How retailers can benefit from a reduction in the rate of economic growth?
Alexander Shubin, managing partner "Partner Business Consulting", Head of strategic consulting practice in the retail sector and FMCG.
Times of economic downturn are critical for retailers. A recent McKinsey study shows that during the last two recessions (1990-91 and 2000-01) in the United States, growth was slower in almost every retail sector. Ninety-three percent of retailers surveyed in the study confirmed that the annual revenue growth has slowed down significantly in one of two recessions, and 59% experienced a slowdown in both cases Unfortunately for retailers, their position is "at the forefront" of consumer spending does not lead an immediate increase in turnover, while improving the overall economic situation, which is usually a result of the recent trading on the stock exchange. The average growth rate of retail trade in the first year of recovery after recessions (1990-91 and 2000-01) was about 0.3 percent. 12 of the 15 retail sectors lagged behind the average growth rate.
Such dynamics of the recession, when, after a decline in sales of the recovery period should be inert, means for retailers that they should make quick steps on the path to minimize efficiency losses. The question is, how to set priorities in the selection of measures. The range of such measures at the retail company is very wide: from cost savings through restructuring or closing stores provide processes to increase revenue by upgrading shops or implementation of effective marketing campaigns to promote.
Many people make the mistake of focusing only on simple and well-known methods, and are failing to find and implement a more ambitious goal that could strengthen the competitive position of the company during the economic boom that inevitably follows a recession. Experience with McKinsey shows that there are some basic rules that can be very useful for retailers to quickly find and help set priorities, particularly in determining whether to choose an offensive or defensive tactics. The combination of critical self-assessment and a realistic analysis of the external environment can help retailers decide on the importance of cost reduction, increase investment, create financial flexibility and finding opportunities for short-term growth (see figure)
Retailers should begin with a thorough analysis of the balance sheet, management teams and general operational efficiency. Companies that have a reasonable reserve of cash and access to credit, for example, have options, such as investment in stores, people or acquisition, which is not available weakened competitors. At the same time, retailers need to be realistic about the potential of their business. Are the growth prospects of store formats and the sector in which the company does business? What volume of this market is now and where the company is relative to its competitors? Indicators of this growth, the share of market penetration, the strengths and weaknesses of competitors are important factors that should be taken into account in the analysis of the environment.
Companies with a strong financial position and growth potential should reflect the strengthening of investment to achieve a strategic advantage over competitors. Using a large chance such as doubling the number of new stores or redesign old, one of the possibilities. No less important features are the "little chance" such as hiring talented workers who tend to move away from weaker competitors, or investing in a marketing point. For example, when one of the specialized retailers began to experience difficulties related to the decrease in customer traffic in its stores, the company created an analytical tool to help retailers and marketers from the central office more efficient use of data from CRM systems and transactional databases. This enabled the company to improve the accuracy of demand forecasts and decide what products and how much space should occupy in ad slots. As a result, sales increased from 2 to 4%.
Retail companies that have strong financial position and operating in mature markets can also use aggressive tactics by taking action to increase revenues through the deployment of additional customer traffic into stores, offering a unique setting. The companies need to be sure that employees in the sales area will cope with the additional flow. For example, a retail company in North America that sells textile products, stopped the decline in sales, improved customer satisfaction, increased the frequency of purchases and the amount of average check by avoiding situations "no goods", improve the efficiency of the staff on the trading floor, small changes in the layout of stores allowing shoppers to quickly find products that they need.
Companies whose precarious financial situation will need to focus on reducing costs. Practice shows that the weak, from a financial point of view, the players have a great opportunity to reduce inventory by optimizing headings and product mix, which will free up working capital and to review the terms of supply in favor of direct deliveries. These companies can also increase the efficiency of the trading floors directly in stores where there is usually a lot of gaps in operational efficiency. Applying lean manufacturing techniques, they can reduce the time that is not associated with customers and increase service time buyers. The aim of this work should not be to reduce the number of hours of staff and to obtain additional sales, as the main driver of business - it is sales, not cost, calculated as a percentage of sales.
To sum up, the retailers should keep in mind that during the recession and the crisis of the only effective action - "to duck and slip through the storm." Despite the fact that by taking quick steps to improve efficiency, will not be able to avoid some of the problems, however, this will reduce the chance of a deep decline in sales and market position, to ensure that during the ascent to be a full participant in the business.
* This article was prepared on the basis of a translation of article «How retailers can make the best of a slowdown», Ashish A. Kotecha, Josh Leibowitz, and Ian MacKenzie, McKinsey Quarterly, Sep, 2008