The Sky Is Not Falling

The drumbeat of negative news—store closings, layoffs, bankruptcies—has many thinking the sky is falling. Calm down, people. We’ve been there before, as recently as early 2001

Economists like to call this a “correction,” a time when the irrational exuberance that drove markets upward and upward returns to a more rational approach. Just as the housing market had its bubble, so too did store growth.

We’re a publication that celebrates new store construction. This month we will host the 44th annual SPECS, dedicated to store planning, equipment and construction. But let’s be honest—some recent development was just too iffy, built on a quicksand of unrealistic expectations. What we are witnessing now is the rationalization of real estate holdings, first in the consumer market and next in the commercial sector. Was it realistic to believe that all those sub-prime mortgage holders were good credit risks on which to build a retail business? The bankruptcy of Levitz definitively answered that question.

Are we in a recession? Technical economic analysis requires six months of negative economic activity. But popular belief surely has us mired in a recession.

Again, no need to panic. We’ve been there before. What should a retailer do? “This is not the time to be playing defense,” Larry Selden defiantly told those gathered at last month’s Retail Connections Summit in Boca Raton, Fla. Selden is professor emeritus of finance and economics of Columbia University and the Wharton School of Business. Notably, he is a guru of customer centricity. He actively helped Best Buy install this groundbreaking concept that has made it the envy of most retailers.

Selden’s prescription calls for retailers to engage in an integrated business that strategically combines the previously standard silos of finance, marketing and operations. Asserting that retailers need to achieve a minimum 5% comp-store gain and a 12% return on invested capital to remain viable, Selden said that to boost sales and profitability retailers must improve close rates, up the ratio of transactions to customers, and increase units sold per customer.

He cautioned against cutting staff or services to ensure that a retailer’s best customers are not taken for granted. “I find it insane that retailers will spend $5 million to build a store but won’t spend $100,000 to train the people inside them,” said Selden.

Yet that is what they are doing. Brian Hume, president of Martec International, a training and consulting firm based in Atlanta, said training is one of the first expenses cut.

Numerous CIOs at Retail Connections acknowledged pressure on their budgets, pressure to go forward with just the most business-critical projects. However, that might not be the best strategy. “This is the moment to increase spending,” said Richard Hastings, VP, retailing industry analyst, Bernard Sands/Trading Partners Collaboration. Increased spending, he said, could either make them better or make them more attractive to buyers.

Bennett Nussbaum had a more practical reason to invest more. “The price for capital goods and services tend to go down in these types of financial times,” said the senior VP/CFO of Winn-Dixie Stores.

“It’s a bear market in stocks, but a bull market in cost of capital,” said Hastings.