Road Map For Profitability
What to do? That’s what many chains are asking themselves these days as the economic slump deepens and consumer spending plummets. While many merchants are turning to aggressive price promotions and merchandise remixes to help stem the tide, some experts believe such actions aren’t likely to be very effective unless they are executed in concert with a strategy designed to immediately reduce operating costs and boost overall performance and profitability.
“Many retailers have begun attempting to increase margins by lowering their costs of goods sold through global direct sourcing or improving supply chain efficiencies,” said Kathy Iversen, managing director, Alvarez & Marsal, Chicago, and the firm’s retail practice leader. “But such efforts, while well-intended, typically take six to 12 months to produce savings.”
Some retailers don’t have that much time, according to Iversen, who said that in order to ensure survival, underperforming companies should take immediate steps that yield more short-term, yet sustainable impacts on their cash and capital positions, and contribute to their war chests. Here are Iversen’s specific recommendations:
- Reduce inventory investments by trimming assortment breadth and depth: Enact a markdown policy that sells through slow-moving inventory and reduces exposure to unproductive items. Analyze patterns of inventory turns and stock-outs by customer segment and geography to identify SKUs to drop from the mix entirely, and regional or store-level SKUs to increase or decrease from the average. Narrow the assortment to gain an immediate capital release;
- Improve the chain’s real estate: Review stores for age and condition across the portfolio, and identify immediate customer-experience improvement opportunities. Perform a complete four-wall contribution analysis, including the cost of real estate, and raise the bar for store performance. Identify chainwide and industry metrics (such as sales per square foot), and shutter at-risk and underperforming locations;
- Drive lower SG&A costs: Work with specialists on a contingency basis to identify savings within accounts-payable categories. Negotiate immediate vendor savings for indirect services, such as travel, HR benefits administration and IT. Simplify organizational structure and reduce management layers;
- Optimize selling space: Put inventory in a better position to perform by focusing on improved space allocation. Analyze performance of space and items in the context of merchandise and customer trends, and financial contribution. Employ best practices in display, such as using tables vs. racks for key items. Place higher-margin items within categories so that they have greater customer facings;
- Implement a strategic initiative-management program: Assess and rationalize the current portfolio of major projects across the company by tying business cases to EBITDA impact. Identify and act quickly on project integration opportunities, while postponing initiatives with below-average EBITDA impact and/or above-average time to realization. Work with specialists to conduct a value-creation audit; and
- Strengthen merchandising and leadership talent: Work with leading retail service providers with well-developed industry and functional training and development offerings to provide targeted skills development in the basics of merchandising, store operations, and financial management and leadership development to retain top talent. Focus on immediate gains by incenting your merchant team on short-term margin dollars while driving as many goods out the door as possible through volume-based incentives to store sales personnel.