Should Stronger Dealers Spend During A Recession?

Publish Date: 
Sep 26, 2008

MOVING QUICKLY to improve your store's performance will help you recover faster when the economy improves. The worst thing you can do? Hunker down and weather the storm, according to researchers at McKinsey & Co.

"Downturns are tough on retailers," say researchers Ashish Kotecha, Josh Leibowitz and Ian MacKenzie. And even when the economy improves, retailers aren't that quick to recover. Retailers surveyed by McKinsey who were in business during the 1990-91 and/or the 2000-01 recessions averaged only a 0.3 percent growth rate in the first year after the recession ended.

All this means retailers must minimize risk quickly by cutting costs and/or increasing revenue, depending on how their balance sheet looks. "Many make the mistake of focusing on what is easy or known to them, and fail to tackle more challenging goals that might improve their competitive positioning" when the economy improves, researchers say.

"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 on the relative importance of reducing costs, increasing investments, creating financial flexibility and seeking near-term revenue growth," researchers note.

For example, a dealership carrying reasonable cash reserves and with ready access to credit lines should consider making investments in the store(s) and staff to more effectively outrun a weaker competitor. They also should examine recent market growth rates and the store's market penetration figures, and then seriously review the strengths and weaknesses of competitive dealerships, researchers suggest.

Translation: if you're financially in good shape and your market is still robust, put money into your business to gain a strategic advantage over your competitors. "Big bets, such as doubling down on new stores or remodeling old ones, are one possibility," researchers note. "Equally important are smaller bets, such as recruiting talent from weaker players" and retooling your local store marketing campaigns.

Healthy stores should consider increasing foot traffic by creating compelling sales offers. McKinsey points to one soft-goods retailer that reversed declining sales by focusing on eliminating obsoletes, raising the effectiveness of its front-line sales staff, and making small merchandising and layout changes to help customers find the goods they want quickly.

On the other end, if a dealership isn't in the best financial shape, it's time to cut costs, say researchers. "Weak performers have major opportunities to rationalize inventory SKUs — freeing up working capital," they note. "By applying lean operations techniques to redeploy labor, they can shorten the time staff spend on non-customer-facing tasks, and increase the time spent on helping customers. The focus should be on getting more from existing sales resources, not just on cutting labor hours. Indeed, the key driver of economics is sales — not just cost as a percentage of sales."