Adapt today to thrive tomorrow

The retail industry is in the midst of a cataclysmic change brought on by a host of factors, most notably the clampdown in the credit markets and the severe pullback in consumer spending. The result: a modern-day natural selection that is affecting retailers across every sector. Gary M. Kulp, president of the Retail Division at Gordon Brothers Group, offered these strategies not only to help retailers weather the current economic storm, but to ultimately thrive in its aftermath:

Convert unwanted inventory into working capital. 

At any given time, up to 20% of a retailer’s merchandise mix can be classified as obsolete, surplus or underperforming. Many times, converting these unwanted assets into working capital can be as important as gross sales when contributing to the bottom line. Moving unwanted goods takes a singular focus and highly specialized sales techniques. Areas of a sales floor must be temporarily set aside for unwanted goods and separate advertising often must run concurrent to existing promotions to call attention to clearance goods without taking the customer’s focus away from normal-course merchandise. Additionally, discounting cadences must be managed and adjusted on a daily basis to ensure sales velocity.

Capitalize on competitors’ store closings. 

Still another way for retailers to increase revenues is to aggressively pursue orphaned customers from competitors that are either going out of business or exiting select markets. By increasing promotional efforts in those markets, surviving retailers can grab incremental sales. For example, when KB Toys began going-out-of-business sales in December 2008, savvy Toys “R” Us responded the following month by offering 15% off one toy to customers who brought in a KB gift card. Another way for retailers to capitalize is by selling products that were their competitor’s best-sellers. Not only does the surviving retailer stand to attract additional customers, but it also stands to secure advantageous wholesale pricing from its competitor’s vendors who just had a distribution channel dry up.

Close unprofitable stores immediately. 

Any store that has negative cash flow should be closed immediately and the cash generated from the liquidation of inventory, fixtures and, if applicable, the sale of owned real estate, should be funneled into ongoing operations. Sears Holdings, the parent company of Kmart and Sears, Roebuck and Co., has been employing such a strategy, having shed 54 underperforming stores over the past year. This has helped the retailer beat fourth-quarter analyst earnings estimates by nearly 10%. A crucial component of any store closing is the successful migration of both current and prospective customers to neighboring, ongoing stores where the incremental sales volume becomes more profitable. This is achieved by initiating a carefully planned “customer redirection program” midway through the store-closing sales event.

Examine and renegotiate leases. 

The National Association of Realtors’ forward-looking index and forecast for the commercial real estate market (released in February) stated: “The retail vacancy rate will probably rise to 13.4% in the third quarter of this year from 9.8% in the third quarter of 2008. Average retail rent is expected to fall 9.0% this year; it declined 2.0% in 2008. Net absorption of retail space in 53 tracked markets will likely to be a negative 49.8 million sq. ft. this year.”

While this is discouraging news for developers and landlords, it gives retailers an opportunity to renegotiate current leases to achieve advantageous terms and lower rates. This is particularly true of leases that are set to expire within the next 12 months as landlords will most likely be hesitant to risk incurring an extended vacancy period by allowing the space to turn over.