3 Keys to Navigating Digital Disruption: The Case of a Luxury Retailer

THE BIG IDEA

The Chalhoub Group is the biggest luxury goods distributor and retailer in the Middle East and North Africa, operating more than 650 stores in 14 countries across the region. With an estimated $1.5 billion in revenue, Chalhoub’s success had historically been driven by blending its knowledge of luxury and high fashion with its unique Middle East expertise: building a network of enduring, high-value and trusting partnerships in a region where relationships are of critical importance.

In 2015, the organization faced a number of new challenges. Geopolitical uncertainties in Europe, coupled with economic contraction driven by dropping oil prices, were squeezing business. This, combined with digital disruption and changing customer behaviors, had created a perfect storm of political, economic and technological pressures that saw growth slow to just 2 percent.  

Realizing that the “age of abundance” was over and that changing demographics were driving a shift to e-commerce, CEO Patrick Chalhoub implemented a “digital fix” in early 2016. The company’s products — dozens of brands — had been decentralized, each with its own site and digital presence. This approach proved ineffective, and Chalhoub created a digital competence center in the United Arab Emirates to work on new web-based projects.

THE SCENARIO

By July of 2016, it was becoming clear that the digital fix was not working. Bottlenecks at Chalhoub’s digital center pointed to the fact that its team couldn’t move at the speed of business.

While senior management had understood the need for transformation, they had underestimated the scale and breadth that this transformation needed to have. Digital was not something marginal to the sustainable future growth of the business, it was integral to everyone and everything.

It had taken six months to formulate a digital strategy, but that strategy was too far removed from the core of the business. CEO Patrick Chalhoub announced that the company in its entirety would need to pursue integral, organizational transformation, and that change would span everything from its culture to its behaviors and processes.

At the heart of this transformation would be a focus on customers who were themselves changing. And changing quickly.

THE RESOLUTION

In 2017, the company worked to refine and improve its strategy of customer focus. It had absorbed some tough lessons from its initial digital experiences. The new business plan would completely transform the business model to create a “customer-centric, hybrid retailer.”

Leveraging agile philosophy, principles and techniques, Chalhoub organized its transformation process into a sequence of 10 90-day sprints. It articulated a new vision: It would shift from being a traditional distributor and retailer of luxury in the Middle East to becoming an agile organization capable of placing “convenience at its customers’ fingertips.”

Between 2017 and 2019, the organization rolled out a series of initiatives to shift its focus to customer-centricity. To engage its customers more effectively, it moved to an omni-channel approach, revamping its brick-and-mortar spaces and operations to blend its top-notch customer service with e-commerce-like efficiency. Traditional retail became more experiential; for example, the beauty chain Faces incorporated elements like augmented reality tools that customers could use to try out products virtually, while they could also enjoy in-store testing of products.

With this shift to customer-centricity came far-reaching organizational and cultural changes within the company itself. It launched Ibtikar, an internal innovation lab, to foster intrapreneurship across the company. It also established external retail tech accelerator Greenhouse, which made allies of startups with the potential to become one-day competitors, harnessing the power of entrepreneurship to innovate in the retail space.

The center of gravity in decision-making was also lowered in 2018 when the CEO announced that Chalhoub would embrace a “more open company culture that encourages bottom-up innovation and collaboration.” Employees were to enjoy greater autonomy to test new ideas, learn quickly and share knowledge across the company, while leaders focused more on coaching and mentoring than on instructing.

True to its core competency of relationship-building, in May 2018 the Chalhoub Group announced a partnership with international online retail marketplace Farfetch, which was looking to grow its business in the Middle East rapidly. The joint agreement called on Chalhoub to merge its services in distribution and marketing with Farfetch’s e-commerce platform and to translate content into Arabic. In return, the Farfetch platform, already demonstrably successful, would host Chalhoub’s brands.

THE LESSON

The Chalhoub Group has driven organizational transformation by embracing an agile philosophy that encourages all employees to experiment with new ideas, learn from them and share knowledge across the company.

Critical to the success of this transformation are three core ideas.

1. Digital transformation is not an add-on. Integrating digital presence with ongoing operations requires a comprehensive transformation of the organization and its culture. This kind of change cannot be separated out into strategy, HR, R&D or operations issues, but needs to be combined. Companies that navigate digital disruption successfully are those that grasp the multidimensional nature of building organizational agility.
2. Customer-centricity is key. While organizational changes require flexibility and agility, the focus on the customer has to remain stable. A useful analogy comes from skiing moguls — negotiating steep bumps along the way by keeping your chest towards the goal. Customer-centric companies are those that integrate agility with a constancy of focus on what the customer wants and needs.
3. Keep close to core capabilities. Another thing that doesn’t change much in the Chalhoub case are its core strengths in high fashion and trusted relationship-building with partners. While the company pursues a range of initiatives that demonstrate nimbleness, there are certain values and abilities that remain strong and focused on the core of creating value for the customer. This has helped them create consistency as they accelerate change.

The preceding is based on the case Chalhoub Group: Transforming the Luxury Retailer (Darden Business Publishing) by Darden Professor Scott A. Snell.

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