Recessions are tough on retailers. Recent McKinsey research shows that during the last two recessions (1990-1991 and 2000-2001), growth slowed across most retail sizes across the United States. 93% of the retailers surveyed that survived both recessions experienced slower sales growth in one of the two recessions, while 59% seemed to suffer in both. Unfortunately for retailers, their position as direct consumers of consumer spending does not translate into a quick turnaround when the overall economy is going through a period of back-to-back hardships like this. The average retail sales growth rate during the first year of the inevitable recovery from the 1990-91 and 2000-01 recessions was 0.3%. And 12 of the 15 retail sales stagnated even as growth picked up during one or two recoveries.
These recessionary dynamics—declining sales followed by a sluggish economic recovery—mean that retailers should move quickly to minimize the loss of efficiency. Of course, the challenge means that retailers have a wide range of options to juggle, from cutting costs by limiting store openings or restructuring support functions to increasing sales by refreshing stores or re-examining promotional programs. Many retailers make the mistake of focusing on what is easy or well-known, and fail to address more challenging goals that could improve their competitive position during the inevitable recovery.
In our experience, some guiding principles are invaluable in helping retailers quickly sort through their options and establish priorities for action – in particular, determining when to take an offensive or defensive approach. Combining a rigorous self-assessment with a detailed analysis of the business environment can help retailers decide the relative importance of reducing costs, increasing investment, creating financial complexity, and pursuing revenue growth over time.
Retailers should also start by taking a hard look at the health of their balance sheets, management teams, and overall performance. For example, companies with adequate cash reserves and access to credit have options such as investing in stores, people, or acquisitions that simply drive out weaker competitors.
At this point, retailers need to be realistic about the potential of their businesses. Can they operate store formats or follow a format with strong growth prospects? What expansion is needed in a truly saturated market, and where can retailers stand out from their competitors? Recent growth rates, market penetration investments, and a serious assessment of the strengths and weaknesses of their competitors all become important considerations.
Companies with strong financial positions in potentially important growth markets should increase their investments to gain a strategic advantage over their competitors. Major investments such as doubling down on new stores or redesigning existing stores are one such possibility. Equally important are smaller investments, such as recruiting talent from weaker competitors or investing in more careful local market execution. For example, when a specialty retailer begins to experience declining sales due to less foot traffic to its stores, it should build an analytics engine that helps stores and members of the central marketing organization use customer-relationship-management (CRM) data to drive sales. CRM) and transaction databases more efficiently. This allows retailers to better anticipate local demand and decide which items should make up what percentage of their core advertising campaign. Comparable store sales are likely to increase by two to four percent in test markets where the new promotional tool is effective.
Financially strong retailers in mature industries can also counterattack by taking steps to increase sales quickly by driving customers to stores with more compelling offers and ensuring that employees are available to assist with sales. For example, North American Apparel was able to reverse declining sales, improve customer satisfaction, and increase the frequency and average size of transactions by focusing on eliminating overstocked merchandise, increasing the efficiency of front-line salespeople, and making small changes to store layout to help customers find the merchandise they want quickly.
For companies with weaker financial performance, a more immediate focus will be on cost reduction. Our recent experience suggests that poor performers have significant opportunities to rationalize inventory stock keeping units (SKUs)—freeing up working capital—and renegotiate direct sourcing terms. They can also improve customer acquisition efficiency, an area where they have been slow. And by using contingency management techniques to redeploy people, they can reduce the time employees spend on non-customer-facing tasks and increase the time they spend helping customers. This focus should be on existing sales sources as soon as possible, cutting not only hours but also costs as a percentage of sales—a key driver of the economy.
And more broadly, retailers should think that the least effective thing to do during a downturn is simply to “hang in there” and “weather the storm.” Because even if there is no way out of some of the difficulties, making quick changes to improve performance can reduce the impact of a large decline in sales and position retailers to perform more fully in the inevitable recovery that follows a downturn.
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