposed the underlying, widely known issue– the product. As Doyle told CBS, “We went on air on a Monday, and by Wednesday, our sales were up double-digit. And we hadn’t even told them how we’d fixed it.” The leadership team and organization focused on fixing the product and, in doing so, reinvigorated the brand. It then focused on enhancing customer experience through the facilitation of convenience by turning itself into a technology-focused company. The results speak for themselves as the company’s stock outperformed traditional high-achievers Amazon, Apple, and Facebook over a seven-year period.
So, what can we conclude from the data and from Domino’s success? Three themes stick out:
- Leadership and courage make all the difference. It doesn’t show up in any of the numbers but leadership and the courage to fundamentally address and then fix underlying issues separates companies like Domino’s. It’s hard to publicly acknowledge to both customers and Wall Street – particularly when executives’ compensation is tied to stock price – that your company has problems, but leadership is about making difficult decisions. As Doug Stephens writes in the Business of Fashion:
It requires significant organizational introspection, courage, honesty, design thinking and research. There is no off-the-shelf solution, no app and no magic to it – just the willingness to reinvent, reimagine and risk the occasional screw up. Think of it this way; if it’s not risky, it’s probably not innovative.
- Understanding what a company sells and then reinventing the product is core to a successful transformation. Identifying the customer value proposition in terms of both product and experience– not how the company maximizes profit – is how a company reinvents itself. Domino’s went about fixing its product (pizza) and then creating a seamless customer experience through digital and mobile. It did this even though the legacy business and its processes relied on physical locations. Nordstrom is experimenting with service-only locations because it believes this to be a resonant experience for its customers. As Mr. Stephens writes, “Customer experience is…the future of how physical retailers will generate revenue. Experiences won’t just sell products. Experiences will be the products.”
- Rethinking the talent strategy – both internal and external – is critical. To reinvent a business, leadership needs to also rethink its talent strategy. According to Rob Biederman, CEO of technology platform Catalant, 53% of individuals in the C-Suite are now thinking about a more agile workforce as a top priority. Domino’s now has 50% of its headquarters employees in software and analytics. The transformation of the organization is key to reinventing the customer experience and building an exponential mindset in the organization as the industry continues to evolve.
As change becomes the norm in the retail and consumer goods industry – as well as most others – executives and leaders will need to re-think what it means to transform their businesses rather than, as Barack Obama once said of his opposition, “wrapping an old fish in a piece of paper called change.” Leaders should ask themselves: what are the underlying issues? And how do we take a non-linear approach or exponential mindset to transforming the business, even if it disrupts our current model?
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