Downturns are tough on retailers. Recent McKinsey research indicates that during the last two recessions (1990–91 and 2000–01), growth slowed for nearly every retail sub-sector in the United States. 93 per cent of the retailers surveyed that existed during both downturns experienced slowing revenue growth in one of them, and 59 per cent endured it in both.
Unfortunately for retailers, their position on the front lines of consumer spending doesn’t translate into a rapid turnaround when the general economy experiences a subsequent uptick. The average retail subsector growth rate during the first year of recovery following the 1990–91 and 2000–01 downturns was 0.3 per cent. And 12 of 15 retail sectors lagged behind even that rate of growth during one or both upturns.
These downturn dynamics—declining sales followed by a sluggish recovery—mean retailer should move quickly to minimise performance deterioration. The challenge, of course, is that retailers have a large number of options to sort through, ranging from cutting costs by shutting stores or restructuring support functions, to increasing revenues by refreshing stores or overhauling promotions. Many make the mistake of focussing on what is easy or known to them and fail to tackle more challenging goals that might improve their competitive positioning during the inevitable upturn.
In our experience, some basic rules of thumb are invaluable for helping retailers rapidly sort through their options and set priorities for action—in particular, determining whether to take an offensive or defensive approach. Combining a tough self-assessment with a hard-nosed scan of the environment can help retailers decide on the relative importance of reducing costs, increasing investments, creating financial flexibility, and seeking near-term revenue growth (see Analysing Options for Retailers During a Downturn).
Retailers should start by taking a rigorous look at the health of their balance sheets, management teams, and overall operating performance. Companies with reasonable cash reserves and ready access to credit lines, for instance, have options—such as investing in stores, people, or acquisitions—that weaker competitors simply lack.
At the same time, retailers need to be realistic about the potential of their businesses. Do they operate store formats or play in a sub-sector with strong growth prospects? To what extent is the market already saturated, and where does the retailer stand versus competitors? Recent growth rates, market penetration figures, and a serious review of the strengths and weaknesses of competitors are all important factors to consider.