Download Batten Down the Hatches

Batten Down the Hatches
A Recession Is Coming in 2018.
Start Cutting Costs Now.
Although the U.S. economic picture currently looks
bright, we believe there are storm clouds gathering
on the horizon. And a big soaker is threatening to
hit the U.S. shores as soon as 2018.
So even though it may not feel like it, factors like
strong consumption, tame inflation, solid household finances, falling oil prices and more all point
to the fact that we’ve seen more of this current
economic cycle than of that which remains ahead.
(See Exhibit 1.)
Why do we find ourselves in increasingly rough
waters? Historically, economic booms and busts
have rolled through our economy in fairly steady
patterns. And now, even though many consumers
are just beginning to feel as if our economy is back
on track—while millions more feel trapped under the
burden of growing income inequality—economic
data actually shows that we are well into our current
economic cycle.
And what comes after the boom end of an economic
cycle? Inevitably, some kind of bust.
This looming recession will arrive, just factoring
in the intricate drivers of the U.S. economy. And if
there is any doubt that a U.S. recession is coming,
remember that global forces are also contributing
to the looming storm. Many of our trading partners
Exhibit 1: Consumer sentiment is near pre–Great Recession highs.
GROSS DOMESTIC PRODUCT INDEX VS. UNIVERSITY OF MICHIGAN
CONSUMER SENTIMENT (1978–2016)
140
120
120
100
GDP INDEX1
80
60
60
40
40
20
= CONSUMER SENTIMENT
Index 2007 = 100, Annual, Seasonally Adjusted Annual Rate
University of Michigan: Consumer Sentiment©, Index 1966: Q1 = 100, Not Seasonally Adjusted
1
2
2
|
BATTEN DOWN THE HATCHES
2015
2016
2013
2014
2011
2012
2010
2009
2007
2008
2005
= GDP
2006
2003
2004
2001
2002
1999
2000
1997
1998
1995
1996
1993
1994
1991
1992
1989
1990
1987
1988
1985
1986
1983
1984
1981
1982
1980
1978
1979
0
20
0
CONSUMER SENTIMENT INDEX 2
100
80
There’s just no way we can continue at our
current pace while the world’s economies flounder
around us, given today’s global economy.
continue to struggle in Europe, Latin America and
Asia. There’s just no way we can continue at our
current pace while the world’s economies flounder
around us, given today’s global economy.
Other economy watchers agree. As one Merrill
Lynch report pointed out, our current economic
expansion looks very similar to its 1990s cousin. That
expansion was 120 months long and was ultimately
felled by oil prices collapsing and a series of currency crises in emerging markets. We’re at around
the 80-month mark in our current expansion.
Meanwhile, a Societe Generale report said that while
the chance of a recession this year is under 2%, our
current highs are not permanently sustainable and
recession will come knocking in 2018 or 2019.
Now what? Execs can continue to operate like
sunny days will last through the planning period,
or they can start working now to build a revenue
engine to power their organization through choppy
waters and invest in long-term cost structure
changes to drive and sustain profits.
Let’s go through some of the biggest cost-saving
moves a retailer can make, using real-world examples to see how the savings stack up. Leading
retailers are pursuing many of these cost-cutting
initiatives simultaneously—when it comes to cost
cutting, there’s no such thing as a silver bullet.
1. RETHINK THE STORE.
There’s plenty of room to lower a store’s fixed costs
without damaging the customer experience and, in
some cases, actually improve it.
While retailers are understandably wary of cutting
labor out of fear of hurting the customer experience, not all labor is created equal. Start by reducing the number and frequency of non-selling activities, such as inventory checking, receiving, moving
products from backroom to the selling floor and
price changes, and then converting some of those
employees to customer-facing work while reducing
overall staffing levels—and costs. Basically, retailers
should strive to spend as little as possible on any
non-selling activities.
One multibillion-dollar specialty retailer piloted
several efforts in this area, including redesigning
the sales floor to accommodate more of each
item, reducing nonproductive sales areas—thereby
decreasing replenishment time—and revamping its
backroom operations through the use of standardized processes and cross-training teams to share
labor across functions.
In pilot testing, the retailer was able to reduce labor
hours by 10% and overall baseline labor costs by
3% to 5%. The retailer is investing 25% to 40% of
the savings back into the business to improve the
customer experience by having more trained staff
available at the point of sale and other customerfacing areas, helping to drive additional sales to
power through a recession.
Meanwhile, a national footwear retailer reviewed
all of its store operations to bring them into line
with best practices while developing better store
labor standards for payroll planning, budgeting
and labor scheduling. As a result of this work, the
retailer is expecting a 15% to 40% improvement in
labor efficiency for key store tasks, leading to the
opportunity to recover roughly $7 million in annual
labor expenses.
Plus, future stores fully implementing 1:1 Retailing
technology like digital shelf edges and magic dressing room mirrors will be able to provide even better
service with fewer staff. This may also include using
temporary or flexible staffing models, as startups
like Forrge bring this Uber-like model to retail.1
Especially as the recession hits, retailers will
cut prices in a bid to remain competitive, so it’s
important to devote a significant chunk of instore selling space to revenue generators that
are less vulnerable to encroachment by Amazon
and other low-price warriors, such as providing
services related to the products you sell. Not only
are services inherently harder to offer online and
BATTEN DOWN THE HATCHES
|
3
in value-driven retail formats, they also help bring
customers back into the store, driving up traffic
and creating new paths to purchase.
processes to First Insight, which uses technology
to assess the likelihood that a given design or style
will be successful.
Retailers can also save money—and improve the
customer experience—by heavily curating and minimizing in-store inventories and then pushing larger
assortments to their digital channels. Having smaller,
more locally tailored store assortments helps reduce
inventory carrying costs and store footprint and
improves margins by reducing markdowns. Several
studies show that consumers actually prefer this
pared-down in-store experience as well.
On a related note, make sure that the services
you’re already contracting out are still valuable.
Retailers can unlock surprising value by revisiting their vendor base every few years for things
like travel, office supplies, building maintenance,
contract labor, rentals, marketing and technology
service providers—all without impacting customers or internal stakeholders. These types of goods
and services represent 10% to 20% of a retailer’s
total operating costs, and one specialty chain found
that it would be able to save 5% to 20% on indirect
spending in each category it revamped.
For this strategy to truly succeed, it is imperative
that real-time inventory availability be trackable
across channels and that store associates are
empowered to use this data to save the sale.
Using stores strategically can also help reduce shipping costs—consider increasing ship-from-store to
help close the delivery speed gap and reduce lastmile charges. And, of course, buy online, pick up in
store programs help drive additional store traffic.
Finally, make sure to revisit your store opening plans
to see if they still make sense given slower industry
growth, lower spending and increasing cannibalization from online channels.
And when you do open new stores, consider how to
do it more cheaply. For example, one retailer saved
7% to 10% on planned new store openings by cutting overall site size via reductions to the parking
lot, landscaping and lighting—all without compromising the customer experience.
2. WHO’S DOING WHAT?
Instead of building massive internal teams to deliver
non-core competencies, consider aligning with and
leveraging innovative solution providers, which not
only gives you access to the latest thinking, it also
helps avoid major fixed-cost burdens.
Take First Insight. Retailers can essentially outsource some of their new product development
4
|
BATTEN DOWN THE HATCHES
Even capabilities that remain internal deserve a
second look in this cost-cutting environment.
For example, one $8 billion global specialty apparel
brand saved more than $100 million by adding more
brand-based structure to its organization. The new
brand-based P&L and leadership team, consisting of
key owners from merchandising, planning, finance
and creative services, were able to remove some of
the inefficiencies inherent in region- and channelbased organizational silos. This new group was able
to reduce the brand’s SKU count from over 5,000 to
around 3,000, which also helped reduce development, labor and marketing content creation costs.
This strategy also works for single-country, singlebrand retailers. One national U.S. chain built a center
of excellence for its learning and development function, which also had the benefit of standardizing all
training across the organization—especially critical
for customer-facing roles—and its human resources
and accounts payable functions. These efforts resulted in a 10% to 12% reduction in baseline costs.
3. INVEST SMARTER.
With a recession on the horizon, segment growthoriented investments into two categories: keep
and toss.
When you’re facing a recession, it makes sense
to proactively trim back inventory levels, simplify assortments and up the mix of value-oriented products.
Solidly in the “keep” category: key growth-fueling
investments in a wide variety of cost structure
changes, from product distribution and supply chain
to technology and labor productivity. You’ll need
these to power you through the recession, and they
could take up to 24 months to pay off, so start making them now.
Another investment that may make sense in a recession, especially one that impacts different regions
at different times, is improving inventory visibility
into product flow so that you can react quickly to
changing demand. Having this technology in place
can also help you route extra product directly to
liquidation, as Saks Fifth Avenue and other retailers
did successfully during the last recession.
While we’re discussing inventory, when you’re facing a recession, it makes sense to proactively trim
back inventory levels, simplify assortments and up
the mix of value-oriented products. One big-box
retailer is anticipating turns improving from 2 to 3,
while also increasing top-line sales by $100+ million,
all from this type of work, enabling it to invest in its
best-selling, core products.
But other business practices may not be very fruitful,
and now is the time to revisit them. One common
example for many retailers: massive investments
in same-day or next-day delivery that are essential
for some businesses but are just nice-to-haves for
others and not worth continued investment heading
into leaner times.
4. EXPLORE NEW PRODUCT FLOWS.
Changing some key sourcing and product flow
steps will help cut costs and, if done correctly, also
improve the customer experience.
For example, consider near-shoring. Not only does
it help retailers bring products to market faster,
helping them to be more responsive to consumer
demand and to stay on top of new trends, it’s also
not as expensive as it once was and can deliver even
higher profits. Plus, as sourcing activities shift away
from China, sourcing offices can play a smaller role,
saving money.
There’s also significant opportunity to reduce
complexity across the product development and
sourcing process. Many retailers can also reevaluate
their sourcing capabilities, going from working with
many vendors with narrow capabilities to developing deep relationships with a few world-class, fullservice vendors.
Don’t forget to look at reducing complexity when
it comes to materials. One specialty retailer had
over 50 active mills and more than 300 active fabrics weighing down its balance sheet. The retailer
simplified this picture and eliminated unneeded
complexity in its processes by improving internal
skill sets and organizational structure. Living with
the motto “sourcing can do more with less, so let
it” will help the retailer reduce their cost of goods
by 3% to 5%.
Once the product is developed and sourced, retailers
have even more cost-cutting opportunities when
delivering it to consumers. Leading retailers are
exploring end-to-end product flow optimization,
which can drive cost savings in both distribution
centers (DC) and stores and improve inventory productivity by better aligning supply and demand—
reducing inventory holding costs in the process.
Several tactics can get you there, including revamping inbound ordering to reduce minimum order
quantities, reducing lead times, better aligning
order quantities with expected demand, developing differentiated product flows and increasing
drop shipping. All can reduce both logistics and DC
operational costs.
5. IMPROVE THE CASH CYCLE.
Revisit your days payable outstanding and days
sales outstanding agreements with your vendors
and customers to help you hold onto cash longer.
Speeding up inventory turns by integrating merchandising, inventory and operations execution will
also help improve your cash cycle and free up money.
BATTEN DOWN THE HATCHES
|
5
For example, one retailer analyzed payment terms
across more than 2,000 vendors and found that
more than 90% of those vendors required payment
in under 60 days. There were limited processes in
place to parametrically determine payment terms
depending on vendor relationship, market stats
and volume leverage. Buyers negotiated terms
ad hoc and compliance to standardized terms
was negligible.
By renegotiating payment terms and closely monitoring them going forward using formal guidelines,
the retailer could improve its working capital by $20
million. The business can choose to prioritize margin
improvement over working capital by diligent use of
discount terms.
All of these efforts combined will not prevent
struggling retailers from drowning in the coming recession, but they will help strong retailers
weather the storm and put them into a solid coststructure position that will serve them well even
when the clouds part and the sun comes back out,
as it always does. v
1. F
orrge is one of the startups participating
in the XRC Labs retail accelerator, of which
Kurt Salmon is a founding sponsor.
6
|
BATTEN DOWN THE HATCHES
BATTEN DOWN THE HATCHES
|
7
Kurt Salmon is a global management consulting firm dedicated to
building the market leaders of tomorrow. More than just partnering
with our clients, we ally with them, integrating ourselves seamlessly
into their organizations in order to develop innovative, customized
solutions for their 21st-century business issues.
Succeeding in today’s increasingly complex, consumer-driven
environment is an enormous challenge.
But companies need to look beyond today; they need to position
themselves for continued success in the even more uncertain future.
That’s where Kurt Salmon comes in.
We call it delivering “success for what’s next.” The results are
transformative.
AUTHORS
Together, Bruce Cohen, Peter Hsia and Praveen Kishorepuria
have 65+ years of experience advising the world’s leading
retailers and brands on end-to-end strategies to help their
organizations remain at the head of the pack.
CONTACT
Praveen Kishorepuria
Partner
Retail and Consumer Goods Group
[email protected]
Kurt Salmon
650 Fifth Avenue
New York, New York 10019
+1 212 319 9450
www.kurtsalmon.com
Americas · Asia · Europe
© 2016