What advice are retailers getting in these tough times? Close the doors.
What advice are retailers getting in tough times? Keep Going!
Looking for a job title that sounds secure in these troubled economic times? How about Retail Distress Expert? That's Marti Kopacz, of Grant Thornton.
With this week's news from the Commerce Department, her services may be even more in demand soon. December sales, which were expected to drop by 1.2 percent actually fell more than twice that, by 2.7 percent.
Kopacz has worked with retailers for over 20 years. Her clients generally fall into the categories of underperforming, distressed, or traumatized. By the time they meet with her, they are saying, "I can't keep doing what I'm doing." She guides them through the process of paring down to a solid core from which they can still operate. That's what she calls, "reducing their footprint."
Here's an example of what she does. Suppose a retailer has 12 locations, 7 of which are doing well and the rest are underperforming. Kopacz helps them make the difficult decision to close some of the locations so that the limited resources they have – capital and human resources – can be redirected and focused on the locations that have a better chance of survival. When the suggestion is made to close locations, Kopacz and her team are often met with two obstacles.
First, retailers tend to be overly optimistic, she says. When sales are bad, they attribute it to the construction down on the corner, or a bad store manager that is now gone, or the full moon, or one of a dozen different things. "Next season, things will turn around," they say. Not that there is anything wrong with optimism. But it's Kopacz's job to bring them back to reality, and in the long run, possibly help them cut their losses.
The second obstacle she finds is sentiment. It's common when she talks about closing a location to hear something like, "But this was Grandpa's first store. I can't close this one." Never mind that the population base has moved away from Grandpa's store and the cost of getting freight to it is twice as much as the other locations, or that a retail giant moved in down the block that sells the same items for half the price. Kopacz helps them arrive at the realization that if their other locations are to survive, the underperformers will have to close.
Often when retailers do make the hard decision to close some locations, they don't pare back far enough, she says. "Look at Circuit City. They closed 200 stores, then they had to come back later and close another 150." In the end, if the resources hadn't been spread too thin keeping underperforming stores on life support, the remaining stores might've been better poised for the future.
For all of her clients, Kopacz urges them to have early and often dialogues with their lenders so they know what they can count on. A common practice is for retailers to borrow based on the value of their existing inventory, but in many cases, that value has fallen. To make matters worse, banks that were willing to lend 80 percent of the value of the inventory are now lending only 65 percent. With the ability to borrow reduced, retailers are having to scale back the items they offer. That's where the "black shoe" factor comes in.
"Sell black shoes!"
The public has gotten used to walking into a store and choosing from a wide variety of items, like eight different colors of the same shoe. Even so, the vast majority of shoes sold in the United States are black. With less money available to buy inventory and fewer sales, stores are wise to stick to what does sell. Kopacz tells her distressed retailers... "Sell black shoes." Black, maybe white, and if you really want to sell brown, only order a couple of pairs. Stores that also offer online shopping can direct their customers to their Web site, where a wider variety may still be available.
How does the future look?
For the near term, not so good, says Kopacz.
Right now, in spite of the holiday sales figures, retailers are starting to feel hopeful again. The season will change before long, the administration is about to take control, another bailout is imminent... so they're thinking the consumer will come back in the spring. "I don't think that's going to happen," says Kopacz. She looks ahead to the next 30, 60, and 90 days and predicts a significant rise in retail establishments filing bankruptcy, mostly liquidations. By summer, she says, a lot of mom-pop shops that have barely held on will go under. On the other hand, she believes that in the summer and fall, retailers that are still strong enough will get into the active restructuring mode. Some national names will fail, but some will regroup and restructure.
"This is the time for most retailers to pare down, contract down to a stable core," says Kopacz. And look for opportunity. "The successful retailers of tomorrow are going to be out looking for new real estate today." With real estate values reduced and rental properties commanding lower prices, retailers that need to improve their locations and can afford it would be smart to shop around. But, says Kopacz, they have to be sure to maintain a cushion if they are going to get through the downturn in case it lasts a couple of years. In a nutshell, she tells retailers, "Downsize your footprint, sharpen your focus, simplify business to the extent you can."
What does this mean for the public? In prior recessions, retail was the fallback job. Displaced employees knew they could always go back to retail, but that's not the case now, she says. Now stores worry that they'll have too much staff and nobody buying the products. Of course, people will still buy what they have to have, so stores like WalMart and discount clubs will continue to need staff. It's the specialty and department stores that she predicts will be hit the hardest, maybe seeing a 15 percent drop in sales and a reduction in employees.
For consumers, she predicts that by the time back-to-school sales roll around next fall, there will be a lot less inventory on the shelves, a lot less choice, and a lot more black shoes.
What advice are retailers getting in tough times? Keep Going!