How retailers can emerge stronger from times of crisis
The coronavirus has major consequences, also for the retail industry. The virus has accelerated the deterioration of the economic situation. Because many economists had already predicted that there would be an economic downturn. However, it was not expected to take at least as great a shape as the 2008 recession. While it now seems that the disaster may be bigger than it was then. The stock prices are lower than at that time and there is great uncertainty about further developments. Retail is a huge challenge. The question is how they can best cope with this. Consulting firm McKinsey has investigated what makes one retailer stronger, while others fall mercilessly.
Bending or cracking
According to McKinsey, the 2008 crisis has not only resulted in losers. Where countless retailers fell, others flourished under exactly the same conditions. Domino’s Pizza delivered a total return of 16 percent from 2007 to 2011; for one of their competitors, that figure was only 7 percent. The consultancy examined what makes the difference between success or failure in times of crisis. They interviewed dozens of executives and reviewed performance from 250 retailers between 2007 and 2011.
As expected, most did poorly. No more than a fifth of retailers did well. They delivered a 21 percent total return, while the rest managed to achieve only 4 percent. This was not only a result of cost reductions; these retailers saw their revenues increase by more than a third between 2007 and 2011. But what makes the difference between retail organizations with little resilience and retail organizations that can move with unforeseen circumstances?
Six actions that ensure a resilient retail organization
McKinsey’s research revealed that there are six things that distinguish retail success from retail failure in times of crisis.
1.Build up cash reserves: Retailers successful in times of crisis managed to increase cash reserves by 18 percent between 2007 and 2009, while others had barely any cash growth. The growth of resilient retailers was the result of divestments and divestments. Yum !, the owner of fast food chains such as Kentucky Fried Chicken and Taco Bell, reduced the share of its corporate restaurants in the United States from 22 to about 10 percent. That released capital for more difficult times.
2. Create margin space: While resilient retailers saw costs fall from 13 to 11 percent of turnover in the period immediately before the recession, it rose from 13 to 15 percent for the other retailers. In other words: the margin space was reduced for the latter group. Discount store Dollar Tree saved 7 percent of its costs between 2007 and 2008, allowing it to absorb the declining margin from its stores. The discounter was even able to invest in growth, such as financing an aggressive marketing campaign and opening new stores to reach the group of customers who had less to spend as a result of the crisis.
3. Take the Attack: Because resilient retailers cut costs on time and built up cash reserves, they were able to invest when the economy actually weakened. They increased their marketing and operating expenses by 2.2 percent from 2009 to 2011. For example, T.J. Maxx (which includes TK Maxx) is a 15 percent ad spend as part of a strategy to target new customers affected by the recession. In 2009, the company reported that 75 percent of that year’s shoppers had not shopped in stores the previous year. According to McKinsey, all retail success stories during the crisis indicated that they maintained or increased their marketing spending during the recession in an effort to increase market share.
4. Enter new markets: In the last recession, many retailers had to close their stores or cut growth plans. But the resilient retailers took the opportunity to enter new markets. Zara took over retail spaces that her competitors had left. In 2009 alone, it opened 28 stores in North America and flagship stores in Beijing and Tokyo.
5.Adding Value: While hard-to-reach retailers focused on giving discounts to boost sales, successful retailers selectively added value. They repositioned different parts of the formula based on customer needs and trends. Based on customer research, the Tiffanys department store lowered the average price of the high-end fashion jewelry, but increased the prices of recession-proof engagement jewelry. As a result, net income increased and margins remained stable.
6. Invest in Customer Contact: Retailers who turned out to be less resilient tended to make massive layoffs, both at company headquarters and in stores. While successful retailers decided not to reduce costs in customer contact. Some even invested in additional training. When everyone in the retail sector saved on personnel costs, Coolblue spent more on customer handling. In this way, the retailer also managed to achieve growth during the crisis. Again, Coolblue is taking quite drastic measures in times of economic bad times. For example, they close shops, they stop affiliate marketing and currently irrelevant categories such as suitcases and barbecues are placed online.
What McKinsey’s research shows is that retailers who keep moving along not only manage to survive tougher times, but even take advantage of them. According to the consultancy, how retailers perform in a recession is largely determined by how well they prepare and how decisively they act.
No one knows how big the impact of the coronavirus will be, but it is certain that this will not be the last time that it will be economically worse. In the economy, times of economic boom and economic boom alternate. Developments such as digitization, aging and the need for sustainability will also pose challenges in the future. It is important that retailers are prepared for this whenever and wherever.