Navigating The Recession
A checklist for entrepreneurial retailers navigating the recession.
These are difficult, unprecedented times. As I write this, at the beginning of April 2009, it's hard to know for sure what the future holds. For many entrepreneurial retailers, sales are down as much as 25% to 40% versus last year. If there's any glimmer of hope, sales declines appear to have stabilized, but that may all change with the next batch of headlines. The recession has a stubborn grip.
One thing does appear to be certain; if sales have in fact stabilized, they are not likely to increase significantly for the foreseeable future. The banks are still a mess, and home prices are still falling. It's very conceivable that when we do come out of this period unemployment will remain stubbornly high for quite a while. It's very likely that today's sales levels are going to be the new baseline for quite a while to come, at least through this year and maybe for another several years. Those entrepreneurial retailers that come to terms with this and figure out how to be profitable in this new environment and at these new revenue levels have a very good chance to make it. Those who don't likely won't survive.
Let me share my thoughts on what it's going to take to navigate the recession, starting with the immediate urgencies and then looking out into the foreseeable future.
- Put together a clear-eyed sales plan. If your percentage decreases have been relatively stable for the past three or four months, there's no reason to anticipate that changing, no matter how optimistic you'd like to be. The key thing is to keep your inventories as lean as you possibly can, given that sales plan. For those of you accustomed to programming your season out upfront, I would strongly recommend placing only what you absolutely need to have on-hand for the next couple of months, and play hand-to-mouth through the rest of the spring. There will be plenty of merchandise available to buy.
- Assess how your margins will be affected over the next several months . The current decreases most likely have been accompanied by seriously eroded margins, as markdowns have exploded to keep sales up and inventories in line. You are not likely to be able to sustain your normal margins anytime soon; your customers and the competitive environment probably won't allow it. What margin levels will you be able to sustain going forward? Now is the time to press each of your vendors for pricing concessions. There's no reason why you should be absorbing the margin hits alone. If retail price points have to come down then so do wholesale costs. Further, by keeping your inventories lean and holding dollars in your back pocket you can also put yourself in a position to pick up discounted goods in the market as you need them.
- What level of payroll can be sustained? The fact is that most entrepreneurial retailers are loath to cut payroll. They have long understood the importance of passionate committed, long-term employees. Many are like family. All too often, as a result, payrolls are not reduced as much as sales have declined, resulting in an increase in payroll as a percentage of sales, a situation that can be sustained for only a short period of time. The critical issue is how you reduce payroll. Do you do it through cuts in head count, cuts in hours worked, cuts in salary or hourly wages, or some combination of the three? Payroll may be your biggest expense, but your employees may be your most important asset. The primary concern has to be on limiting the impact on your customers.
- Review your lease agreements. Rents are going down like everything else, and landlords all over are finding they have to make concessions to keep vacancy rates from exploding. Be aggressive in re-negotiating lease terms to bring your monthly payments into line with your new revenue baseline, perhaps in exchange for a slightly longer lease term, if that makes sense. Review all of your other service agreements as well. Whatever your can do to reduce the long-term monthly burn rate on these overhead expenses creates more financial space to manage your business dynamically.
- Focus your marketing efforts on your best customers. These are the customers who have repeatedly bought from you before, given you their email address, and that you probably know by name. The most efficient and effective marketing is the personal referrals and recommendations that these customers gave to their friends. When you foster and nurture these customers, they lead you to your next tier of customers. This isn't done with extensive price promotions, but with referral programs, trunk shows, private viewings, and other special events. In the current environment, each sales dollar that you receive from these customers will be less expensive to generate than a sales dollar from a new customer that you have to reach through a formal advertising campaign.
- What changes will you need to make to your merchandising strategy? Inventory levels have to be reduced to reflect the new revenue realities, and that's going to impact your assortments. You can't allow cash to pool in inventory that's not turning. It's not enough to simply cut out marginal programs or categories that are no longer sustainable. Inventory levels in core programs or categories are going to have to be scaled back as well. A balance will have to be arrived at between narrowing assortments and reducing depth of inventory. Will you become narrower but as deep, or shallower but as broad? Different strategies may be appropriate for different categories. Through it all, you're going to need to maintain a healthy mix between destination and impulse items to keep your units-per-transactions up.
- Plan your cash flow. If you have cash, there's a tomorrow. If you don't, there's only an abyss. Projecting your cash flow for six to twelve months on a rolling monthly basis enables you to establish benchmarks and spot potential trouble before it's on you. As each month closes in turn, update your plan and take the actual ending cash balance and roll that forward into the future months, and review each month's projected ending cash balance. This is the critical step in order to spot potential cash flow problems as early as possible. Your cash flow plan is a living document and gives you the opportunity to develop the widest array of options to deal with any cash shortfalls, whether it's reducing expenditures, seeking additional capital, or sitting down with your banker to discuss additional financing.
- Through it all, you have to position yourself for the long haul. I believe there is a bright future for those entrepreneurial retailers who narrowly focus on a carefully defined specialty niche. These retailers will go beyond customer-centric retailing, beyond experienced based retailing, beyond lifestyle retailing, to a heightened level of engagement with their customers. It will be personal, passionate, authentic, empathetic and connected. It will recognize that retailing at its finest always has been and always will be about people, not stuff. This will require you to rethink your concept of what makes a store compelling, your relationships with your customers, the role and skill set of your employees, your deployment of technology, even your mission statement and business model.
For many entrepreneurial retailers, the earth feels like it is moving beneath their feet. The margin for error is slim to non-existent There are many more sleepless nights. So my final piece of advice is to not try to navigate the recession by yourself. Now is not the time to go it alone. This is a time when an outside, independent perspective can be invaluable in helping to identify risks and protect cash flow in the near term and position the business for sustained success in the long term.
Navigating the recession will not be easy for anybody. This will test the mettle of even the most seasoned merchant. Nobody can be sure when the turnaround is coming. The customer right now is very frightened. It's going to take time for them to get their balance sheets in order, feel secure in their jobs, and regain their confidence. Even then, it's unlikely that spending levels will rebound anytime soon. Now is the time for every retailer to take a fresh look at their business and do the things that must be done to profitably adapt to the new reality.