Case Study: Second Thoughts About a Strategy Shift

Augustín Rey, a celebrated European businessman and the new presidente of the century-old retailer Emilia, drove an SUV full of teenagers into the Spanish city of León to show them the revolution firsthand.

A few hours earlier he had been visiting close friends, Camilo and María Veiga, in their home near the provincial capital, and had animatedly explained his plan to revamp the chain’s merchandising strategy and redesign some of its dowdiest stores. The store in León, for example, was getting a complete makeover: An indoor central “plaza” would provide space for young people to listen to musicians or watch movies projected onto walls; stalls and pushcarts along radiating “streets” would offer merchandise selected to appeal to Spain’s youth culture.

The Veigas’ son and daughter had been intrigued. Emilia? they had asked. That old place? So Augustín had invited them and three of their friends for a sneak preview. María had decided to come along as well.

The group’s midmorning arrival at the store, which was in the final stages of its renovation, caused quite a stir. Awestruck employees lined up to shake Augustín’s hand as the teenagers fanned out among the piles and boxes of merchandise.

Nearly all the company’s stores in Spain, France, and Italy had already been renovated to at least some degree, Augustín told María. About 10% of them, including this one, were getting the full treatment, and most of those were already up and running. But that was just the first wave: Every Emilia store was to be redone over the next four years.

“They seem to love it,” María said, watching her kids and their friends cruise along the indoor streets, touching the skinny jeans and baby-doll dresses on display. “Usually they turn up their noses at Emilia — they say it’s a store for old ladies.”

“Sure — it’s a great layout, and the clothes are beautiful,” Augustín said. “But what will really hook this generation over the long term is this little detail.” He held up a square black price tag bearing “€21” in large type and, in smaller letters, the word diario — “every day.”

“This is the revolution,” he said. “Realness.” He let the words sink in and then added, “These kids represent a chance for retail to start over and get real. They are young and idealistic and untainted by the money games that have been plaguing retail for too long — the ridiculous markups followed by sales and two-for-one deals and special promotions. The young, the old — all retail customers — want straight talk: hablar claro. And we’re going to give it to them.”

“Hablar claro” was the name of Augustín’s strategy for turning Emilia into the next Spanish retailing miracle, and it had initially thrilled investors. Results for the first full quarter of operation under the new strategy had been outstanding. But second-quarter performance was disappointing, and what Augustín didn’t tell María was that the most recent results would show further deterioration. Customer traffic was down significantly, and same-store revenue had dropped. When the results were made public, in a few days, the muted criticism that had begun a few months earlier might burst into demands that he change the strategy.

But you can’t chicken out in the middle of a revolution.

Editor’s note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.

 

A Great New Hope

Augustín’s first retailing success, years before, had been his reimagining of the showrooms of Hogar, a European home-design company. But it was his stint as head of retailing at the fast-fashion chain Xela that had made him a star. His initial focus had been operational efficiency; to drive that home, he had stripped the stores down to their essence, sometimes even exposing wires and ducts. His second focus had been cutting-edge style; to emphasize that, he’d created in-store teams of genios de moda — great minds of fashion — to provide style tips and listen to shoppers’ ideas. The teams were hailed as retailing’s first really new concept in decades.

So it was considered a great coup when Emilia’s board announced that Augustín had been recruited as the company’s next leader. His mandate was to radically reinvent an enterprise that seemed to have lost its way in the face of challenges from fast fashion, big-box stores, and e-commerce.

Emilia, named for the mother of the chain’s founder, had acquired a distinctly matronly air over the decades; it was where frugal middle-aged women shopped for sensible clothing for themselves, their husbands, and their school-age children. This didn’t exactly constitute a thriving market. Even worse, Emilia’s customers had become conditioned to buying only when prices had been slashed. No deal, no purchase. So for years Emilia had competed aggressively on price, offering more and more “door breaker,” holiday, and clearance sales and churning out circulars with coupons, just to get customers to visit the stores or go to the website.

“We have to break people from their addiction to discounts,” Augustín said to María as they sat on a bench outside the store. Then he asked, “Do you remember my aunties, Tía Marta and Tía Teresa?”

María smiled. She and her husband had known Augustín since school days in Galicia, and she well remembered the aunts, who had often taken him in when his parents were traveling for business.

“They would put on their matching hats and take the bus and spend the day going into one store after another, hunting for bargains,” Augustín said. “I still remember the junk they came home with. And why? Because some shop owner had made up a ‘full’ price for a fan or a pair of gloves and then, after much haggling, dramatically caved in and slashed the price to what it should have been in the first place! Whereupon my aunties would gladly pay the so-called bargain price and go running out of the store, crowing about their great victory.”

María laughed. “It was a harmless form of recreation for them.”

“Perhaps. But on a huge scale in today’s retail environment, it’s not harmless. It’s mutual victimization: We victimize the customers by deceiving them — we lure them with huge reductions from artificially inflated list prices and then try to get them to buy other things while they’re scooping up their discounts. Meanwhile, they victimize us by forcing us to cater to their irrational need to find bargains. Do you know that in the year before I was hired, Emilia spent more than €700 million to execute 590 different sales and promotions? And 72% of its revenue came from products sold at less than 50% of the list price. The average discount needed to get customers to buy has soared from 38% to 60%.”

“It’s all part of the game, Augustín.”

“Retail should not be a game. Hogar and Xela are the paradigms. They excel by being straight with customers. No gimmicks. No deception. That’s the ethos I’m going to bring to Emilia.”

“But Emilia has such different customers from Xela,” María said. “Won’t they be upset?”

“A few will be upset. To which I say, ‘Fine. Be upset.’ Others will be relieved.”

“Won’t you need new customers to replace those who defect?”

“Just look,” Augustín said. The last of the young people had come out of the store, chattering excitedly about what they had seen inside.

“Them?” María asked.

“Yes, them. As well as older teenagers and twenty-somethings. Emilia will truly become a store for the whole family, by appealing to different family members in different ways. Older customers will want to come here for value; young adults will want to come here to be with their friends. They’ll walk along those indoor streets, hear their music, see images of their idols wearing our hip new clothes. It will be a retail playground for them — while their mothers are upstairs trying on sensible shoes.”

“But this generation is so obsessed with the internet, I doubt they’ll ever set foot in stores again.”

“We are replicating the in-store experience online,” Augustín said. “But I think physical stores will continue to be very important to people. Buying clothing is a touch-and-feel experience. Young people will use social media to spread the word that Emilia is a fun place to meet and socialize.”

“OK, but what if they — or their mothers, if they have no money — refuse to pay for the cool stuff?”

“They won’t refuse,” he replied. “We’ll stay inexpensive. We offer ‘everyday low prices,’ as they say in the States.”

“I guess retailers are born optimists,” María replied.

 

The Reckoning

The most recent quarter’s results were every bit as bad as Augustín had expected. He studied the numbers during a visit from two board members at his Andalucían home overlooking a golf course and the distant Mediterranean. The loss had widened to €211 million. Same-store revenue was down by 19%, and customer traffic had dropped by 10%. The chances now seemed remote that this year’s holiday shopping season, which was right around the corner, would provide much of a lift.

“But it’s a four-year plan,” Augustín said as he closed the folder. “Not a one-year plan. We need time for the changes to play out — for all the stores to be renovated, for customers to understand our pricing strategy.”

“It can’t be a four-year plan if the company doesn’t survive for four years,” said the board chairman, Nicomedes Mallo.

Augustín was startled. Nico had recruited him and had always been his staunchest supporter. Quietly he said, “Survival is the whole reason for the four-year plan. We are extricating Emilia from the death spiral of a shrinking customer base, deal-obsessed customers, tired merchandise, and escalating price promotions.”

“But customers don’t like the new approach,” Nico said.

“They need to be educated,” Augustín replied. “If our new strategy has one weakness, it’s in marketing execution. In fact, I’d like to start a new campaign: Haz los cálculos — ‘Figure it out.’ It will be aimed at educating consumers about our competitive everyday prices. We have the data to back it up: A random bucket of items shows that although some items are slightly more expensive, overall Emilia is significantly cheaper than all its direct competitors. Plus we have a policy of matching any other store’s price.”

“If the straight-talk campaign isn’t working, what makes you think ‘Figure it out’ will fare any better?” Nico asked. “You haven’t done any research on this.” He reminded Augustín that the board had agreed to run hablar claro without testing it first, buying in to his argument that the company needed to get out in front of consumers rather than be led around by their misguided desires. The board didn’t want to make the same mistake again.

“Recent customer surveys show that people see Emilia as offering less value than competitors,” Nico added. “And to take advantage of the situation, our competitors are ramping up their sales. They’re offering them every weekend, issuing savings passes, and flooding the airwaves with advertising about new low prices. Customers are responding. That’s why our numbers are so bad.”

“We’re starting a realness revolution,” Augustín said. “We knew we’d have to take a few arrows in the back.”

Nico asked the other board member, Celso Peres, for the papers they had drawn up and spread them out on the glass coffee table. “We are proposing a modification of the new approach,” he said. “One that more closely addresses the expressed desires of our existing customers, whom we cannot abandon.”

“First,” he continued, “we give up the hablar claro idea. Customers seem to find it condescending. Second, we go back to our old policy of ‘best price weekends.’ Third, we show the list price for every item so that customers can compare it with the discounted price. Fourth, we reintroduce the words ‘sale’ and ‘clearance’ into our marketing communications. Fifth, we go back to printing circulars and coupons. This will make it simpler for customers to understand our stores. It will show that we are on their wavelength.”

Nico slid the papers across the table toward Augustín. “This isn’t a coup,” he said. “We still believe in you. We’re still behind your vision to cater to younger customers, to turn the stores into social hubs, and to be more transparent about pricing — to a degree. But we know those changes will take a while, and in the meantime we don’t want to alienate our existing customers.” He tapped the papers with his finger. “You don’t have to follow this plan to the letter,” he said. “But it’s the sense of the board that your new strategy is too extreme for our customers. They don’t know what to make of Emilia anymore.”

Augustín looked at the plan. It was nothing short of a return to business as usual. To him, it represented a colossal failure of nerve.

Question: Should Augustín abandon his bold strategy?

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