Time to Talk Turnaround

With fourth-quarter sales generating modest gains and 2010 sales growth estimates ranging between 1 and 3 percent, the aftermath of the economic storm continues to require that retailers pay careful attention to every facet of their operations.

For some companies, the challenges go well beyond shelving expansion plans and tweaking systems. What’s called for is an evaluation of every cost center and operating system as part of a turnaround strategy, including supply chain management, store operations, merchandise assortments, real estate strategies and, of course, shopper traffic.

Improving these key operations is made more complex by rapid changes in the marketplace, and further exacerbated by the challenges of having to chase capital amid tight credit markets. And consumer demands and expectations continue to evolve, with a strong trend toward deferring discretionary purchases – all while expecting courteous, knowledgeable sales associates to help when they are ready to buy.

Positive projections
Even before the economic meltdown began in late 2008, there was no shortage of competition and signs of trouble for some retail companies. But, as Michael Dart, a senior partner with New York-based Kurt Salmon Associates, puts it: “There were opportunities for retailers to re-create themselves.”

These days, the appropriate remedies call for “substantial cost-cutting across the board,” he says. “Last year, retailers’ earnings came from cost-cutting rather than top-line growth. People in the industry have been very aggressive in controlling costs. Inventory-to-sales ratios have declined radically: People are pulling inventory out.”

The National Retail Federation announced in late January that it expects a 2.5 percent increase in 2010 retail sales, compared with an overall 2.5 percent decline last year.

KSA’s projections are similar. “We expect there will be growth,” Dart says. “The likely range for consumer spending will be around 2 percent positive, compared to 2009. And retail growth will not be that far off.”

Eaglepoint Advisors is a newly formed KSA affiliate, a full-service turnaround, restructuring and crisis management firm focused on the middle-market retail segment. Its leadership is drawn primarily from the ranks of executives who have, collectively, completed more than 140 restructurings.

David Chamberlain, a managing partner with Eaglepoint, says that with general consensus around projections of 3 percent growth in GDP, “my sense is that 2010 will be a solid year for retail, but the first half will be stronger and 2011 will be more difficult.” Joe Alouf, also a managing partner with Eaglepoint, says, “Two key factors will be economic growth and disposable income, and disposable income goes down when taxes go up.”

Alouf is concerned about how the national economy and retail sales growth will be impacted by inflation — and the possibility of deflation.
“If prices are going to go up next month, people will buy today, but if consumers think prices are going to go down, they will wait until next month to make their purchases,” he says.

Dart offers insights into how turnaround strategies have been adjusted to address a marketplace that is much changed. Prior to the recession, “there was substantial consumer confidence, substantial liquidity and the economy was going well,” he says. “There was the shock from oil and commodity pricing, but other than that things were going pretty well. It was a matter of who had the best business model and how competitors could gain market share.

“A lot of our clients were reinventing their supply chain and taking control by building in flexibility, shrinking the product development cycle, getting the fashion goods into stores more rapidly and doing more localization with regional assortments.”

Making the right changes
Fast-forwarding to the present, Dart sees critical steps that troubled retailers can take to improve their operations.

“There’s an immediate need to know what’s going on with costs,” he says. “Costs have to be rationalized, and retailers must right-size their store counts. People have to have a supply chain that is more nimble and flexible than they had before, and be more cost-effective — with quantities that don’t create huge exposures over long windows.

“Where it used to be that retailers could lose share and still grow as a company, now it’s about gaining share from a smaller pie,” Dart continues. “In store operations, people have been scaling labor back and matching it more successfully with consumer demand. But they also need experienced sales associates to be successful going forward. It is as important as ever that consumers find happy and helpful people in stores.”

Areas of opportunity for rapid improvement include striking the right balance in stores’ in-stock positions — especially avoiding a sense of emptiness on shelves. Citing the consumer electronics segment as an example, Dart points out that shoppers are exhibiting lifestyle preferences: They will spend for the newest gadget, even as they defer other purchases. And they expect to find the newest technology on store shelves, with information about planned purchases readily available.