Retail's Recession Survivors: Not Waiting for a Rescue
As retail executives have gone from discussing unparalleled growth to questioning their survival, it reminds us of Alexander Selkirk, the real-life castaway believed to have been the inspiration for Daniel Defoe's Robinson Crusoe. Marooned, he built a shelter from pimento trees, hunted goats for food and even domesticated feral cats for protection. Will retailers prepare for survival à la Selkirk or wait passively for rescue?
Many retailers will be the un-Selkirks of our day and wait to be rescued. If they do manage to survive, they will end up in a weakened state and as prey for corporate predators. Those that adopt the Selkirk approach, however, are likely to emerge from the recession in a position of strength, having stolen share from weak competitors and positioned their companies for profitable growth. Smart companies will conserve capital by curtailing new-store openings and refurbishments of existing stores, postponing or scaling down IT investments, and reducing inventory levels and breadth of assortment. They will also gain strength by freezing salaries, reducing corporate administrative costs, and restricting discretionary travel and training (see figure 1). Two major U.S. retailers have already gone this route: Macy's announced a 55 percent reduction in capital spending, and Best Buy offered voluntary separation packages to its entire corporate staff. In all sectors, 25 percent of U.S. companies are freezing salaries in 2009.
These are all good cost-reduction measures for companies concerned about short-term survival. The larger question is whether retailers will survive over the longer term. Answering the survival question will require addressing core operational and merchandising deficiencies that may have gone unaddressed during the retail boom years.
Don't Just Weather the Downturn, Emerge Stronger
This recession is unlike any other. There are some similarities to past downturns, but there are also unique forces that will affect how the retail industry will look postrecession. An awareness of these forces is pushing many retailers to strengthen their balance sheets and earnings outlooks, while also undertaking a rigorous review of processes and performance. There are two areas that deserve immediate attention: operations and merchandising.
Operations: efficiency is everything. We hear so much about the importance of improving retail operations but rarely any specifics on how to do it. Here we offer a "how to" primer on improving the retail workforce, processes, supply chain and store life cycles.
Get the best out of your workforce. When a swift change in consumer behavior pushes comparative sales into negative territory, it soon follows that spending on store labor must change as well. By change, of course, we mean remove—and the critical differentiator is how you remove those labor costs. There are plenty of examples of what not to do. U.S.-based Circuit City reduced the pay of many of its salespeople, thus creating a disgruntled workforce in a sales process that requires significant interaction with customers. Not a good idea.
A better idea is to get the most out of your sales force, which, by extension, will lead to happier, more loyal customers and higher revenues. This begins with understanding workload demands and labor deployment for both customer-facing and non-customer-facing tasks. We want to avoid the staffing-to-availability pitfall and schedule the most experienced and productive workers when they will have the most impact on profitability (see figure 2). Shifting operational tasks to spread the work will help avoid those killer days that frustrate associates while also maximizing the time they are on the sales floor with customers. Many retailers are also shortening their daily store hours to keep more staff on the floor during busy periods. All of this can be accomplished while reducing the overall level of labor.
Meanwhile, view tough actions such as staff layoffs as an opportunity to increase bench strength—developing and retaining your best and brightest people. Make sure you communicate and reiterate to those remaining—at every possible opportunity—their importance to the organization and its success. Consider incentives to motivate them, perhaps through target-based awards or bonuses.
Create efficient processes. Over time, layers of management (store, district, regional or national) may cause inefficient processes and force rank-and-file employees to react with one-off solutions. Who hasn't developed a workaround to solve a process problem? These quick fixes are not always sustainable for the long term, however, and they are especially troublesome during a recession when there are not as many workers available and customers are more demanding. Instead, we suggest that systematically eliminating non-value-added tasks (that's code for useless, unnecessary, make-work stuff) while consolidating useful activities. This way, you can create better labor plans and ensure that workers and managers have clearly defined responsibilities appropriate to their positions. It also frees up time to focus on the customer.
A recession is a good time to secure lower rates and reduce the total landed cost of goods, and to take a closer look at internal supply-chain operations.
Even slight improvements can have big results. Consider, as an example, a retailer friend of ours that had inadvertently piled on the paperwork. Every time there was a product return, customer-service associates had to question customers to the nth degree. They wanted to know everything. What was wrong with whatchamacallit? Could you give an example of how the whatchamacallit did not work? Was there a certain time of day when it would not work? What is your mother's maiden name? You get the idea. What started as one screen entry at the point of sale became burdensome manual reports for the store and region. We found that 90 percent of the information captured in these forms was never used, and the other 10 percent could easily be added at the point of sale. This retailer purged the useless questions and never looked back.
Make money up and down the supply chain. Almost everyone in the supply chain is being affected by this recession—retailers, suppliers and logistics partners—so make sure your suppliers are helping you make money. By comparing net pocket margin among vendors, you can pinpoint which suppliers are not providing their fair share of profit to your business. Then, take a closer look at why. The reasons can range from distribution inefficiencies to product costs to quality issues that lead to returns. Understanding what drives suppliers' profits puts you in a better position to renegotiate contracts and source new vendors, and it helps your suppliers maximize their own profits. Conversely, if you represent a high cost-to-serve for your vendors, you will likely incur costs that must be passed on to the consumer. There is no better time than now to reevaluate.
Remember, too, that your manufacturing and distribution partners are also suffering. Transportation rates are sliding downward due to lower demand, while reduced capacity has failed to match the pace of decline. A recession is a good time to secure lower rates and reduce the total landed cost of goods, and to take a closer look at internal supply-chain operations. When the store footprint changes (due to closures or openings), a reevaluation of the distribution center network is in order. Within the four walls of the distribution center, there are surely ways to cut costs, improve order accuracy and boost responsiveness, which will reduce stock-outs on the store shelf. There should be opportunities to open new distribution points, close existing ones or consider an outsourced distribution center model. Also, don't ignore the final 100 feet from the store dock to the store shelf. Having product arrive at the dock on the right day, when store staff is prepared to move it onto the shelves, is key to capturing shelf space.
Finally, keep the lines of communication open. Predicting demand accurately at the store level will become more difficult, as last year's performance is not necessarily indicative of this year's. Faster feedback from stores and better collaboration with vendors will be essential, both now and when consumer spending rebounds—which could happen without much warning.
Evaluate stores by life cycle. Every store has a life cycle—from opening, through rapid growth, steady-state, slow-growth, and eventual decline or even closing. The length of the life cycle can be extended, either because of a great location or a remodeling that brings new life to an old format. Continually evaluating the four-wall profitability of your stores will ensure the right actions are taken at the right time. Why sign a new lease for a store in the declining phase unless you have a clear plan to restore its profitability?
The formula for evaluating store profitability, design and site location will change from recession to postrecession, as new real estate opportunities materialize. According to market research firm Reis, Inc., vacancy rates at malls and shopping centers in the 76 largest U.S. markets rose to 8.3 percent in the fourth quarter of 2008, up 0.5 percent from the third quarter. This is the largest increase since 1999. Reis also found that the effective rent for neighborhood shopping centers fell in 65 of the 76 markets. The possibilities for renegotiating rent terms are better now than they have been in some time. When evaluating and designing a new store footprint, be sure to consider future demographics and consumer behavior. The trend toward reurbanization may steer retailers away from the suburban shopping mall; however, the high costs of urban locations will require more thoughtful design.
Faster feedback from stores and better collaboration with vendors will be essential, both now and when consumer spending rebounds.
Merchandising: productivity is paramount. Merchandising is another area of critical focus during a recession, as strategies employed now can help retailers emerge stronger later. There are four ways to improve productivity.
Live and breathe assortment. The trend away from conspicuous consumption toward "virtuous" consumption means people are becoming more selective about their purchases, seeking more value in terms of higher quality, larger quantities, environmental friendliness and even commendable social practices. Old assortments may underperform and some products may need to leave the portfolio. In this environment, it pays to monitor the changing preferences of your customer base and adjust both core and luxury offerings accordingly.
Cost of goods sold (COGS) should also be on your radar. Currency fluctuations, commodity pricing, transportation costs and economies of scale all affect COGS. Take every opportunity, therefore, to lower these costs or switch products in areas where these costs are rising. Also, monitor manufacturers' responses to this new environment. The recession is affecting all industries, and manufacturers will be watching how they spend their trade funds and how they deal with terms of sale. They may also rationalize their portfolios to drive out inefficiencies, which could affect a retailer's assortment. If you've been putting off forging closer relationships with your vendor network and understanding product profitability, now is the time to do it.
Internal improvements can also help weather the recession. For example, we helped a clothing retailer reduce its stock-keeping units (SKUs) to a shallower assortment, and deploy fewer new floor sets and one-off fashion offerings throughout the year. "We kept the SKUs and fashions that were most profitable and core to the brand, and eliminated noncontributing SKUs that added extra cost to the sourcing process," explains the merchandising manager.
Finally, if not already doing so, consider private-label brands. There are many quality store brands, and they are also competitively priced. These can have a significant impact on profitability in a category, while still allowing core brands to retain their prominent positions and share. And as vendors face excess capacity, costs of private-label or store-brand products become more attractive.
Set prices, but be selective. It is not unusual to pass by stores and see 50 to 70 percent off last-ticket-price signs in the window. While slashing prices is a valid response to an economic downturn, it can be dangerous if not selective.
The key is to avoid blanket discounting across a wide swath of merchandise. Bring in traffic by offering selective low-priced options and promoting low-priced merchandise. While entry points must be competitive, the remainder of the portfolio should have a planned assortment with price points that cover the spectrum of interests for the customer. Comparing what consumers tend to buy with what is currently offered may reveal overpositioning in high- or low-priced products.
We advocate value-based pricing that doesn't focus on the lowest price alone but considers the entire value associated with the product. For example, when a refrigerator breaks down, there is urgency to replace it before the food spoils. Price is certainly one consideration in the replacement decision; however, so is the ability to deliver the product quickly, within a tight time frame, install the new appliance, and remove the old one. These are all services that people value and are willing to pay for.
As always, recession or not, beware of deep discounting that sparks a fundamental shift in consumer behavior—shoppers may refuse to pay full price long after the downturn has ended. A strong brand represents more than low prices. If you can maintain brand value through the recession, you will be in a better position afterwards to retain loyal customers and draw in new shoppers, even as you begin to raise prices.
Get smart about merchandising. Robert Burns' often-quoted phrase, "The best-laid plans of mice and men often go awry," could be applicable to many of today's retailers. Your merchandisers purchase a great assortment, marketers develop exciting promotions and supply-chain partners deliver their products on time. What goes wrong? Customers walk in and cannot locate the products they want. It happens time and again.
Smart merchandising requires stocking shelves effectively, informing the customer about products and price with well-placed signage, and maintaining a look and feel in the store that is consistent with the brand image. Let's take a minute to discuss each.
Stocking shelves effectively means that inventory and merchandise planners order the right product levels and provide planograms and placement information that can be executed at the store level. Do not allow store associates to plan the shelf. Left to their own devices, they may over- or understock shelf space. Add to this the often-conflicting directions coming from centrally created marketing plans, regional merchandising guidelines, local promotions and store managers, and it should be no surprise that retailers are not executing their merchandising plans as expected.
Well-placed signage should convey the desired message. Price tags should be legible and accurately reflect discounts, markdowns and promotions. If flyers or other external advertising are used, promoted products should be easy to find, and the in-store pricing should be consistent with the promotion. All too often, customers go to a store in response to an advertised promotion, only to leave empty-handed because they couldn't find the product. The result is an expensive promotion that turned a sale into a lost customer.
While slashing prices is a valid response to an economic downturn, it can be dangerous if not selective.
Finally, maintaining the look and feel of the store through merchandising, tidiness, consistency and cleanliness throughout the day ensures that all customers enjoy the same high-quality experience, not just those who shop early. Processes should be set and responsibilities assigned to ensure tasks are carried out uniformly, with leadership and team members held accountable for executing their tasks. Merchandising execution is about respecting the customers so they will spend money at your stores.
Make the most of promotions. What really draws customers into a store during a recession? That's easy. Promotions. When considering promotional activity, there are a few things to find out. For one, determine if there is a gap between your promotional market share and regular market share to ensure promotions are having the desired impact vis-à-vis your direct competition. Benchmarking promotions against competitors will ensure you are capturing your fair share.
Also, know the return on marketing investment (ROMI) for every promotion. Obtaining a higher ROMI is a function of several factors: Increasing revenues and margins from both the target promotional item and from more traffic raises the overall basket size. A less obvious but equally important aspect of promotions is to maximize your marketing investment by using lower-cost marketing channels and negotiating better rates for distributing the message—whether by direct mail, radio and television advertising, the Internet, or text messaging.
The Recession Will End. Will You Be Ready?
When we look back on this recession, there will be retailers that ceased to exist and others that used the opportunity to steal share and build a loyal customer base. Those slow to respond may find they are putting up store closing signs, as Montgomery Ward and Ames did in the recession of 2001 and Circuit City has done in 2009. There is no magic to surviving a recession. It requires taking action in the same spirit as Alexander Selkirk. Instead of building shelters from pimento trees or hunting goats for food, be resourceful by employing the skills that will allow you to remain healthy until the recession ends. And as we know from past recessions, this one will end. The only question is: Will you be around to enjoy it?
Consulting Authors
DEAN HILLIER is a partner in the Toronto office.
JOEL ALDEN is a principal in the Toronto office.
JENNY FUNG is a consultant in the Toronto office.
For more information, contact the authors.
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