What's in Store for Retailers in 2010?

Now, we have good news and we have bad news. (As though you haven't had enough of the latter.) Oh, and then we have some more good news.

First, the really good news. Although we have been perched out on this limb for months, we still believe, overall, sales between Thanksgiving and December 31 this year will recoup about 50% of last year's decline. In other words, if you were down 8% during that period last year, we expect you will be up about 4% this year. But of course, you will have to aggressively go get it!

Now the not-so-good news. We're projecting that the first three to six months of 2010, overall retail sales will be flat. Don't look for gains after this month. Not only is the economy expected to be a drag, but deflation looms. You probably will sell as many or even more units in early 2010 as last year, but we believe volume will be flat.

Ahh, but back to the really good news. Since your operating expenses and inventories are now down (they've had to be), we believe there can be improved margins even with flat sales in early 2010. You will have to be a real merchant to capture these margins, but they are available.

Remember, anybody selling merchandise is a retailer. It's the merchants who lead the way! And for the merchants, "flat is the new up"!

Hasn't Every Mall Lost its "Real" Anchor?

Retail is a mirror of society. And "society" is moving away from malls.

Consider the important social networking role that stores - and malls in particular - have played since their inception. They were the place that people would go to see and be seen, to meet with friends and neighbors; they were the new, clean, comfortable "Main Street", the new "Town Centre".

And many retailers and malls especially served this "social networking" role for teenagers, or for senior citizens walking their laps in a safe, climate-controlled environment. Pedestrian traffic was assured.

So, what's different today? Digital social networks. Malls as social networks have been supplanted. Now we have Facebook. Twitter. Texting. Even email for those a bit older. Socializing has not gone away, but it has moved away from malls.

In fact, when you are in a mall or shopping district, have you noticed which stores actually are busy? Yep. The Apple Store! Then, the cell phone stores. Are we suggesting that all retailers must sell smart phones in order to succeed? Not at all. But clearly, shoppers still seek social networks, and the tools that enable them to accomplish that.

We believe that every mall has a new kind of competitor; it's no longer the development at the next interchange, but the new emerging forms of social networking that engage the time and attention of customers.

Retailing IS a mirror of society. Isn't it time to bring more of a social networking experience into your stores? Malls aren't going to do it for you.

Retailers Will See This Through

A quick recap of the good, the bad, and the ugly about the economy:

• In September, retail sales (excluding autos) increased 0.5%, the second monthly increase in a row
• Unemployment is not expected to have a material drop for several quarters. (This is traceable in part, we believe, to the widespread need for people to find new jobs in new industries or locales.)
• Meanwhile, so far in 2009, 98 banks have collapsed, and expectations are that 2010 will see more of the same

And yet, we still anticipate that between Thanksgiving and December 31 this year, retailers can expect to recoup about half of last Holiday's loss. (That is, if 2008 Holiday sales were off 9%, expect 2009 Holiday to be up 4.5%.)

Why do we maintain such an upbeat view? Here are the main reasons:

1. Consumer confidence, like the stock market, continues to rise
2. Frugal fatigue will be pushed aside this Holiday season. "Enough already!" will be the motto, especially when it comes to buying for others. (We do expect that the popular "self gifting" of 2007 will be subdued, however.)

The enduring effect of retailers who are more "street smart"

The survivors in retailing will each, in their own way, be much more street smart, which will have an enduring effect on retailing going forward. The retailers of the next decade will continue to realize higher turns on inventory, specially discounted merchandise from vendors, extended terms with landlords, and much greater use of technology, especially utilizing their website.

Retailing is being re-invented right before our eyes!

Now Who's Holding Retailers Back?!

Right now, the changes going on in the economy are simultaneously encouraging and discouraging. What a time to be in retailing!

Yes, the overall consumer confidence level is rising. Finally! In fact, we are predicting that Holiday 2009 sales volumes will, in a macro sense, recoup about 50% of last year's drop. That is, if you dropped 9% last December, you likely will be up 4-1/2% this year. We're that optimistic.

But, what's so discouraging is the reticence of vital groups to get on board with this optimism. Not seeing customers come in is not the biggest hurdle right now for many retailers. Instead, the problem is that vendors, bankers, and other lenders are not coming to the party. They need to get with it: the pendulum is swinging back.

The inherent negativism of banks is holding back retailers' ability to get enough product in for Holiday. Failure to raise credit limits for retailers from now through November may, very likely, stifle the sales potential.

What a shame. A missed opportunity for recovery? Timid creditors may be to blame.

Market Upswing in July Means Strong Holiday Sales for Retailers

"He who lives by a crystal ball must thrive on ground glass for lunch."

Ahh yes, a good caution. But some of us believe that the best indicator of the economic future is the six-month predictor of the stock market.

And July 2009 was the strongest July in decades for the stock market. You saw that?!

So, to us, that fact should bolster the optimism of retailers for this holiday season. It's the cause-effect, cause-effect cycle: the stronger stock market leads to improved consumer confidence; consumer confidence drives consumer spending, which should jump up smartly in December-January (six months after the strongest July in decades.)

That's our view. What's yours? (And, shall we save a date in December for lunch?)

Passionate Preaching to Retailers

Some things we care about; some things we care about deeply. This is one of the latter.

Let's all assume that the economy is (finally!) gradually strengthening. There are many bona fide signs of that. Great, as far as it goes.

But we see that many independent retailers are rejoicing with the "Whew! Now we can can back to normal" attitude. And that is very troubling to us. What is sorely needed is a little parental discipline, namely, "Rejoice briefly and restore ratios fervently!"

We see low current ratios and margins along with troubling high Debt-to-Worth ratios. Our mantra - Priority #1 for retailers in an improving economy: Get those ratios restored!

Who knows when the next financial tsunami will come? Retailers must get stronger now! (Want to know what the benchmark ratios are for your retail segment? See the "Benchmarks: 50+ Retail Segments" at The ROI site.)

Get your ratios above the benchmarks for your industry. Then – and only then – should you celebrate being on the road to recovery. Be passionate about it!

Foolish Prediction? We'll See in Six Months

Last week (June 2) we had a catch-up lunch with a long-standing (high end) retail client of ours who, so far, has averted bankruptcy. Surprisingly, the next day we received the amazing, and accurate, note below. He copied us when he sent this note to vendors, an attorney, an accountant and key staff members. Other than getting a chuckle out of it, we thought you might find some of the thoughts quite useful...or hilarious in five months!

"Hi Ya’ll:

I had lunch with the Seattle retail consultants that I’ve used for years. Pat and Dick have consulted together for about 25 years and are nationally known and quoted in their field. Their business is to follow retail trends at a macro level as opposed to living it down in the trenches like we do.

Here are their two websites: http://www.outcaltjohnson.com/ and http://www.retailowner.com/

Pat & Dick say that, barring no huge negative event in the stock market over the summer (which, of course is possible), they predict that high end retail will bounce back in September and October and that we should expect to see 10-15% increases over the 4th quarter period of 1-2 years ago (as opposed to increases against last year’s decreases—make sense?).

They cite:

• improving consumer confidence;
• improving real estate markets;
• improving numbers and wealth generation of the stock market;
• pent up cash;
• pent up demand.

They see our (high end) customers as being psychologically affected by what’s happening rather than their pocketbooks being directly affected.

Moving forward, customers will be cautious and looking for reasons to buy “value”, which isn’t necessarily related to price. As retailers we need to do a better/excellent job of explaining why high end product is a value, ie: style, quality, longevity, uniqueness, etc.

American consumers, they believe, will not outgrow their “I deserve this” way of consuming.

They predict that in the next 18 months, there will be an unprecedented number of retail start ups and entrepreneurs who see openings in the market because of all the retail failures; one more reason we need to stay on top of our games.

Lastly, they acknowledge that there is little we can do to force our customers to buy. What we should do, however, is maintain the course so that our customers see that we are weathering the storm.

Generally, we should not be changing locations if it can at all be helped and that as small, independent retailers, we need to maintain our WOW factor which requires us to have compelling, exciting stores when customers start coming back in.

It’s all prediction, of course, though it’s educated/experienced prediction. It was a great pep talk for me so I hope it helps you feel a tiny bit better about treading water.

And to quote Pat & Dick: Halitosis is better than no breath at all!

Tim"

This Era of Frugality: So What's New?

The general media is making such a big deal out of the stinginess of shoppers that it's become a self-fulfilling prophecy.  Frugality is presented as fashionable, something shoppers should take great pride in.

But, what's new about that?  Nothing!  

Retailers always have had to convince shopper to open their wallets.   In fact, for many shoppers, while NPR stands for National Public Radio, what NPR really means is "Never Pay Retail"!  

That's why every retail segment - from meat markets to autos, from women's apparel to sunglasses - has a "fashion" element.  Customers want whatever is new, or "in", and retailers provide it (some better than others.)

Here is our point: the retailers who moan and provide fodder for the moaning media (and its megaphone) are part of the problem.  Conversely, the 5-10% of all retailers who are true merchants see this era as simply another challenge, even an opportunity.  

Convincing shoppers to become buyers is why merchants love this business.  And love it now more than ever.

You're Focusing on What?! "Top Line Sales"?

"How are sales?"  

That's the international greeting of retailers.  And well it should be.  But if you watch only top line sales, you are not in control of your business.

For example, many retailers will lament, "Last week, sales were off 5% from L.Y. When are things going to get better?"  

But, consider these retailers: 

• "Last week, sales were off 5% from L.Y.  But, transactions were even with L.Y.  Ah ha! Maybe we should spiff our associates for add-on sales."  
  
• "Last week sales were off 5% from L.Y.  But transactions were off 15% from L.Y.  Ah ha! We need a Customer Appreciation Plan whereby our customers get 10% off future purchases each time they bring in a new customer."

See, targeted action steps to address the causes of sales declines, not just the symptoms. And look what it can do for you:

1. Reduce frustration!
2. Spend limited resources wisely
3. Involve sales associate in a positive way

All this just by looking at the free data you already have, and just using it!

Every retailer has access to the number of sales transactions they've had: daily, weekly, monthly.  (It's in your POS system or your cash register.) But too few actually take the next steps – to tally, analyze, identify trends - that can turn it into valuable management information.  

Few independent retailers can work harder.  But there are opportunities to work smarter!

Bigger Could Be (Much!) Better

As the current saying goes, "Why waste a good financial crisis?!"  We support that rationale!

Look, independent retail owners thrive on risk-taking.  They take risks every day.  Buying merchandise; running promotions; hiring new people; etc, etc.  These all are risks.  It's every day life for retailers.

So how about one more?  Right now the world is full of stores and service operations anxious to be sold.  For all the reasons we all know, thousands of owners either financially must sell or they have reached the "I give up" stage. Sad, but true.

What a great time to seize an opportunity!  Let it be known that you are looking to buy businesses that fit your business model.  And you should be, with one caveat: get seller financing.  Don't use much, if any, of your own cash.  Yes, those deals are out there.  So insist on them.

You and the right lawyer might build a much bigger business – fast! – right now.  Lots of low-hanging, distressed fruit available. (And frankly, those retailers who have reached the "I give up" stage will be glad to realize some value from their business, instead of just winding it down. And the seller financing could give them an income stream over time as well. It can be a win-win situation for all parties...including employees and customers.)  

Is "Bigger IS Better" appealing to you?

The Tell-Tale Signs of Retail Recovery

One of the constant major annoyances in life these days is the propensity of the media to dwell on – and bombard us! – with negativity.  And never more so than during this recession.  So how should a retailer cut through the flak?  Just bemoan the negativity, and wait for things to get better?

Not in our view.  The better approach: identify the best leading indicators for retailers, and focus on those.

A few days ago we were debating this topic with a very savvy industry person.  "Unemployment is rising, TARP money isn't helping, sales continue to be off, bankruptcies are escalating.  Is there no turnaround in sight?" he kept bellowing. 

When he finished, we bellowed back, "Well, you're referring to trailing indicators. You're focusing on what already has happened, or is happening. Retailers need to monitor and be riveted on what will happen.  That is, what are the leading indicators that 'normal' shopping is about to resume?"

We continued, somewhat more calmly: "The key leading indicator for retailers is known as 'consumer confidence'.  Watch for monthly reports on this from government and private researchers.  (It's been rising slowly for three consecutive months.)"

"And a major component of consumer confidence is the stock market.  Yes, the stock market, where over 2/3rds of Americans have at least some of their net worth involved.  And that's been rising since March 6!"

Most of all, recognize those trailing indicators for what they are: last week's news.  The tell-tale signs of retail recovery will be revealed first in the most important leading indicator for retailers: consumer confidence.

Where Is Retailing's Bold Management?

Fifty-eight Gottschalks stores, many being the economic heart of their town, being liquidated. Such a shame.  When is retailing going to be willing to take bold steps?  Are managements too wimpy?  Or is it too many "bean counters" and not enough merchants making the decisions today?

Before throwing in the sponge, did Gottschalks look at closing their stores on, say, the three slowest days of the week?  They could be open on whatever 4 days their own data shows their customers prefer to shop.  (And it may not be the same in every town.)  

What's outrageous about that?  Not only might they have reduced overhead by 25-35%, but their very best sales associates would have been available to customers almost all the hours the stores were open.  What a concept!  The best help on the best days for the best customers!

Instead, after 105 years of serving these smaller communities, Gottschalks is going dark full time.  And their towns are going even darker all the time.  Sad.  And maybe unnecessary.

Isn't there an organization bold enough to grab Gottschalks and try out this concept?

  

Bigger Is No Longer Better in Retailing

In our view, the current worldwide financial crisis is the final nail in the coffin of retail bigness. The age of "Bigger Is Better" in retailing is dead.  The issue here is "stores on steroids", the actual physical size of the store, not the total sales volume or the number of stores in a chain. Stores on steroids must go away!

• Retail spaces being over-sized is a leading indicator of failing retailers.  Just look at the falling sales per square foot of many chains and independents.
• Customers have been begging for more and better service, not less. But, the greater the square footage an associate must cover, the less service can be given. 
  
• Customers are insisting on newer, fresher merchandise, not piles of marked down goods. But, stores that are too big still must be filled. Malls and other developers have built spaces that independents must fill with product. This slows down turns, causing higher markdowns, thus lower margins. 

Mercifully, the use of technology in retailing has exploded in recent years. Now the urgency to cut down the lead times of supply chains can be realized with current, leading edge technology. Smaller stores can benefit the most! 

• All retailers can replenish inventories much quicker today than even a year ago. 
  
• Smaller stores can out-maneuver big stores day in and day out. 
  
• And they now can raise turns considerably and thus reduce markdowns. Maintained margins will climb! And the percentage of new, fresh merchandise on the shelves will rise!
  

But who will benefit the most with this "death to bigness"? Customers!  Especially those customers who increasingly are using the web for merchandise information and purchasing. They only want new merchandise, not old and marked down items. They seek knowledge about products and usually smaller stores can provide it best. Since online shopping is not the ultimate in service for hassle-free experiences, smaller stores will grow to be a fine alternative.

Our conclusion: The next ten years will witness the greatest growth in retailing coming from nimble, smaller stores that exploit high tech for their customer's advantage. And how refreshing THAT will be!

Are Retailers "Technology Laggards"?

We know four multi-store retailers (in 4 different geographic markets and retail segments) whose cash flow problems have landed them in the Special Credits department of their respective banks. In each instance the owners have personal guarantees on the loans. And given the economic crisis, whether any of these businesses can survive is still in doubt.

As we reflect on these 4 very distinct businesses, we recognized one shared trait: they each have very old, cumbersome systems.

• Some struggle even to get monthly P&Ls (and therefore find out many months too late how great their losses are).
• Others have very difficult purchasing systems (which tempt the buyers to place larger, less frequent orders, thereby slowing turns...and making their cash flow problems even worse.)
• In every instance, the Owner – and thereby the business – is dependent on essentially one person, either the controller or the custom software developer, for coaxing reports from the systems.

We've heard all the rationales for why this happens. Updating systems is seen as an expensive and time-consuming project, so many retailers are happy to defer that to another day. Others convince themselves that their particular segment is "very unique", and therefore the cost to have something custom-built would be prohibitive. Or, whatever custom-built solution they have had in place for the last 15 years would be impossible to replicate with current off-the-shelf solutions.

Here's the issue: Retail businesses with outdated systems are less able to spot problems in advance. And, once a crisis hits, they are less able to adapt and respond.

As the Owner, you are responsible for the survival of the business. Do your systems provide you with the appropriate information, when you need it?

Going forward, the only retailers who are "technology laggards" are former retailers!

Retail Survival in the “New Normal”

The "New Normal". It is tough and demanding. The temptation for many store owners is to return to “managing in tough times” approaches. Slash expenses, put in more hours yourself, extend suppliers, and cut back on inventory purchases. Unfortunately, even if you can do these things, it is likely they won’t be enough. Sorry, but those “tried and true tactics” may not be sufficient in the New Normal.

Here is why. Those old standbys are focused almost exclusively on the income statement (also called the profit and loss statement, or P&L.) What is needed in the New Normal is this: You must dedicate your attention to that other part of the financial statement you receive from your accountant or bookkeeper: the Balance Sheet.

As Owner, your #1 responsibility is the survival of the business. Therefore, you need to put considerable thought and energy into your Balance Sheet. You must steer your Balance Sheet with at least the determination you have been steering your P&L. Effectively controlling a retail business in the New Normal must start with – and tirelessly stay focused on – your Balance Sheet.

The Balance Sheet is the most telling measure of the financial strength of your business. Without financial strength, your retail operation lacks staying power, and could be flattened like road kill.

Retailing is Not Dead; It's Being Re-Invented!

"Four days, for savings, for you!"

Five-store Kitchen Kaboodle in Portland, Oregon has been a full-line, full-price kitchen and furniture retailer for 30 years. It's become a prominent and respected private chain.

But customers increasingly have been buying only the merchandise that's been discounted. And only at the times that suit them the best. Of course, that's the trend everywhere. So what can retailers do?

Effective March 6, Kitchen Kaboodle boldly switched to a 4-day week with everything off price!

Here's part of Kitchen Kaboodle's announcement of their new business model of "Four days, for savings, for you!"

"Shocking? Not really. As a locally-owned business, as your friends and neighbors, we feel a special need to give you what you want, these days more than ever. And who doesn't want the same great Kitchen Kaboodle stuff, at new lower prices? You don't want cheap steak, you want steak, cheap. To get it, just visit us Thursday through Sunday, or stop by anytime on the web. See you Thursday morning!"

By going to a 4-day week – closing all Mondays, Tuesdays and Wednesdays – Kitchen Kaboodle is cutting expenses by over 30%. By passing those savings on to customers, all prices on 100% of the merchandise are discounted all Thursdays, Fridays, Saturdays and Sundays. And none of their five stores are closing!

As Co-Owner John Whisler says, "We're offering our best merchandise, at the best prices with our best staff on the best days for shopping, all for our best customers. That's retailing for this 'New Normal.'"

See the Kitchen Kaboodle website for more info about their reinvention. For further details, call John Whisler at 503.241.4040.

Full disclosure: Outcalt & Johnson: Retail Strategists, LLC, the Co-Founders of The Retail Owners Institute, developed this reinvention concept for and with the Owners of Kitchen Kaboodle.

What Is "Value" In This Economy?

Value is not just another word for low price. Instead, the definition of value is, "benefits received for the burdens endured."

How can retailers deliver more “value” to customers? Start by “unburdening” them!

Think about common cost-saving programs in stores

• less staff on the floor and more "self service";
• self check-out by the customer;
• online searches by the customer for product information;
• online shopping;
• etcetera
  

Aren't these really shifting the burden - the work - to the customer? And what benefit does your shopper receive for the increased burdens they now endure?

Retailers: Time to Focus on Your Most Profitable Customer

Most retailers are facing difficult choices in 2009: where and how to cut back. Many have no choice but to cut expenses, cut inventory, go out of categories, or even close stores.

The challenge: how best to choose? What to cut, and what to keep?

We believe these tough owner choices can be guided by knowing just who is your best - that is, your most profitable - customer. This economic climate offers a great opportunity for you to do to your customers what they have done to you for years...shop around for them! Be very selective. You must lose the ones that are not good for you.

Remember, the retailers who will continue to survive in 2009 and beyond are those not with the most profitable locations or merchandise, but the most profitable customers.

You may be surprised at how quickly you can get the facts for yourself. And it may cost you nothing extra! Indeed, with today's POS systems, you may already have the data available to you. What better time to turn that data into strategic management information you actually can use to help your business survive?!

Retail Dealers: What Will It Take to Survive This Financial Crisis?The Answer: C - A - $ - H!

Your #1 responsibility as a retail owner is the survival of your business. Here is a 4-Step Survival Plan that you, as Owner, can put into practice right now.

1. CONSERVE Cash
2. RAISE Cash
3. FIND MORE Cash
4. Start with Step #1 again!

Remember, especially in this economic environment, the "old rules" no longer apply. Lenders, vendors, landlords, and yes, even employees, are more open to negotiating. This is the time to find new win-win situations.

Where's Your CASH FLOW Plan?
To control cash in your retail business demands an up-to-date Cash Flow plan. And we mean a basic Cash Flow, that you always have with you. Here are some key reminders:

• Cash Flow plans have just three basic parts: (1) cash coming in; (2) cash going out: (3) the difference.
• Cash Flow plans are projections. You are looking ahead a few months, at expected sales (cash coming in) and purchases and expenses (cash going out).
• It's just arithmetic! Just find the difference each month between the cash in and the cash out. Now, you can start to plan, manage and control the cash!
• Update your Cash Flow plan! It is a living, breathing tool. Many retailers do a rolling three-month or four-month plan. Others actually do a weekly cash flow.

The Top Five Killers of Stores (And guess what did NOT make the list?!)

Last year, every 12 minutes, a retail business in the U. S. failed. Over 5 failures per hour, every hour, every day, 24/7/365. What caused these failures?

#5. Out-of-control growth
#4. Out-of-control expenses
#3. Failure to manage Gross Margin
#2. Out-of-control inventory
#1. Being out of cash

Notice what's missing from this list? Not one mention of the "top line" - sales!

If there is any good news in this list, it is that the most damaging forces for retail businesses are in fact "controllable variables". Owners CAN control expansions and growth, expenses, inventory, and yes, even margins...all of which affect the availability of cash.

That's not to say these are easy choices; many are very anguishing. But especially in this economic climate, the most uncontrollable variable of all is the customer.

As Owner, keep focusing your resources, energy, and efforts on those parts of your business you can control. Happily, those are the ones that are most likely to enable you to survive!