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Retail businesses are more than ever wanting to get closer to consumers and the contents of their pockets. In the last 48 hours I have watched the hour long Sainsbury’s programme on Channel 4 (I’m Running Sainsbury’s, Tuesday 9pm), seen ASDA kick off a price war on school uniforms through the social networking website Twitter and watched Oasis become the first retailer to launch an application through the Apple iPhone. In this competitive market cash, more so than ever is king. Behind the scenes, retailers are tentatively talking about allocating budgets to programmes and projects but they are not rushing to spend money on development programmes. For the majority of retailers there are still substantial cost reduction opportunities to be had.
Most retailers are aware there are inefficiencies or areas for cost reduction and have embarked on some sort of cost reduction initiatives. However, they are often not deep enough and are not embarked upon early enough and there is hesitancy to implement them because of the fear that the cost of finding and resolving the saving may outweigh the value delivered. I believe the last few months of this year will be predominantly about turnaround and distress situations where businesses are focussed on finding immediate cash in order to survive. Tactical value engineering projects that can deliver a disproportionate return on investment must now be high on retailers agenda – otherwise the next few months may see external influences (and investors) move projects from ‘tactical’ to ‘distress’.
Jonathan Flynn is Head of the Retail Practice at Interim Partners.
June 10th, 2009 at 10:06 pm
Hi Jonathan,
I agree with a lot of your comments. I would add that a lot of the cost cutting is done with a distinct lack of imagination and in some cases unthinkingly. Consequently, just when you need the front line teams to be engaged and enthused they are being turned off. This inevitably leads to a loss of sales and a further round of cost cuts and so the downward spiral continues. It does beg the question how many retailers are giving any thought to life after the next 12 months.
If top management would truly engage with there teams and create the right context then costs can be taken out of a business without damaging the motivation of the team or the long term future of the business.
Regards
Gordon MacDonald
June 15th, 2009 at 9:28 am
Much depends on the situation within the individual business and the market they’re in.
In a down-turn some markets benefit – note the discount grocers, whilst others suffer disproportionately. Businesses that are highly leveraged and in difficult markets are understandably in survival mode and, whilst they may be aware of the need to have a plan for 12+ months out, all of the management focus is on staying one step ahead of payments. In that situation, every spend is scrutinised, the priority is retaining cash, and if a proposal, whether for people or for investment, doesn’t have a copper-bottomed return in a short space of time, it isn’t going to get funding. But Gordon is right, anyone can strip out costs, but doing so without damaging the business requires much more skill, and can benefit from experienced external help. Often, the simplest DIY answers of radical restructures and capping of front-end investment can be very disorientating for a business and, in the medium term, make it more difficult to create momentum when the tide turns. However the big, internally-driven, fully valued change often plays better for a management team in trouble than a riskier, more difficult to value externally delivered solution, however more appropriate to the business need.
At such a critical juncture, a visibly engaged, confident and positive leadership team can make all the difference, looking beyond their skillset to solve the immediate issues, and remaining focused on lending the organisation their Dunkirk Spirit, rather than letting it develop its own Gallows Humour. Spending time helping the majority of good people feel secure can help avoid the in-fighting and negative spiral that often develops as executives and employees alike see the company’s fortunes begin to sour and departments and budgets come under the knife.
Over the longer term though, there is a maxim that you should attack costs whilst the market is in your favour, and invest in marketing and innovation when the market is against you. Albeit a simplification, it is based on some good evidence of companies that prospered following the last recession, but to do it requires an objective separation of performance into the elements driven by the market, and the elements driven by management. Having this clarity, and even this discussion, in the boardroom is rare, especially when times are good, hence few companies tend to be truly prepared to take advantage of the downturn – the time when they can grow their share most cost effectively.
But to Jonathan’s point, are the people who are in that position, like Sainsburys, Boots, ASDA et al., properly taking advantage of it? Or are they taking a conservative view, sitting tight and waiting until the economy picks up again before they start ramping up investments? I’d like to think that, with their clearer external persective, and being able to see the wood for the trees, this is an area that really good, persuasive Interims and Consultants can add a lot of value.
Thoughts?
Martyn Drake
http://www.binleydrake.com