What advice are retailers getting in tough times? Close the doors.
Paul Pinkus, a managing director at RSM McGladrey, works with companies that supply non-consumer goods to retailers, like displays, signage, and fixtures. So you might say he is inside-inside retail. He counsels clients on how to hunker down, tighten up, and often... find the advantages that arise in a recession. In fact, part of his job is delivering seminars on "Managing Business Through Difficult Economic Times."
With some analysts predicting that the next few months will see 20 to 40 percent of retailers closing down, it's clear that these business owners need good advice and they need it now. Some CEOs are responding to the sluggish economy by making broad, across the board cuts. That's a mistake, says Pinkus. Instead they should look at this as an opportunity for a "tune-up." They need to examine every area of expense, cut the fat and rein in costs that are unnecessarily high. Now's the time to do some surgery, but selectively. Retailers that do will come out of the recession nimble, healthier, and ready to compete.
"You need to look at every area of operations that you might not have considered before," says Pinkus. "During expansion times, businesses don't usually do that." Some companies, he says, should probably spend more on consultants now rather than less to help them trim down, to see what they can delete.
"The idea is to make every element of your business the best it can be, without sacrificing effectiveness." That may mean taking a hard look at your lenders. Are the lenders you are using the right ones for your business?
Are you getting the right information out to your investors? Are the suppliers you are depending on solvent? If they are not, you may find yourself with nothing to sell because the supplier can't deliver as promised.
If you cut personnel, be careful not to cut so much that you end up with stock sitting in the aisles and no one to put it on the shelves. One retail giant did a pre-emptive staff cutback, hoping to pare down costs before the worst of the recession hit. Unfortunately for them, that meant they didn't have enough cashiers to check customers out
efficiently, and some of those customers decided the low prices were not worth the wait.
Success is Possible, Even in a Recession
For naysayers who think nobody can do well in this economy, Pinkus points to three companies that launched products or brands during recessionary times: MTV, Trader Joe's, and iPod. How did they do it? By taking advantage of opportunities to buy other companies, brands and products. The smart companies, he says, look at this economy with two questions in mind:
How can we make sure we operate lean and effective, that is, how can we cut where it makes sense to cut without impairing our competitiveness?
And... Where are the opportunities that we wouldn't have during robust times and how can we capitalize on them?
If a competitor closes down, consider how you can capture their customers. Those customers have to go somewhere... it may as well be your establishment. Why not hold special sales, send out direct mail, key your marketing plan to focus on residents in that geographic area? You might even be able to open a store of your own in the same building they occupied. Chances are if you did, you could assume their lease at a below market rate. That would mean you could operate in the same location... which customers are used to visiting, more cheaply than your competitor was able to do.
Here's an example of finding the silver lining: WalMart is using this time to attract customers that normally balk at shopping in their stores. Their TV ads at Christmas emphasized how families could still afford what they need, not to mention putting some pretty nice presents under the tree, like plasma screen TVs, by shopping at WalMart. Whether you love WalMart or hate them, the truth is they are doing well in an economy where many retailers are closing down or barely hanging on. You don't have to be a giant like WalMart to come out of this recession bigger, stronger, better, faster... you just have to be leaner, and keep your eyes wide open for opportunity.
Here's How Another Accountant Guides His Retail Clients
Allen Hillman, at DeLeon and Stang in Gaithersburg, Maryland is a pro when it comes to helping his retail clients stay in business. It's not magic... they just keep an eagle eye on the line item variable expenses month-to-month, and when they see an unusual increase, they call the client and have a conversation. And... they evaluate each client on a case by case basis. When retail clients at D&S wonder whether they should keep going or close the doors, Hillman takes them through a look at specific areas of operation.
For retailers that are having trouble, reducing staff is not necessarily the best advice, Hillman says, because the economy will turn around and then companies that were too quick to lay off staff will not be positioned to compete. Then they may find themselves rushing to hire staff without the proper care. On the other hand, for his clients in the auto industry, Hillman might recommend cutting sales staff, and adding mechanics because it will take longer for auto sales to rebound than other segments of retail. At the same time, auto dealerships are finding that while sales have dropped significantly, their repair centers are seeing an increase as people try to keep their old cars in good condition.
In general, Hillman says, his firm's retail clients are in good shape. But when one does edge toward trouble, Hillman looks to a cash flow analysis to determine where they stand. For those with accounts receivable, he advises them to keep a constant watch on those customers who start falling behind and to get in touch early to find out why.
Hours of operation
Though some consultants suggest that struggling stores cut back their hours of operation, that is seldom a suggestion that Hillman would make. In fact, he's more likely to advise staying open longer hours, or adjusting the open/close times to better suit customer needs.
Not advertising, or cutting back on advertising is not an option. But Hillman does tell clients to pay more attention to which ads work and which don't. Then refocus advertising dollars where they are most effective so that you keep your name before the public.
This is always touchy, because in tough times, retailers are tempted to keep slashing prices to draw in customers. The risk is that the public will perceive the retailer as preparing to go out of business. Hillman tells his clients that offering discounts is good, but stick to around 20 percent so that you don't eliminate profit altogether.
The advice Hillman gives clients about credit is to stay in touch with their banks. They need to know at all times whether they can renew their lines of credit and whether the rate will remain the same.
Last summer when gas prices were outrageous, Hillman suggested to retail clients that it might be time to pass those charges on to customers in the form of surcharges, at least until fuel prices returned to reasonable. In the greater Washington D.C. area, where many of his clients are located, he says one group of retailers found a very creative solution to last summer's high delivery costs. Florists, whose businesses rely heavily on delivery, got together and divided their service areas into quadrants. At a specified time, the trucks from the various florists would meet at a central location and deliver for each other within their designated quadrants, saving all participants significant cost. That kind of cooperation and creative thinking probably kept some of them from closing their doors.
Many client of DeLeon and Stang sell high-end merchandise, like fine jewelry. For retailers that are having a hard time with inventory costs, Hillman advises them to not stock the higher priced items like expensive watches, or to only stock one or two for display and then to rely on special order when customers want the more pricey merchandise.
During tough economic times, retailers may want to rethink their suppliers, or renegotiate with their current suppliers, says Hillman. There may be discounts available from new vendors who are trying to build their customer bases. On the other hand, current suppliers may offer deeper discounts to keep existing customers.
Closing a location to consolidate resources might be a good idea, says Hillman, depending on whether or not a store was still profitable. If the profits were marginal, he might advise the client to stay open shorter or different hours, at least for a trial period.
Overall, Hillman seems optimistic about the retail business for his clients in the greater Washington D.C. area. "We take an active interest in their business at all times. We look over their numbers as we get them, and if we see something happening, we're on top of it. We notify them right away and say, 'come in and let's talk'." The idea, says Hillman, is to notice a problem early and help the client do something about it before it becomes a bad trend. So far, says Hillman, this policy of vigilance has worked well for retail clients of DeLeon and Stang.
What advice are retailers getting in tough times? Close the doors.