Retail downturns compress margin and cash simultaneously. The instinct is to discount, which is frequently the fastest way to make a difficult period worse.
Understand what is actually happening
Before acting, work out whether the problem is:
- Fewer customers — a traffic problem.
- Same customers spending less — a basket problem.
- Same spend, worse margin — a mix or cost problem.
Your point of sale data answers this. Each cause has a different response, and treating a margin problem as a traffic problem produces discounting that makes it worse.
The discounting arithmetic
Discounting reduces price without reducing cost, so the whole discount comes from margin.
An item costing $60 selling at $100 carries a 40 percent margin. Discount 20 percent to $80 and margin halves from $40 to $20 — requiring twice the volume to generate the same margin dollars.
In a downturn, doubling volume is precisely what is not available. Discounting into weak demand reduces margin without recovering the volume, and it trains customers to wait for sales.
Calculate the required volume increase before any promotion. If it looks implausible, the promotion is a decision to make less money.
Where discounting is right
Clearing stock that will not sell at full price. The loss occurred when the stock stopped moving, and cash recovered now funds stock that sells.
Be decisive about this. Slow stock held hopefully through a downturn ties up the cash you need and is worth less every month.
Protect cash first
- Reduce stock purchasing. The largest cash lever in retail. Buy narrower and deeper on lines that sell rather than maintaining range breadth.
- Clear dead stock and convert it to cash.
- Negotiate with suppliers before due dates, not after. Extended terms are frequently available and cost the supplier less than a discount.
- Talk to the landlord. Rent relief or deferral is sometimes available, particularly where the landlord would struggle to re-let. Ask before you are in arrears.
- Contact Inland Revenue early if tax will be difficult. Arrangements are far easier to agree before a due date.
- Build a thirteen-week cashflow forecast and update it weekly. In a downturn this is the instrument, and businesses without one are flying blind.
Wage cost
Labour is the largest controllable cost and cutting it has a cost that does not appear in the wage line — understaffed stores lose sales and burn out remaining staff.
Before cutting hours, check whether they are in the right places. Roster to actual trade by hour using your point of sale data. Many stores are overstaffed in quiet periods and understaffed at genuine peaks because the roster was set years ago.
Where reductions are necessary, employment rules apply. Reducing an employee’s guaranteed hours is a change to terms requiring agreement, and imposing it unilaterally is a breach. Restructuring requires genuine consultation and a fair process.
Protect the things that generate recovery
Businesses that cut indiscriminately damage their ability to recover:
- Core range availability. Customers who cannot find what they came for stop coming.
- Your best staff. They have options and will use them.
- Store presentation. A tired-looking store accelerates decline.
- Customer contact. Marketing is frequently cut first and is what brings people back.
Focus on existing customers
Retention is cheaper than acquisition, and in a downturn acquisition is harder.
Pull a list of customers who bought last year and not this year, and contact them. That converts at far higher rates than any advertising, and almost nobody does it.
Fix the friction that loses people: hard to order, slow to respond, out of stock, poorly handled complaints. Most of that is operational rather than financial.
Consumer law does not relax
Consumer Guarantees Act obligations apply regardless of trading conditions. Refusing remedies to preserve cash creates Fair Trading Act exposure on top of the underlying obligation.
Sale pricing must be genuine — was-now claims where the was price was never charged for a reasonable period are exactly what the Commerce Commission pursues.
Know when to stop
Where the business cannot service its obligations, directors have duties not to trade in a way creating substantial risk of serious loss to creditors. Continuing to take deposits and order stock while insolvency is realistically in view creates personal exposure.
Take advice early. The options available at month three are considerably better than those at month twelve.
Stats NZ publishes electronic card transaction data by region free, Retail NZ publishes sector material, and business.govt.nz publishes cashflow guidance.
General information only, not legal or financial advice.
