Bed, Bath & Beyond's omni-channel transformation needs more proof points as "detached from reality" management comes under fire

Stuart Lauchlan Profile picture for user slauchlan April 11, 2019
Activist investors are circling the CEO and management team at Bed, Bath & Beyond, with the retailer still moving too slowly on omni-channel transformation.

Bed, Bath, Beyond
When you’re embarked on what your CEO admits is a period of “enormous change to adapt to the environment and our customer needs and to improve our competitive position”, it’s indicative of a need for long term thinking - which is the position that Steven Temares, CEO of Bed, Bath & Beyond, finds himself in:

Our transformation began some 18 months ago and comprises a thorough overhaul of much of what we do to deliver on our commitment to improve revenue growth, enhanced gross and operating margins, and create sustainable shareholder value. We have been driving significant foundational change across our business.

That’s fine and dandy - and reassuringly familiar, bordering on the cliched - as a mission statement in the turbulent retail sector. But the problem with long term thinking is that there needs to be some short term achievements clearly on view for all stakeholders to keep calm and carry on.

And that’s where Tamares has run into a problem, in the form of three activist shareholders seeking to take control of the firm’s board of directors. The investors state bluntly that the CEO’s assessment of how the omni-channel transformation is “accelerating” don’t hold water and that:

management's unsupported claims of progress serves as a stark reminder to us of how far removed from reality Mr. Temares and the Board have become. In our view, only the complete replacement of the Board and CEO will be sufficient to drive the necessary changes to produce lasting margin improvements and growth in earnings.

Ouch! The problem here is that there’s a lot of hand-waving going on about how the transformation strategy is supposedly delivering and not a lot of detail. For example, a useful indicator these days in retail circles is the comparison between digital sales growth and same-store growth, with most successful omni-channel retailers boasting of their double digit growth in the former.

Bed, Bath & Beyond isn’t providing the numbers here, with CFO Robyn D’Elia merely stating:

On a directional basis for the quarter, comp sales growth from our customer facing digital channels continue to be strong, while comp sales from our stores declined in the mid single-digit percentage range.

Such vagueness inevitably prompts suspicions that digital isn’t delivering at the pace that other retailers can boast. If there were good numbers to boast about, why wouldn’t they be pimped as hard as possible?

Prove it

So what successes can Temares point to? First up he cites the Next Generation Lab store initiative, 21 of which were rolled out over the past year. These are shops that are used as experimental environments to test new ideas and merchandise, with the goal of re-imagining the in-store customer experience. Temares explains:

Our Next Generation Lab stores [are] where we're testing a variety of experiences and visual merchandising to enhance our customer experience; front-end optimization, which supports a better customer experience across our digital channels; and value optimization, which supports our commitment to being priced right, including competitive in markdown pricing or to drive sales while maximizing profits, enhancing our competitive place in the market, and positioning us for long term growth.

Again, a sweeping high-level mission statement, all the right words, mostly in the right order. But what do these stores deliver in practice? Temares says:

Some of the experiences in these labs stores include scarcity products, a greater emphasis on home decor, food and beverage, and health and beauty care, improved sight lines showing collections, cross-merchandising, lifestyle merchandising and queue lines, as well as an even more meaningful reduction in inventory already accomplished in the rest of our Bed Bath & Beyond stores, all to enhance the overall shopping experience.

For these lab stores that have a different combination of these experiences and [in those] that have been open for at least four weeks, our recent results show that they are out-performing similar stores in sales, transactions, margins and margin dollars. For example, over the last four weeks, sales in these stores are about 2.2% higher than comparable Bed Bath & Beyond stores. Transactions are higher by about 3.7%, product margin dollars are higher by 3.6%, and the product margin rate is slightly higher by 50 basic points. For the same period, these lab stores are also achieving inventory reductions approximately 7% better than the inventory reductions already being achieved by comparable stores.

The trick now is to get the entire Bed, Bath & Beyond real estate portfolio onto the same sort of operating model, he adds:

The learnings from these lab stores will be refined and scaled into additional stores to accelerate sales and enhance margins. We have already started rolling out some of the learnings to additional stores, such as queue lines and increasing sight lines, which can be done fairly quickly and at a relatively low cost.

Meanwhile there’s work being done to improve performance in customer-facing digital channels - or Front End Optmization (FEO) as it is referred to internally. The firm has completed re-platforming of Bed Bath & Beyond's and buybuy BABY's digital channels with a new service based architecture and responsive design, which Temares says allows for a faster and more cost-effective implementation of features across these two web and mobile channels:

The performance of these websites has been enhanced, including the improved page load performance and we introduced a cleaner, more contemporary website design. As mentioned, another benefit to FEO is the speed at which we can now release new features and experiences to the websites, moving from monthly to weekly releases post FEO and moving toward daily.

We're also benefiting from lower development costs through automation as well as no longer having to write separate codes to develop experiences to each channel. At the same time, we seen growth in conversion post FEO for and in the United States, we experienced a combined year-over-year growth rate in conversion in the mid single-digit percentage range.

There’s also been an uptick in the focus placed on analytics and understanding/exploiting customer data, with Temares stating:

We are deeply committed to analytics and are making certain that our data is a strategic asset….I mean the more we get more advanced analytics, the more we're understanding the profitability of our sales and so we're able to make better decisions about what categories are profitable, at what price points through what channel. And so we're able to pull back on some areas where we're not as profitable and put our efforts into the areas that we are profitable. And that's really the focus that we've been gaining on and focusing on for the last several months and we will announce in the future.

This means embedding analytics capabilities across the entire business, leading, says Temares, to enhanced decision-making:

We have established a multi-disciplinary branching for Bed Bath & Beyond to reposition and articulate our brand in the marketplace, including all our customer interactions across our assortment, storing digital experience and marketing, and look forward to seeing these efforts manifest during the year.

The company has also taken what might be regarded as a bold move in the current Make America Great Again climate, where US firm are under enormous pressure from the very, very top to keep work in the domestic market or face an early morning Twitter ‘name and shame’ rant. Temares is heading in the different direction:

We have transformed our approach to developing, managing and delivering technology solutions to meet the needs of the business. Under new technology leadership and with enhanced processes, we can better identify, prioritize, resource, collaborate and deliver against our ever increasing technology road map. To help support the growth in our IT projects, we established an India development center in fiscal 2018 to provide cost effective enhanced productivity for our IP deliverables and plan to expand our center in 2019 to leverage the additional skilled workforce in a 24-hour work day.

My take

Progress, but not fast enough.

Achievements, but not enough detail.

A strategy, but not enough time.

It’s not a pretty picture at this point for Bed, Bath & Beyond’s omni-channel future - at least not under the current regime. The last thing management needs to be worrying about at the moment is fending off a boardroom coup, but that’s looking like exactly what they’ve got.

If there is a change of executives, what that means for the current transformation program is anyone’s guess, although the activists are talking about a need to evaluate “non-core assets”. Fire sale ahead?

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