A downturn is a good time to consolidate, sign up new properties, renegotiate agreements, and discover new vendors, says BS Nagesh, Founder – TRRAIN and Vice Chairman- Shoppers Stop. Carefully managing property, inventory, and customers is the key to survival.
In the last few months, I have had people calling me up to ask about the status of the market and its growth prospects as well as the future of retail, retailing, and retailers. My investment banker friends tell me most investors typically call them on two occasions: in a panic situation when the markets are down, or in a peak market to tell them how smart they have been as they are investing and the market is likely to go up. Similarly, I have many retailers who tell me how they are opening 100 or 200 stores in the next 2 or 3 years, but, unfortunately, none of them calls to say if they are closing any stores.
Every time we go through the down cycle, I wonder what has changed. Has the Indian middle class – now 300 million strong – decided to go underground for 12 months, or have people stopped eating, drinking, wearing clothes, and consuming? How is that our primary belief or the fundamentals on which our businesses were set up get questioned again and again in short periods of time cycles?
In fact, if you have a long-term belief in the India story, got your customer segment right, focused your positioning properly, and have long-term plans in place, then every downturn in the economy is a good time to sign up new properties, chalk out new agreements with the existing vendors, discover new vendors, and hire that employee who always was willing to join you for a price but now is feeling the pinch and wanting to come cheaper than what you would have had to pay otherwise. If you have built your war chest, then buy small companies which are going belly up because they were busy opening stores but not running or operating them profitably.
Retail is a very long-term game, especially in emerging markets where everything is in a fluid state. It is certainly not a business for the weak-hearted, as it is prone to multiple shocks. In India, it is even more vulnerable because of flash strikes, laws being formulated at regular intervals, laws being enacted retrospectively, laws being interpreted differently by law enforcing agencies, and so on.
With such a background, how does one plan for bad times or down-cycles in retail, especially in India? The answer lies in two words: one is “focus” and the other is “grounded.” Fortunately, these two cannot be changed from season to season or year to year. You always need to be focused, more so in brick-and-mortar retail, since your properties are grounded, you are grounded, and you have to always think through realistically and not by flying higher than the strengths of your wings. Let us look at a few elements of the business and view them in good and bad times.
Property: Although every guru of retail chants the mantra of “location, location, location,” this should not be taken to mean “location at any cost.” A retail property or location generates revenue and profits once the same-store growth turns positive. It is therefore always critical to look at rentals as a percentage (for the best and worst case scenarios) of sale on a sale-per-square-foot basis.
Such an analysis will throw light on profitability once the business reaches stability and when there is a downturn. We also need to remember that in downturns, you cannot give away your lease acquired in an upturn because there would be no takers at that price. On the upside, if you are sitting on a pile of cash or running a profitable business, you can acquire a lot of stressed retail properties.
Inventory: To my mind, inventory is not just about managing the working capital – it is the core of retail business. A retailer can never succeed without having a great assortment of products and goods availability. It is also essential to keep the stock fresh and manage it in such a way that the sales through-put ensures inventory movement and less cash locked in.
Inventory management in retail cannot be learnt in bad times. It is a practice which the retailer has to make a part of his day-to-day living. If you are optimally stocked in good times, then you will be a little over-stocked in bad times and can still manage inventory and generate cash flow, ensuring freshness of stock. But if you remain over-stocked throughout the year, then in bad times it would be the dooms-day.
Therefore a key lesson is that there are two areas – property on the fixed assets and inventory on the current assets – where a retailer cannot experiment too much. In these, he has to err on the side of conservatism.
Retailer’s Loyalty: Customers compare their loyalty to a retailer in good times to the retailer’s loyalty to them in the bad times. Imagine a long-standing loyal customer discovering that new customers are being wooed by the retailer with special offers and schemes while nothing is being offered to him. Credit-card companies and airlines frequently offer a joining bonus to new customers, but rarely give a retention bonus to customers who have stayed on with them in good and bad times.
Be good and great with your customers in good times and they will be there with you in your not-so-good times. Loyalty to your customer pays.
*This column was originally published in July 2012 issue of Images Retail.