Many retailers are already engaged in some kind of exercise focusing on what it should do about the current economic crisis. In 2007, even before the financial crisis and recession began in the U.S., same-store-sales – “comps” – have dropped by double digits for many chains, store closures have accelerated, store openings have slowed, and shareholder-value destruction has been massive.
But in every crisis there is an opportunity. When consumers are tightening their belts, retailers are feeling the pinch that they fail to see the opportunity to win the loyalty of more customers, increase productivity, cut bad costs, and strengthen market position.
Win the Loyalty of More Customers. Every retailer knows the value of keeping its loyal customers. That’s a given. However, focusing too much of your company’s peso in maintaining your loyal customers may be too expensive yet may not provide you the much needed market share growth in a downturn. Many retailers fail to see the importance of “switchers” – customers who are loyal neither to you nor your competitor. To gain that market share growth in a downturn, you need to allocate more resources to win the loyalty of “switchers”. Let’s face it; you can’t get your competitors’ loyal customers just like it will be difficult for them to steal your own loyal customers. The best bet now is to put your peso on the switchers and turn them into your loyalists.
Increase Productivity. Next, to capture more business, you must entice those customers spending elsewhere to spend in your store instead. That means closing the gap between what they want and what you offer, not merely ordering more of what’s already selling well. The advent of better inventory management systems enables the retailer to identify real time product movements. Nice, you must say, but don’t let yourself fall into the trap. This conditions the merchants and store managers to stock up on what’s selling well and pare down on what’s not. This then leads to big gaps between a retailer’s offer and what the customers want since it says nothing about what the customers might be buying elsewhere. So instead of reducing space to increase productivity per square meter, offer products with attributes that customers (“switchers”) want most but were going elsewhere to get. To find out what the switchers want, don’t stop at asking “Did you find what you need?, instead your sales clerks should also ask, “Is there something you want that we don’t carry?”.
Cut Bad Costs. When sales tumbles, retailers almost instinctively cut costs and preserve as much margin as possible. But all too often they take out the good costs with the bad ones. Good costs are the essentials to producing what your customers value and are willing to pay for. Bad costs are those that do not add value to what customers want and are willing to pay for. Like most companies, retailers tend to manage their costs on either a line-item or an activity basis. Unfortunately, this method of tracking costs does not reflect the links between cost, value and customer benefits such that when there is a need to cut costs, it is done all together rather than in a targeted manner. Botttomline, retailers must tie their costs to the values/benefits that customers are willing to pay for when shopping in their stores.
Strengthen Market Position. The top three requisite of most retailers in opening new stores are – location, location and location. That’s an age old retailer mantra. But when opportunities for rolling out a successful formula in new locations are plentiful, all that matters is opening as many new stores as possible while the formula is still working. However, when managing through a downturn, differences among locations are especially crucial. As your number of stores increases, it is essential to cluster your stores to optimize the cost-benefit relationship. You may cluster similar stores in terms of their competitive situations, and their customers’ needs, expectations, wants and specifications (NEWS). Although it may be feasible, but it is not always wise to cluster stores geographically. More so, if you adapt customer-centricity as strategy, you may need to cluster your stores according to how you segment your customers to better serve their NEWS.
To sum it all up, retailing in a downturn requires that you win the loyalty of more customers, increase productivity, cut bad costs, and strengthen market position. To do that, you may need to revisit your core processes to identify areas for improvement.
First, you’ll have to take a look at your customer research process. Your research should be able to answer the following questions – Why are customers shopping in our stores? What do they buy from other retailers? What are their needs relative to what we offer? Who are the most profitable customers that we don’t have but could get?
Second, merchandise planning must be reviewed. In a downturn, instead of simply stocking up on what’s selling well and stocking down on what’s not, your merchants should also be able to answer the following questions – Which merchandise should be expanded because both sales growth potential and profit per square meter are high? Which should be shrunk? Which should be fixed (rather than shrunk) because their productivity is low but their sales growth potential is high? Which should remain as they are because their productivity is high but their sales growth potential is low?
Third, performance management in a recession should have scorecards that focus on winning more customers, increasing productivity and cutting bad costs. Don’t just focus on comps, gross margins, sales and profits per square meter. Retailers should also track their performance by store cluster to avoid the apples-to-oranges comparisons that inevitably occur when monitoring stores by geographic territories.
Finally, strategic planning is imperative. The strategic planning process must focus on winning the loyalty of more customers, increasing store productivity, cutting bad costs, and strengthening your market position. Nothing else.
Written by: MING DELOS REYES