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Jim Green's blog

Coping with the ‘R’ word — recession

December 2, 2008

It occurred to me recently, that to be able to remember first-hand the last really serious recession (1980-1982) as adults, individuals would at least have to be in their late 40s. Yes, there were relatively short-lived downturns beginning in 1990 and 2001, but they were nowhere near as deep as the 1980 contraction.

The one we are facing today may prove to be every bit as severe, if not more so. This means that employees and managers working in the retail furniture industry have never been through anything like this unless they have worked in the business for a very long time. I wonder how many have a definite action plan to deal with what we’re facing.

History shows that there have been 32 cycles of expansions and contractions since the mid-1800s. Each time, the economy turned around and eventually found its way back to prosperity. The Great Depression took many years, a world war, and many business failures to find its way out, while other contractions were barely blips on the screen. Businesses go under and businesses survive. Few make it however, without recognizing the reality and seriousness of the economic situation, developing an action plan to deal with it, and executing that plan.

It seems that the challenges are relatively simple to list:

1.    Minimize the erosion of revenues and the loss of gross margin dollars.
2.    Reduce the company’s expense structure without causing significant losses of revenue or margin.
3.    Minimize debt.
4.    Retain at least the most effective employees.
5.    Maintain the company’s mission, even if changes are made to strategy and tactics.
6.    Weather the storm.

In large measure, survival and current or eventual prosperity is dependent upon cash flow … the liquidity to keep the business running, pay the bills, retain the best employees, and maintain the company’s reputation during the lean times.

Doing nothing and hoping that somehow the recession will simply go away may produce disastrous results. Additionally, psychologically and emotionally taking action to survive this economic crisis puts control back with the company where it belongs. Indeed, it establishes the sense that “we are proactive and are doing what must be done to survive and be ready to thrive when the economic downturn, turns up.” A strategy is needed and should be vigorously executed to successfully navigate the choppy waters of an uncertain time.

These are a few thoughts on some of these challenges.

Minimize the erosion of revenues and loss of gross margin dollars

Although it is business as usual during a downturn, it is indeed not business as usual. It is, in fact, the time to take all steps possible to protect the health of the company. The following actions may lead to less erosion of sales and margin.

1.Keep a tight rein on advertising and sales promotion. This is not the time to withdraw from promoting the business or the merchandise. Indeed, it may be the time to add to the advertising budget (as a percentage of sales, not necessarily additional dollars expended). It is the time to review and re-evaluate every dollar spent. Is the advertising strategy precisely targeting your customers? Are the messages clear and exactly what you want them to say? Is the company using the very best, most cost-efficient advertising vehicles to reach the greatest number of potential customers? Research new types of advertising vehicles available in your area. A weekly Saturday ad may not be the most cost-efficient means of populating your store. Very importantly, because your company has always done it one way does not mean that way is still the best way to accomplish sales goals. Be innovative and search out new and different promotional angles.

Summary: Review every aspect of your advertising strategy to achieve maximum exposure to your potential targeted customer.

2. Take full advantage of any free or low cost advertising that will reach your target or any public relations vehicles that are available. Are you using your mailing lists wisely? Do you make full use of opportunities available from financial service providers, local media outlets, community events, etc.

Summary: Make certain you are taking full advantages of all low cost, nontraditional advertising methods.

3. During difficult economic times, it is a common strategy to reduce margins in order to lower retail prices. It may be necessary to reduce margins but do so not to reduce prices, but rather to maintain price levels and offer greater value … offering more bang for the buck. Then, make sure consumers are aware of it. The customers that are buying may buy from your company rather than another retailer if they are offered a sofa with the features of a $699 item for $599 (if that is a price point in which your company competes). Offering $399 sofas makes little sense if your company doesn’t compete at that level. To paraphrase Warren Buffett, “give the customer more for what he pays.” It is a subtle distinction but one worth noting in these unsure times. Instead of selling cheaper, sell better at the same price.

Summary: If you lower margins, use them to create better value, not lower price points.

4. Be conscious of the fact that furniture retailers compete not only with other furniture retailers but also with retailers in other industries. Any discretionary purchase of merchandise from another industry represents dollars taken from your cash register. Electronics, automobiles, gas grills, jewelry and vacations all compete with furniture retailers for the consumer’s disposable income. Consider gearing promotions to capture some of those dollars:

“The difference between a $20,000 car and a $30,000 car may be a beautiful new home.”

“YOUR CHOICE…Vacation for two weeks OR create a beautiful new home environment to enjoy for years … and take the same time off.”

“Select a beautiful new home environment at our new Bridal Registry.”

Summary: Compete against any other retail entity that captures discretionary dollars from your potential customers.

5. Be proactive in your marketing approach. Look for all potential markets and users of your furniture products besides residential buyers. Homeowners may not be the only target customer. Consider using managers or salespeople already on the payroll to solicit these businesses in these sectors (and think of other sectors in your market that might be potential targets):

Hospitality — restaurants, hotels, boutiques, cocktail lounges, etc.
Corporate – commercial offices, stores, banks, etc.
Condominiums
Resorts
RV dealers
Yachts

Summary: Market to potential new users of your products beyond residential customers.

6.Be proactive with information that is readily available online or in your local newspapers or newspaper archives. Salespeople can sit and wait for their next “up” or they can work to bring some business into the store. Have employees already on the payroll armed with pre-developed marketing programs contact potential customers regarding:

Engagement and wedding announcements
Birth announcements (look at the archives for birth announcements from four or five years ago. Those babies are now little boys and girls in need of kids’ furniture.)
Real estate purchases and closings
Management promotions (With promotions comes higher salaries)

Summary: Use downtime wisely by going outside of the four walls of the showroom floor and soliciting business by utilizing readily available information.

7.Consider creating alliances with non-competing retailers in the home furnishings sector to jointly advertise or promote each other’s businesses. You might even display specific category merchandise in each other’s retail outlets. Consider online links on each other’s Web sites and offering special incentives. Alliances can increase the efficiency of the sales promotion spending for exposure dramatically. Consider joint ventures with businesses marketing:

Electronics
Flooring
Paint (and painters)
Window treatments
Real estate
Kitchen and bath
Home fabrics
Lighting
Home improvement products

Summary: Ally your company with other non-competing retailers.

8.Consider special promotions directed at specific categories of workers. Workers employed in the public sector that have relatively little risk of job loss may be potential customers with little angst about keeping their jobs. Percentage of sales for cost of advertising can be very small since it is a targeted segment. Consider special offers to:

Teachers
Postal workers
Firefighters
Police officers

Also, consider special promotions for workers in fields that are much in demand with good job security such as nurses, physicians or other health care workers. Seek out professional organizations that can become a part of the promotion.

Summary: Consider small-scale, targeted promotions.

These are just a few ideas to boost sales without giving away the store by promoting the “NEXT SALE OF THE CENTURY.”

9.Recognize that many if not most of today’s furniture buyers shop online first. Review your Web site to be certain that it is up-to-date and current and presents your company in the best possible light. Be sure that the Web site does not shoot your company’s image in the foot. It should clearly focus on your company’s competitive advantages and position the company as the place to go for the widest selection, the greatest value, and the easiest, most pleasurable shopping experience. Then, prove these claims. Keep in mind that inasmuch as the furniture industry is a fashion business, your Web site should reflect the fashion forward nature of your company. If you have no Web site, now may be the time to initiate one.

Summary: Review and re-evaluate your online marketing efforts.

10.Realize that during downturns in our industry, the sales of complete housefuls, roomfuls, and suites are dramatically curtailed. This of course is not an earth-shattering piece of news. The important aspect of this reality though, is that while the number of potential customers making larger transactions diminishes, many residential customers still would like to do something to spruce up their home, remodel a bit, or just get a fresher look. As a result, while they might not buy an entire living room complete with upholstery, tables, lamps and accent pieces, they might buy a sofa, a pair of chairs, a curio or any number of other items. For this reason, merchants should re-evaluate their “item” selection to be certain that there is an excellent assortment of this type of merchandise. As well, marketers should pay added attention to marketing these “items.” Often in times like these, a three-piece upholstery package will not bring nearly the response that a pair of chairs or rockers and a free ottoman might (old as the hills but it still works).

Summary: Merchandise and market “ items.”

Reduce the company’s expense structure without causing a loss of revenue or margin

Watch the pennies and the dollars will take care of themselves. During tough economic times, clearly it is critical to minimize every expenditure. Obviously, it will help mitigate the inevitable downturn of sales and margin loss during the low points of the business cycle.

These steps may seem self-evident but they are nevertheless worth listing.

1.Renegotiate your leases or mortgages on real estate and physical plants. This can prove to be a little tricky but it can often be accomplished.

There are a few points to consider:

No property owner will come to you and offer to reduce your monthly lease payments on your store because business is bad. There is not a mortgage holder that will propose that you should reduce your mortgage payments because the country is going through a downturn. It is up to you to initiate the negotiation.

The last thing that property owners or lenders want to see happen is to get their buildings back. This is not the time to try to lease or sell vacant property, and landlords and banks are all too well aware of that fact.

Generally, retail furniture stores are nearly “single-use” buildings without going through major renovations. Furniture stores are designed for furniture retailers and are typically wide open spaces. Very few furniture retailers are out looking for new locations and if your company ceases to occupy the physical plant, it will likely stay empty for the foreseeable future. Landlords and mortgage holders are very cognizant of this reality.

The time to renegotiate leases or mortgages is before the business is in jeopardy, not when it is a last ditch effort. Both property owners and mortgage holders understand this. Neither wants you to fail and often would far prefer to receive steady (albeit lower) revenues from you than no revenue at all (to say nothing of the ordeal of trying to re-lease or sell the property).

The tricky part lies in not sending the signal that your business is presently in trouble. Rather, the negotiating point is to convince the lessee or lender that your company is preparing in advance for any eventuality before it has to, and simply engaging in wise planning for the future. When the economic cycle once again turns positive (which it inevitably will), you will return to the original terms of the loan or the lease. It only makes good business sense and the lessee or lender will probably understand this.

Finally, go into your negotiation with the terms you would like to obtain firmly in mind. The savings may well be substantial and might increase your company’s cash flow significantly. (Example: If you now pay $20,000/month on your lease and you are able to negotiate that down to $12,000/month during this downturn, there lies an additional $8,000 cash flow per month.)

Summary: Renegotiate all real estate leases and/or mortgages.

2.Renegotiate every other expense where outside services are utilized and where it makes sense (Obviously, you probably can’t renegotiate the costs of utilities.) Do you use an outside delivery service? Renegotiate. Do you use a local automotive repair company? Renegotiate. Do you use outside furniture repair technicians? Renegotiate. TV and/or radio advertising? Renegotiate. Newspaper or other print advertising? Some of this you also will be able to renegotiate.

In short, look at every recurring expense that represents a service performed by outside service personnel and renegotiate.

Summary: Renegotiate all service contracts and agreements.

3.Review every outside service to determine whether the service might be done in-house. Often, during good times managers tend to opt for the more expedient and easiest approaches for needed services. Why not? Business is good, the company is making money and can afford it, and why be bothered? During tough times, however, it is necessary to look at every outside service that is provided and determine whether it might be done in-house by existing employees. Does an outside janitorial company need to come in and vacuum and dust? Could a company worker not accomplish the task as easily and for far less expense? Can warehouse personnel change the air conditioning filters rather than the HVAC company that charges a high price for the filters, labor and their profit? Might not some bookkeeping functions be performed by in-house personnel? Look at everything.

Summary: Review every outside service to determine need.

4.Review every expense to determine whether it necessary for sales revenues. Here’s the question to ask: “Is the expense necessary for operating the business or making sales?” Does it save money? No expense line on the income statement should be immune from scrutinization and review. During down times, look in the corners of the warehouse. Many small savings add up to big savings. On the showroom floors, are lamps lighted with frosted 75-watt bulbs? Change to 40-watt clear bulbs (they’re brighter than frosted) and save a significant amount on kilowatt usage while losing nothing on the floor. Better yet, use energy efficient, fluorescent bulbs. In warm weather, turn the AC to 78 degrees rather than 72. Turn off computers overnight.

Summary: Look for the pennies to save.

5.Every few months, revisit delivery schedules and territories. The time and costs (payroll, gas, wear and tear on the delivery van, etc.) for delivery drivers and helpers to simply drive to their assigned delivery zones can be significant. If a driver and helper can visit distant delivery areas one day less per week, substantial savings may result. Revisit methodologies, in delivery to distant areas.

Summary: Analyze customer distribution methods.

6.Look for even the smallest expense items. Does the company buy branded legal pads where generic pads from the office supply store would do? How much paper is the company using in the computer age that may be unnecessary? Are you discarding cardboard from the distribution center or delivery trucks that might be sold?

Summary: Look everywhere for expense savings

7.Certainly, one of the greatest assets a company has is its staff of employees. These folks are on the front line every day, and may have a keen sense of where there is waste and where there may be operating cost savings. Solicit their ideas as to expense reduction. Every employee from CEO to janitor wants and needs the company to survive and thrive. For that matter, all stakeholders in the business should be queried as to waste and efficiency. You may be surprised at the ideas that are received; and if a really good one comes along, be sure to give credit to where it is due and make it worth the while.

Summary: Look to employees and other stakeholders for cost containment ideas.

8.Get the company’s inventory in-line and ultra-clean. Sell discontinued and distressed merchandise at cost or below if necessary to free those cash flow dollars. Liquidate any damaged merchandise for whatever price can be generated rather than leaving it in the racks. Get rid of it and take the few dollars you get. If an item is on the floor and not selling, don’t wait for the next furniture market to replace it. Sell it off and replace it, now. Make certain that your inventory investment is resulting in the greatest return.

Summary: Clean up your inventory.

9.Emphasize programs that increase gross margin return on investment (or inventory). There are today many merchandising and marketing programs offered by manufacturers and furniture suppliers aimed at reducing the inventory levels at retail and significantly increasing a retailer’s GMROI. Take advantage of those that fit into the merchandising and marketing strategies of the company. Obviously, if the merchandise does not make sense to the strategy or is not saleable, then it is not for the company. The less inventory on the books, the better.

Summary: Exploit quick-ship programs that lessen inventory exposure.

10.Rather than laying off employees, managers may wish to reduce hours. Certainly, one of the hardest things to face in difficult economic periods for owners, executives and managers is the prospect of the need to lay off employees. Not only are these emotional decisions, but from a practical standpoint every businessperson wants to retain the most productive and effective people. Consider alternate arrangements. Instead of laying off workers in a particular job category, a possible reduction in the hours worked for all employees in the subset might be in order. For instance, instead of 40 hours, each worker might be reduced to 35 hours; this is over a 10% reduction in payroll. Each worker might earn 10% less, but might this not be preferable to losing a job?

Summary: Consider alternate strategies designed to reduce payroll expense without a wholesale layoff of staff.

11.Evaluate managers, supervisors and employees to determine their importance to the company. Now is the time to review employees and retain workers that are the greatest assets to the company. Obviously, there may be some that have been instrumental in past successes, so decisions must be made in light of this loyalty. Some of these employees might need to be laid off. Others might take other positions in the company as they open through attrition or others means.

A company might also wish to look into early retirement programs for some highly paid employees. A little extra expense now might be very advantageous later.

Summary: Re-evaluate all employees as to need.

12.There are very few businesses that don’t have non-productive, non-inventory assets hanging around. It might be a 10-year-old forklift, some display racks, an old van or truck, a pre-computer age inventory system, cash registers that have been replaced — in short, assets that are no longer of use but are taking up space and can be sold. Sell them for whatever you can get. Clean house and use the money, however little, to add to the cash flow of the business.

Summary: Clean house of all unnecessary, unused assets and convert to cash.

13.Use the downturn wisely to train, train, train. This recession will not last forever. Many of the employees that remain are the same ones that will likely be the staff that will facilitate the company’s future success and growth. Use any down time to teach and train these workers and managers so that when the turnaround does appear, the company will be ready.

Summary: Have your company ready when the economy is set to recover through training.

Keep spirits in the company high. Recognize, and be sure your people recognize, that economies have turned sour many times over the years and always recover with time. Run the best and most efficient business you can. Re-evaluate your strategies and tactics throughout the company and be sure they are effective for the time. Above all, don’t make kneejerk decisions, don’t simple react, and dodge bullets.

Many other ideas can be found in my three-book set, “Furniture Retailing 101.” The books are available on the www.furnituretoday.com Web site by clicking on the “Research” button on the top of the home page, clicking on “Books” and going to “Furniture Retailing 101.”