Operating in a downturn: strategies for success

Managing costs

Retail brands that remain strong during a recession all have one thing in common: they are expert at managing costs, and just how to do that was an oft-discussed theme at this year’s conference. As The Entertainer chief executive Gary Grant pointed out in a panel session on value, even good, profitable retailers can still go bust if they don’t manage their cash flow.

Original Factory Shop chief executive Angela Spindler said that retailers just need to be clever about cash flow, pointing out that you can make a store look great through smart merchandising, rather than expensive fixtures and fittings. She added that retailers must do all they can to get the best deals. “Anyone who is not taking advantage of that is missing a trick,” she said.

The falling price of sterling has posed another challenge for retailers battling to keep costs down. In his one-to-one session with conference host Declan Curry, Marks & Spencer executive chairman Sir Stuart Rose said: “The adverse effect of the currency is very unhelpful and will require us to see how we can become more efficient.”

Debenhams chairman John Lovering said dealing with the issue has required close negotiations with suppliers. In another panel discussion on protecting profit during a global economic crisis, he said: “We’re saying to suppliers: ‘We’ll help you by having larger product runs, but we want you to soften the blow with the exchange rate’.”

Particularly telling was Lovering’s euphemistic description of the changing nature of supplier relationships during a recession: “The spirit of partnership prevails across the land.”

Rose also had a warning to retailers that are slashing costs within the business. “Cutting the fat out is a good thing to do, but don’t cut an artery.”

The right team for the job

“Retail is the ultimate team sport,” Kingfisher chief executive Ian Cheshire told conference delegates in his session on how to strengthen teams in tough times.

“If people don’t understand how to work together in a team they can’t really contribute,” he said. Rallying the workforce to ensure it is capable of making a retailer succeed during a recession requires five vital ingredients, he maintained: the right goals, the right people, real development, rules and rewards.

Notably, Cheshire warned that despite the waves of cost-cutting, retailers should not compromise on people development. “If you invest in high quality teams now you will benefit so much more,” he said.

In an audience poll during Cheshire’s session, 42 per cent of delegates said pay freezes were being imposed in their organisation this year. And yet rewards, said Cheshire, will be crucial. To that end, Kingfisher is to reward high-performing store managers with shares worth up to six months of their salary. “Bonuses are not a bad thing, provided you know why you’re paying them and that they are sustainable. It’s critical that people are recognised,” he said.

So too is leadership. In another session on protecting profitability, Debenhams chairman John Lovering said: “The difference between a performing business and an underperforming business is the enthusiasm and sense of belief that the leaders have managed to instil.” New Look chairman Phil Wrigley backed that view. When asked about the essence of staff retention in a recession, he replied: “It’s about how you lead and what environment you create – where people understand the risks and they’re clear about their part.”

The rise and rise of Morrisons

“Plenty of heart, plenty of stomach, but perhaps not as much head,” is the way Mark Bolland described the Morrisons he took over in 2006.

After a dramatic overhaul of the company, two years later profits have soared tenfold from£62m in 2005/06 to£655m. The figure is all the more impressive when you think that Bolland had no previous experience of retail when he took the job.

Coming into the industry with a fresh pair of eyes, he told delegates, has helped. But he was also forthright about what it was like taking over in the shadow of the legendary, now retired, founder of the company, Ken Morrison. “It was a privilege working with Ken,” he said. “He is a born retailer. People like that have different eyes and different ears and they see more and hear more, so don’t try to compete with them.”

The first challenge, he said, was addressing the problem of brand perception. New logos, packaging, product ranges and store designs was his solution. “In 2006 people didn’t really know Morrisons. They thought it was a discounter with a very limited range and they didn’t like it,” he said.

As the retailer continues to enjoy soaring sales and growing market share, Bolland was unsurprisingly in a jovial mood – particularly about how consumers might be trying to cheer themselves up as the economy plunges ever deeper into recession. “Sales of joints of meat, bath foam and bath herbs are still strong,” he said. “I have to check the figures for candles but it seems like people are still amusing themselves with a nice bath and a Sunday roast.”

Credit-crunched shoppers

Sainsbury’s chief executive Justin King is a man who looks on the bright side. Describing himself as a “glass half-full” kind of man, he focused on how retailers can get through the bad times.

Understanding what the shopper does in a downturn, he said, is essential. What doesn’t help, he added, is the fact that many retailers are under an illusion about what has changed in the habits of the average consumer.

He said there are three myths about the average credit-crunched consumer that need to be dispelled. Firstly, shoppers aren’t down-trading across the board as many people assume they are. Secondly, he rejected the idea that shoppers are more selfish in a downturn. Thirdly, he believes that the middle market is not being squeezed as much as people might assume.

“Being in the centre is a good place and you are uniquely positioned to work with customers as they make changes,” he said.

Meanwhile, Unilever UK and Ireland chairman Dave Lewis described the “despair, concern and nervousness” shoppers were feeling at the moment, but also had a positive message for the delegates. He pointed out that many of the problems on the high street are more to do with confidence than anything else. In many cases, disposable income has risen slightly compared with a year ago because of decreases in petrol prices, interest rates and commodity prices.

“Income isn’t the real issue,” he said. “It’s about confidence. People are genuinely concerned about what is going to happen.” He added that the most important goal to achieve is ensuring that retailers are engaging with all of their customers.

“It’s hitting some people but it’s not hitting all people. You need to make sure you’re really connected.” Key to this, he concluded, is to move with the times and offer the shopper the most possible for their money as their “definition of value” changes.

Developing overseas

Three retailers who spoke at the conference proved that each company’s experiences of developing an international business can be very different.

Best Buy international chief executive Bob Willett was honest that he had delayed the opening of the retailer’s first Best Buy-branded store in Shanghai twice. After this the company then took 19 months to open its second store in Shanghai because it wanted to make sure it was doing the right thing before extending itself further.

Debenhams international director Francis McAuley mentioned the retailer’s failure with a franchise partner in Russia, but said that he has also had experiences with great partners – for instance Iran. Debenhams’ first store there has only been open for a couple of weeks but McAuley says it is already probably trading at the highest density of any of its international sites. Debenhams will open three or four more stores there in the next 18 months and he thinks Iraq could be a similarly successful market in the longer run.

Korea is another prospect for Debenhams. McAuley said there is nothing better than visiting a region for four or five days and looking at the people to decide how suitable a country is to enter. He also said that retailers should talk to each other, as the more UK retailers that expand overseas the better.

Aurora deputy chief executive Mike Shearwood said expansion doesn’t need to be costly if retailers work with franchisees. He identified the Middle East and Nordics as traditional expansionary markets; the US, Russia and China as strategic; and countries such as Cyprus – where entry is eased by cultural or fiscal similarities – as opportunistic.

His big tip was to not underestimate the difficulties that can be caused by cultural differences.

Planet Retail global research director Bryan Roberts added that grocery stands out as the sector where retailers need a strong domestic business in order to expand internationally.

He said that several of the most successful international retailers have been able to take a long-term view on profitability in international markets because of their private ownership. He contrasted this with the experience of public companies such as Tesco, which gets grilled about the performance of its US business at every analyst event.

Mothercare chief executive Ben Gordon said that his franchise partners bring a strong entrepreneurial spirit, which is a boon when a fast roll-out is wanted. It also means that aspects such as marketing can be tailored to a local audience in a way that would not be possible if everything was run from the UK.

At the same time, Mothercare has rolled out an intranet to connect all of its partners so they can download and use point-of-sale material that is consistent with the retailer’s brand.

Mothercare has also found it easier than some retailers to expand into India. Gordon said this was partly down to the partner it works with and partly down to the fact that it already had significant sourcing opportunities in the country, which has helped it overcome some of the import issues other companies have faced.

Social responsibility and profit

Doing the right thing can be good for business, said Marks & Spencer executive chairman Sir Stuart Rose.

Although gagged on current trading due to M&S being in a closed period, he was forthright on social responsibility. Talking about the retailer’s continued commitment to its Plan A, Rose said that after spending£200m, the initiative is now profit positive after two years.

He said that it was both good for business and the right thing to do. Rose also pointed out that corporate social responsibility is not new to M&S – Simon Marks traditionally called it “enlightened self-interest”.

He was outspoken on various important social issues, including clothing having got as cheap as it is possible to get, food waste and the meddling of non-governmental organisations.

Rose added that despite sales of organic produce falling back slightly for all retailers, it is still a fact that customers do care.

He spoke of population growth and population ageing as issues that politicians do not have a mandate to tackle and said that business should step in.

The value proposition

Many retailers who spoke at the conference referred to the value proposition they are offering budget-conscious customers, even if their disposable income is not under pressure.

Both Tesco and Sainsbury’s spoke of savvy customers developing coping strategies, making careful choices about when to buy big brands and when to opt for own-label. Tesco’s response has been its Discounter range and special offers on everyday essentials. Meanwhile, Sainsbury’s has focused on helping its customers get back to cooking their own meals and maintaining high ethical standards even for its value-range meat, fish and other fresh produce.

The traditional value brands are also wise to the supermarkets and other mid-market retailers increasingly trying to occupy their space. TJ Morris operations director Joe Morris was dismissive of the mid-market’s move to value. “You are either a value retailer or you are not. Doing promotions is not being a value retailer,” he said.

He added that Woolworths, with the leases it was tied into, failed partly because it no longer had the cost base to maintain its position as a value retailer.

Original Factory Shop chief executive Angela Spindler added that Woolworths’ demise is creating opportunities for value retailers such as hers. She said: “It gives us access to sites and capacity, but we should learn the mistakes of that business too.”

N Brown Group chief executive Alan White noted that both older and more affluent customers are being particularly cautious. His customers are increasingly on the look out for a bargain, with a growing trend of visitors to the company’s websites going first to the clearance section, before taking a look at the full-price merchandise.

99p Stores commercial director Hussein Lalani said that value retailers have Primark to thank for making the nation’s shoppers proud to bag a bargain.

Conference polls

When will the economy start showing signs of recovery?

Second half of 2009 11%

First half of 2010 41%

Second half of 2010 41%

Later 7%

Are you imposing a pay freeze for staff this year?

Yes, for all staff 42%

Yes, for senior
management 7%

No, but pay rises will
be small 37%

No, we are increasing pay in line with previous years 14%

Is there room for three store-based electrical specialists on UK
retail parks?

Yes 54%

No 46%

Who holds the balance of power in the supplier/retailer relationship?

The supplier 9%

The retailer 69%

There is an even
balance 22%

Does social responsibility matter to consumers in
a downturn?

Yes, it’s just as
important 41%

Yes, but less than in the good times 52%

No, it doesn’t matter anymore 7%

What proportion of retail sales will be online
in 2015?

Under 10% 3%

11 to 20% 19%

21 to 30% 32%

31 to 40% 29%

More than 40% 17%

Multichannel cohesion

Even retailers that are adept at multichannel have only just begun to scratch the surface of its potential.

Speaking in a session on wiring your business for multichannel growth, Argos managing director Sara Weller said that 38 per cent of its sales were now multichannel and the goal is to get that figure to 75 per cent. Argos’s Check and Reserve service has grown 48 per cent year on year.

But capitalising on that growth requires focus. Weller said there are three questions that retailers must consider: do their channels compete or co-operate in order to satisfy customers? Who is really in charge – the company or the customer? And do retailers allow customers to help them improve their businesses?

“In multichannel retailing, channels don’t compete but work together if a customer is to have a unified shopping experience,” she said. She added that there is often a tension between what the customer wants from a multichannel offer and “the stuff that the people who spend their lives building internet sites want to do”.

In other words – even if on the surface what a retailer is doing doesn’t feel particularly innovative, exciting, or groundbreaking, the customer is far more likely to be interested in whether it works and whether it is practical.

She used the example of Argos’s introduction of a website feature that helps shoppers ensure they have chosen the correct replacement printer cartridge. It has increased sales of these products by 26 per cent. “It’s dull, it’s boring, but it works for the customer,” she said.

She also urged delegates not to overlook the importance of social networking. “Facebook and its ilk are big news and you need to look at how to get involved in this space.” But this doesn’t have to mean the launch of a retailer’s own social networking site. Argos has introduced product reviews and Tell Argos, enabling shoppers to give feedback on the brand. “All of a sudden we have customers talking directly to those who run products and stores without any customer insight team,” she said.

Ultimately, she said, when it comes to multichannel, retailers “need to get channels working together, need to make sure what we develop earns its keep and we need to get customers to help us improve”.