BrainTrust Query: Is Red The New Black?
By Ted Hurlbut, Principal,
Hurlbut & Associates
This discussion article
was adapted from Ted Hurlbut’s blog, which appears both on the Hurlbut & Associates
website and on Inc.com.
I was speaking with the
owner of a small women’s specialty store the other day. We were discussing
the state of her business when she said something that made me pause for
a second.
“I’m concerned that
red may be the new black. I mean, what if the new baseline of my business
is going to be 20 percent below where I’ve been? At 20 percent down, I’m
in the red, but if that’s the new baseline, I’ve got to figure out how
to run in the black at that level.”
I suspect it’s a question
that many small, entrepreneurial retailers are asking themselves. What
if red has to be the new black?
Every retailer, large
and small, has to plan for this possibility, and they need to plan for
it now. In many cases, losing 20 percent or more of your revenue base will
require you to fundamentally re-think your business strategy. Here are
just a few things to consider:
How will margins be affected?
The current decreases most likely have been accompanied by seriously eroded margins,
as markdowns have exploded to keep inventories in line. It’s probably not prudent
to assume that you’ll be able to maintain your previous margins in this new environment.
How can you generate more margin dollars from this revenue base? How will your
promotional posture have to change given the new realities? How can you protect
your pricing integrity?
What levels of expenses can be sustained?
What does this mean for your marketing budget and advertising? Can you continue
to sustain the current channels? How do you re-strategize your marketing?
As I’ve written before, my sense is that current marketing efforts should
focus on your best customers, who are less expensive to reach than potential
new customers.
How much payroll can you handle?
How do you manage payroll
reductions? Do you reduce payroll through cuts in head count, or cuts in
hours worked or cuts in pay, or some combination of the three? How will
this impact your customer experience?
How does this change how you merchandise?
You’re going to need to reduce your inventory levels. How will this change
your store layout and visual presentation? How will this affect your
assortments? Will you become narrower but as deep, or shallower but as
broad? Will you alter the mix between destination and impulse items?
Will you use different strategies for different categories? How
will this impact how you source?
Discussion Questions:
Of the advice given for small businesses trying to weather the recession,
which (at their peril) do you expect they’ll ignore the most? Which changes
in business strategy are retailers more likely to gravitate toward? Which
will they need the most help with from third parties and trading partners?
Seems the advice here (more appropriately, the questions posed here) flow from one fundamental need: Merchants large and small need to fully grasp that we’ve entered a new era of retailing. From that realization flows the necessary questions and the needed answers, including the setting of a new baseline. Hoping for a return to the days of yore is futile. The merchant referenced in this piece seems to have grasped that realization, and the right questions have been posed. Now they just need to answer them in the context of their overall, unique retail operations, including company goals, core shoppers, product mix, promos, marketing schemes, etc.
Small businesses need to pay more attention to, and act on their overhead with respect to space rental and location. In the current environment and well into the future the commercial real estate inventory will be reshaped and up for grabs. This is the time to re-negotiate a lease or consider looking for a smaller, more intimate space. Businesses that banked on growth in far out suburbs that are now in engine stall should rethink whether they can reasonably make it in those financially decimated areas even when economic conditions start to improve.
Smart, small businesses can survive and prosper but must come to grips with the fact that customers (even loyal, well served ones) will never go back to the audacious free-wheeling spending of the past decade.
I heard this quip the other day, which I like a little better:
“Flat” is the new “up.”
How true.
The only way to be in business is have margins and reap profits, but I know business owners dumping cash into what are essentially hobbies, not going concerns.
The only way to get margin is sell the merch, not stack it and hope someone sees its value. That’s the number one thing to be ignored by most business owners who are being advised repeatedly in the media to cut, cut, cut. At this point it is not the red meat or the bone but the very heart of the business that is being effected by such thinking. You have to sell the merch, not, for example, cut the busboys.
Advertising and marketing expenditures are the first to go. It’s funny because history has shown us that the companies that redouble their efforts and maintain or increase expenditures during tough times emerge all the stronger.
They will also ignore reasonable cutbacks in personnel. It’s the old story of cutting to the bone and then cutting the bone. It just makes you weaker in terms of customer service.
I think that small business will look to cut staff and marketing dollars. And they do this at their peril. One way for a small business to distinguish itself from its larger competitors is through customer service. Cutting staff or going with cheaper, less experienced staff usually leads to a lesser customer service experience. Great customer service can negate some of the need to cut prices or margins.
To rise above the clutter and be noticed, a small business needs to advertise. That does not necessarily mean traditional advertising. Small businesses need to find ways to communicate using email, social networking and being creative. Many small business owners need help understanding and using social media.
Focusing on customer service and reaching out to customers one-on-one can help small businesses weather the recession.
The biggest hesitation I am seeing among my small business clients is spending money. Whether its spending money to market your store or spending money on labor or spending money on new merch, the wallets have closed. Those are the areas that can help you navigate through tough times.
I stress that the focus has to go back onto the customer if you want to make money now. Marketing is obviously important but more so when times are tough. Potential customers need to be reminded of the services and products that are available to them. Spending on staff is always the first to get slashed and should actually be the last. Customers will remember great service in this negative environment we are in. Bringing in fresh and new merchandise will always dazzle customers no matter how they are feeling. Small biz owners must be more creative on how they budget their money. Red may be the new black, but only on the shelf.
Doing business in a recession is a percentage game. Those who have disposable and/or liquid assets are in a better position to win than those who don’t. But, that said, it isn’t just whether or not you advertise, for example, but rather whether or not you advertise effectively. It isn’t about whether or not you cut head count, but rather do you get rid of the right people while retaining those employees who are critical to future success. There are no silver bullets, just lots and lots of tough choices.
Recession or not, small and large businesses constantly need to evaluate their budget in terms of how they can cut costs without hurting the business AND how to attract and retain customers in an effort to grow sales. Both have to happen all the time to stay competitive. Those companies that have not been diligent about costs and now face major cost cutting may be hurting themselves on the other side of the equation by not having enough resources to attract and retain customers in their efforts to grow sales.
I agree that Mr. Hurlbut’s list of questions is very good but, before any retailer can get to this point they need to stop looking and thinking about the past. Retailers of all sizes need to know that we are doing business in an entirely new marketplace. This requires changing how they think about their business including establishing a new budget with realistic operating costs and realistic sales goals. It also means re-thinking how to reach customers with your marketing message.
For small retailers success has always come by creating a compelling destination for their customers. A distinctive selection of merchandise, a memorable shopping environment, awesome customer attention and service are the things that will help independent retailers survive and thrive in this recession and beyond.
The only way to make money is to sell goods. Selling them profitably means right time, right price, right quantity by location. Employing an inventory strategy, such as possibly contracting some reserves with your supplier for quick turnaround, is one way to minimize risk and capitalize on potential additional sales. While staffing is one of the big controllables, it hurts your sales to cut, especially if you go below your minimum staffing needs.
I was talking to a very high-end specialty clothing shop owner last week. She wanted to know if and when I thought things were going to turn around. The “if” was easy; yes. The “when”; not so much. I asked her what she was doing to stay around for the turn around. Here’s what she told me….
First, she renegotiated her lease–these high-end strip centers don’t need empty spaces and most are willing to renegotiate rents. Second, she is bringing a lot of merchandise in on consignment, something not heard of for the small retailer in the past. Third, she’s bringing in less expensive lines but keeping her margins up. Her shop is known for very high end one-of-a-kind fashion. She’s having to look harder and negotiate, but is having luck finding great product that she can value price and maintain margins. And last, but probably most important, she’s really turned on the social networking machine. She’s doing weekly trunk shows, makeover parties, and hair parties where she creates a fun and positive buying environment. Her customers appreciate the new value-priced but stylish clothing and the upbeat environment and are rewarding her with their business and loyalty.
My take away from this: be proactive, get creative, and take very good care of your customers.
To build on Marge Laney’s illustrations: it pays to go to every supplier to get lower prices. Ask your landlord if he wants his keys back. Ask the bank if they’d take a haircut. Ask every merchandise supplier for lower prices and longer dating (cash terms). Ask the local media (the radio station, the newspaper, the coupon distributor) to give you 25% more for the same price, with extended billing. Shop for a cheaper credit card processor. Tell the bag supplier that the price of oil (for the plastic) crashed, so the bags should cost 40% less. Everything should be negotiated and then renegotiated. Cut your inventory to stop tying up cash. Ask your salaried staff to work an extra 1/2 day a week with no pay increase.
The most important point made in the article is, yes, we are going to work from a different baseline. Once you have established that baseline, you may want to go back and look at how you ran you business 4 years ago, made a profit, and operated at what is now your new, lower baseline.
There will be some cost that are now higher that you will have little control over such as mandated increases in wages but other than that, you may need to push back on your suppliers and landlord for some price concessions.
Look at labor costs but don’t do what Circuit City did and cut your best salespeople. In fact, you may want to figure out how to incentives them even more.
Don’t do anything that will affect your customer experience unless it is going to effect the experience in a positive manner.
Remember two last points. 1) Two brains are better than one. Get every one on your team involved in helping to make the business better. All of your employees have a vested interest in helping you to thrive. 2) Don’t focus on the competition, focus on the customer.