Retail Dogma

How to Manage a Retail Business in a Recession

Primer: Why Recessions Happen?

Because of the nature of our economic system, that is based on extending credit and managing the effects by increasing/decreasing interest rates, our economy is bound to go into endless boom & bust cycles; a.k.a. “Debt Cycles”.

When interest rates are low, people borrow money and buy stuff they can’t afford and plan to pay it back later.

When this happens by enough people, the economy starts to grow (boom) but also prices start to rise with it. To tame this inflation in prices and prevent the situation from going out of control, central banks start raising interest rates (i.e. increasing the cost of borrowing money), so people start borrowing less and the debt they already hold becomes expensive to serve.

So they start spending less on stuff (bust), in order to be able to pay back their existing debt, and also because borrowing money in this case is too expensive.

We recommend watching this video by Ray Dalio to learn more about the economic cycle

Key Takeaway

Recessions are inevitable. They have to happen from time to time, due to the nature of how our economic system works.

When you understand this as a retailer & merchant, who wants their business to stand the test of time, you understand that you will not always be running your business with the same strategies.

You understand that there are strategies and tactics suitable for growth times, but sooner or later you will need to be equipped with other set of strategies that will help you survive a downturn, until the next boom cycle comes.

Read Also: Retail Growth Strategies

What Should a Retail Business Do in a Recession?

A big mistake retailers do when recession comes is getting into the mentality of “Let’s eliminate this & this & this,..”.

It’s usually their first reaction, either out of fear or out of cash flow constraints, to run and cut costs by any means.

However; what we’ve seen is that this approach creates a lot of damage later on, due to “eliminating” a lot of valuable assets (such as good talents or good store locations) or harming the brand value by deteriorating the customer experience.

So instead of the “eliminate” mentality, it’s better to think in terms of “protect” and “replace“, and thereby only eliminating what is undoubtedly bad for the business and should not be replaced.

We call this the R.E.C.A.P. framework, which stands for:

  • Replace
  • Eliminate
  • Consolidate
  • Automate
  • Protect
Framework to manage a retail business during recession
Download as PDF from here
Explore more frameworks in members area.

1. Analyze

The first thing to do in a recession is to assess and analyze the situation, by going through all your reports and running all the numbers, which you will use later on to decide on what should be kept and what will be replaced or eliminated.

During the assessment phase you will conduct:

The sales analysis will show you the performance of each store against budget, and this you will use later to decide on changes needed to your store property portfolio. It will also show you product category performance, which you will use to make changes to your product assortment.

Inventory analysis will show you how your products are performing and which categories and SKUs are the most productive and have the highest returns. You will use this later to make changes to your product assortment, as well as assess vendor performance.

The P&L analysis will show you how your stores are doing financially, and the cost areas you need to cut back on. It will also show whether or not your current manpower budget is suitable for the coming period, or you need to cut back on headcount.

2. Negotiate With Vendors

Based on the performance of each vendor, you will decide whether or not to keep or replace them with more profitable vendors. This will depend on your negotiations with them.

By vendors we don’t only mean suppliers of your merchandise, but all vendors of other products & services, such as marketing vendors, cleaning vendors, security, …etc.

You will start going through all the contracts with those vendors and see how they can help you navigate this time, by cutting prices from their side. Because you are their customer, and because an economic recession is a situation that affects everyone, in most cases they will respond positively and will help you.

If they don’t, search for alternative vendors for the same products & services, and for products and services that are not essential or merchandise that is not productive (based on your inventory analysis) you can eliminate them altogether.

3. Re-Negotiate Your Leases

Recessions always come with store closures and they are usually the first thing that come to mind for retailers.

However; with the “replace” mentality, we want to make the closure decision the last resort, and instead try and keep those stores open if possible.

This is because one of the most important tasks during this time is to protect your market share, and when you exit any location you are leaving this area to your competition.

We’ve seen a big retail business that have succeeded and taken a large market share in a very populous country. Then this country went into a recession and imposed a lot of rules and capital controls that made it unattractive for investors.

This retailer decided to exit this country altogether and started closing stores.

A few years later, this country started coming out of the recession and its economy was one of the fastest growing economies in the region. Which made this retail business wanting to get back in.

However; what happened was that they now had to start all over again. Basically, all the locations they vacated were quickly snapped by their biggest competitor, who has taken their market share.

After all, recessions are temporary and we now know that there will be numerous boom and bust cycles.

A D V E R T I S E M E N T

Another reason we caution against closing stores is that such a move actually exacerbates the recession itself. When people start losing jobs, they spend less and the economy gets even worse, and more businesses close,… and so on.

So before you decide on closing stores you can start by re-negotiating and replacing all your leases with your landlords. This does not only apply to the rent value, but also to the lease terms.

For example, you might be able to reach an agreement to convert your leases to turnover rents, where you pay a basic rent that is low, and a percentage of sales to the landlord. In this case, they will share with you the upside, and are guaranteed a certain rent if sales are not high, while you won’t have to pay the high amount except if you have high sales.

Tip

Landlords are usually flexible during a recession, so don’t shy away from negotiating

In some cases you will find that the property is good but your store size is too big, and you are better off replacing this location with a smaller one in the same mall.

In some cases, based on your analysis, you will find that it makes more sense to consolidate your stores and serve your customers from fewer locations.

4. Change Your Product Assortment

This one applies all the time, and not only during recession. You should always be assessing your inventory performance and tweaking your assortment for more productive products.

Having said that, many retailers depend only on the reports they have to make changes in their assortment.

This, however, is a wrong approach.

If you keep buying only what you have been selling, you will be missing on a lot of opportunities in the market that you know nothing about. Instead, start researching new products and categories that might perform well during this economic situation (for example due to higher value at lower prices) and start carrying them and replacing other products that are not suitable.

Of course at this step you will also eliminate non-performing products and vendors. For eg. products with very low sell through rates and products that sell at very low margins and have low turns.

A wrong practice we have seen here, especially at fashion stores, is reducing buying and eliminating newness due to built up inventory. This results in a vicious cycle of even lower sales due to low freshness.

Tip

Read our articles & case studies on how to solve such inventory and buying situations in our members area.

5. Improve Productivity

Your analysis will show you a lot of areas, where there are many repetitive tasks & processes that could be automated and save you a lot in manpower costs, and other tasks that can be consolidated under fewer people and achieve the same savings.

Sometimes you will find that the daily tasks done at the stores are taking up a lot of time and energy from the team, and can easily be replaced by simpler tasks that deliver the same value.

For example, we have seen a very good initiative by a retailer for eliminating the majority of paperwork done at the stores for admin purposes and replacing it with digital forms that are simpler and can be completed in much shorter time.

6. Protect The Non-Negotiables

After replacing, eliminating, consolidating and automating a lot of aspects of your business, you will find areas that are essential for the survival of your business.

These are the non-negotiables, which you need to protect.

They include:

  • Your Market Share
  • The Customer Experience
  • Good Talent
  • Cash Flow

Remember that you are not losing your customers, but most of them are now spending less on your business. So make sure to protect your market share by tending to your customer base and continuing to provide them the best products and the best customer experience.

When you decide on cutting costs, only cut where it doesn’t affect the customer experience or the value of your brand. A lot of businesses while going through the “eliminate” phase cut on a lot of essential products and elements of the customer experience, that they end up losing their loyal customers during the recession. Such damage is hard to repair.

This includes laying off some of the best talents on your team, because they have become “expensive”.

Retail is a service business, and service businesses are all about people. So make sure to protect your best assets as much as you can during a downturn.

Finally, one of the most critical areas will be cash flow.

It is now more difficult to manage, due to declining revenue.

But if you have performed the previous analyses, tweaked all the areas we mentioned, and created a realistic sales budget and a cash flow plan you should be able to manage this period and get by.

The thing that will have the biggest effect on cash flow is managing your inventory correctly and buying the right amount of merchandise that is suitable for your new sales budget.

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