I was speaking with the owner of a small women's specialty store the other day. We were discussing the state of her business when she said something that made me pause for a second.
"I'm concerned that red may be the new black."
I thought I understood what she was saying, but I asked her to explain, just to be sure.
"I mean, what if the new baseline of my business is going to be 20 percent below where I've been? I've been running 20 percent down. What if that's the new baseline. At 20 percent down, I'm in the red, but if that's the new baseline, I've got to figure out how to run in the black at that level."
I suspect it's a question that many small, entrepreneurial retailers are asking themselves. What if red has to be the new black?
If you read the headlines, or have found yourself, like me, eating breakfast in the morning with CNBC on in the background, rather than CNN, you know that there's been a lot of speculation about the shape of this recession. Most past recessions have been V-shaped, in that the decline led to a brief bottom before the economy bounced back. The most difficult recessions have been U shaped, with a period of bouncing along the bottom before things turned up. Now, many economic prognosticators are expressing the very real concern that this recession will be L-shaped, that we're going to experience a prolonged period of bouncing along the bottom without any real perceived recovery.
If this recession does turn out to be L-shaped, red will be the new black.
What does this mean for small, entrepreneurial retailers? My suspicion is that most have taken the approach that they can sustain the current decreases for a while, but business will bounce back in the next six to 12 months, and they'll be OK. But what if business doesn't bounce back? What if we don't return to the previous level of consumer spending, a level that we now understand was driven by unsustainable levels of personal debt. We're told that in the short-term that we need to stimulate the economy to get consumers spending again, but in the long-term we have to spend less and save more. What if the consumer decides to ignore the short-term call to shop and settles in for the long haul? What if this recession is fundamentally transforming consumer spending patterns?
Every retailer, large and small, has to plan for this possibility, and they need to plan for it now. In many cases, losing 20 percent or more of your revenue base will require you to fundamentally rethink your business strategy. Here are just a few things to consider:
- How will margins be affected? The current decreases most likely have been accompanied by seriously eroded margins, as markdowns have exploded to keep inventories in line. What margin levels will you be able to sustain going forward? It's probably not prudent to assume that you'll be able to maintain your previous margins in this new environment. How can you generate more margin dollars from this revenue base? How will your promotional posture have to change given the new realities? How can you protect your pricing integrity?
- What levels of expenses can be sustained? What does this mean for your marketing budget and advertising? Can you continue to sustain the current channels? How do you re-strategize your marketing? As I've written before, my sense is that current marketing efforts should focus on your best customers, who are less expensive to reach than potential new customers.
- How much payroll can you handle? How do you manage payroll reductions? Do you reduce payroll through cuts in headcount, or cuts in hours worked or cuts in pay, or some combination of the three? How will this impact your customer experience? How will you have to alter your customer experience, and how do you alter it so that it's merely different, not worse?
- How does this change how you merchandise? You're going to need to reduce your inventory levels. How will this change your store layout and visual presentation? How will this affect your assortments? Will you become narrower but as deep, or shallower but as broad? Will you alter the mix between destination and impulse items? Will you use different strategies for different categories? How will this impact how you source? Will you use more domestic resources to shorten lead times? Will you narrow your vendor structure to remain important to your key resources?
These are just a few of the questions that a thorough strategic review must include. Given your individual situation, there will be many more. The point is that given what we know now, and all of the uncertainties that undoubtedly lie ahead, this is the time to carefully plan for what will need to be done to remain viable if this turns out to be an L-shaped recession.