All the Right Moves

Plunging consumer confidence. Upheaval on Wall Street. The continuing decline in the housing market. These are hard times for retailers. And with the credit crunch in full swing, even the most well-funded and best-positioned companies are finding it more expensive and less convenient to borrow.

Given the current environment, it’s not surprising that the first instinct of many retailers is to hunker down to minimize losses and wait until the storm passes. According to some experts, however, such an approach is the least effective thing a company can do during a downturn. Instead, they recommend that companies move quickly to improve performance on the premise that investing for future growth now will yield the most positive long-term results and help retailers recover faster.

Such a strategy is detailed in the most recent issue of The McKinsey Quarterly, from McKinsey & Co. Entitled “How Retailers Can Make the Best of a Slowdown,” it offers a compelling case for investment, and a working blueprint to help chains get through the current downturn.

According to the report, before setting their priorities and taking action, retailers need to determine whether they should take an offensive or defensive approach. And they should start by taking a hard look at the health of their balance sheets, management teams and overall operating performance. Companies with reasonable cash reserves and ready access to credit lines, for example, have options, such as investing in stores, people or acquisition, that weaker players lack.

In deciding whether to take an offensive or defensive approach, retailers also need to take a careful study of the overall environment, realistically analyzing the potential of their business and taking into consideration such factors as market saturation, recent growth rates, and the strengths and weaknesses of competitors.

Companies with good financial strength in markets with significant growth potential should go on the offensive and lift investment to gain strategic advantage over competitors, the report recommends. What it calls “big bets,” such as doubling down on new stores or remodeling existing ones, are one possibility. So are smaller bets, such as recruiting talent from struggling players.

Retailers with good financial health in mature industries can also go on the offensive, according to the report, taking actions to grow revenue by driving traffic into their stores through more compelling product offers, raising the effectiveness of sales associates and the like. Ensuring the availability of fast-moving SKUs is another option.

Those companies in weaker financial shape need to focus more aggressively on reducing costs, according to McKinsey & Co. Weak performers have major opportunities to rationalize SKUs—freeing up working capital—and to renegotiate terms on direct capital. They also should increase sales-floor efficiency. Among the recommendations: Deploy labor by decreasing the time staff spend on non-customer-oriented tasks and increasing the time spent helping customers.

“The focus should be on getting more from existing sales resources, not just on cutting labor hours,” the report reads.