Keeping business on track
Jean Delaney, retail advisory partner at PricewaterhouseCoopers advises on how to keep your business afloat during recessionary times
11 February 2009 | 0
With continuing uncertainty in local and global financial markets, and declining consumer confidence at home, the challenges for business are many. According to PwC’s most recent consumer survey, 63% of respondents think they will be worse off financially over the next 12 months, compared to only 37% six months ago. With consumers getting more nervous, their purchasing behaviour is changing. Increasingly consumers are seeking out bargains, shifting from “discretionary” to “essential” purchases. These trends result in significant challenges for retailers and consumer goods companies.
Grocery taking a hit this time
In previous downturns, the sectors impacted most were big ticket items where purchases can be delayed, such as cars, appliances, furniture, and discretionary sectors where consumers can reduce consumption or switch to cheaper alternatives, such as restaurants or holidays. Historically the grocery sector suffered limited impact during recessions. However during the recent boom, grocery purchasing has arguably become more discretionary as consumers treated themselves by trading up to premium brands and supermarkets’ “finest” or “best” ranges. As a result, this time round, the grocery sector is being hit harder as consumers rein in spending, cut out unnecessary luxuries and trade down to cheaper value lines and promoted items in store.
This trend was reflected our consumer survey, for example:
• 58% of respondents said that they would buy fewer items
• 57% of respondents said that they would spend more on promotional items
• 51% of respondents said that they would buy cheaper alternatives
• 43% of respondents said they would cut back on eating out and takeaways
The scenario facing both retailers and consumer goods companies is a new era where: consumers are less prepared to pay a premium; the excesses and conspicuous consumption of the boom period are over; and the new consumer priority is to save money. In response to this consumer shift businesses need to be flexible and to reintroduce some basic management disciplines which may not have been areas of focus during the heady growth years.
With a positive attitude and good understanding of all areas of your businesses you can use the downturn as an effective change driver. The current environment also presents clear opportunities for businesses that are prepared to embrace them. Set out below are a number of suggestions which will help you to keep your business on track in these difficult times and to leave your business well placed to succeed when the market environment improves.
1. Take a closer look
The goal posts have been moving and your market may have changed significantly in a very short space of time. You need to identify key contributors to your profitability and consider how your customers, suppliers and competitors will be impacted by the downturn. Once you have gathered this information you should use it to re-assess your strategy and once this is done you should clearly communicate and share your plan.
2. Reliable management information is key
There has been an emphasis across retailers on value ranges, cash-saver items and a significant investment in promotional offers. Funding price reductions and value lines, while appropriate strategies for maintaining consumer footfall and market share position, represent an even greater challenge to maintaining margins and profitability levels.
Now more than ever you need the right management information and budgetary systems to inform you as to whether these actions make sense; decision making needs to be speedy and to be based upon facts; you cannot afford a complex and lengthy decision making process; clearly defined Key Performance Indicators (KPIs) are essential to ensure that profit improvement initiatives effectively add value; you will need to communicate KPIs and then incentivise your people for delivery on them.
3. Review all costs from a zero base
Cost control is now a necessary obsession for all businesses. In good times cost control was frequently subordinated to the imperatives of growth and development. In a downturn, cost control and cost reduction must be a prime focus of management. Consumer goods companies and retailers need to be innovative in addressing cost reduction. Such businesses are seeking to re-examine their costs and value proposition.
Ensuring clear focus on cost of goods, sourcing arrangements, labour costs and overheads (especially energy) require different mindsets. Creating a position of strength from adversity is the challenge with the old “rules of the game” around the relationships between the parties being torn up. There is also a need to embed sustainable cost reductions as opposed to short term measures which may damage long-term growth.
4. Cash is king
With cash in short supply it needs to be an every day priority. It is important to understand and carefully monitor your obligations on your existing bank facilities. A prime focus should be on minimising investment in working capital and this means that stock control and re-order levels require daily review.
5. Plan for different scenarios
Given the volatility that exists at present, all businesses should model a range of financial, operational and workforce scenarios that reflect the potential impact of the downturn on the business. This will enable you to adapt quickly if change continues apace and should any of the key vulnerabilities in the company’s business become reality.
6. Consider the “green” agenda
There will be opportunities for the retail and consumer goods sector to further embed sustainability into the value proposition. The business case for investing in sustainable business models is becoming increasingly clear to all organisations and not just to those operating in ‘green’ niches. Put simply, using fewer raw materials costs less and in an age of rising commodity and raw material costs this makes economic sense. In addition, a credible sustainable customer proposition is a source of differentiation for retailers and consumer goods companies operating in an increasingly competitive environment.
Our research into consumer attitudes and habits clearly demonstrates the existence of mainstream public awareness and concern about sustainability issues. For example, 62% of consumers think that reducing the amount of packaging on products is the most important action retailers or consumer goods companies could take to help the environment. Embracing the “green” agenda will make your products more attractive as well as helping you save cost.
7. Recognise the value of your people
Regular and clear communication with employees is key to their engagement. Now more than ever it is important to ensure that you engage on a regular basis with your employees and motivate and develop high-performers. You also need to watch for pressure points, for example, your finance team may need extra help to get through their increased monitoring and reporting requirements. The downturn can also represent an opportunity to secure strategic new talent that may become available in a volatile market.
8. Take all stakeholders with you in times of uncertainty
Managing stakeholders well in difficult times is crucial to executing a winning strategy. You need to invest time in relationships with all stakeholders in your business: banks, employees, shareholders, suppliers and customers. Take control of the agenda and maintain open and regular dialogue with all of these parties to ensure that they understand the impact of the downturn on your business and the actions that you are taking to respond.
9. Careful tax planning is essential
Don’t lose sight of the importance of careful tax planning while dealing with new management challenges. While still ensuring that your organisation is fully tax compliant, it should be possible to improve your cash flow position by reducing or deferring tax payments; opportunities include making maximum use of losses in calculating Preliminary Tax Payments, availing of VAT Relief on bad debts and ensuring that all available deductions are being claimed. Likewise, the tax implications of any workforce reduction which proves necessary – both the business and the individuals concerned – should also be closely examined.
10. Take advantage of strategic opportunities including M&As
As vendor price expectations fall and forced sales become a factor, M&A (merger and acquisition) opportunities will present themselves. They will be more favourably priced than in the past but there are particular skillsets required in acquiring distressed businesses. Experience shows that if deals are effectively managed in a downturn there is the potential to generate above average returns once trading conditions return to normal. Have you explored opportunities to acquire strategic targets and prepared an accurate assessment of their risk and reward profile? Do you have finance available for M&A purposes? Businesses need to answer these questions now so that they are ready to exploit the opportunities that may arise at short notice.
11. Act decisively
With increased uncertainty and volatility it is important to take decisions quickly. This particularly applies to cost reduction and M&A activity but not exclusively so. Businesses should also revisit their existing investment programmes and decide which initiatives should be stopped or deferred and to identify which initiatives may even be accelerated because they can be more cost effectively completed in a downturn. If change is necessary, don’t sit back and wait; the winners will be those who position themselves now to best survive the downturn and then to take advantage of the upturn.
According to PwC’s most recent consumer survey, 63% of respondents think they will be worse off financially over the next 12 months, compared to only 37% six months ago
Funding price reductions and value lines, while appropriate strategies for maintaining consumer footfall and market share position, represent an even greater challenge to maintaining margins and profitability levels. Now more than ever you need the right management information and budgetary systems to inform you as to whether these actions make sense
Clearly defined Key Performance Indicators (KPIs) are essential to ensure that profit improvement initiatives effectively add value
A prime focus should be on minimising investment in working capital and this means that stock control and re-order levels require daily review
Put simply, using fewer raw materials costs less and in an age of rising commodity and raw material costs this makes economic sense. In addition, a credible sustainable customer proposition is a source of differentiation for retailers and consumer goods companies operating in an increasingly competitive environment
62% of consumers think that reducing the amount of packaging on products is the most important action retailers or consumer goods companies could take to help the environment
PwC’s Cost Reduction team focuses on identifying and validating sustainable cost reduction opportunities for clients and supporting them, as appropriate in implementing these changes. Our focus is enterprise-wide, focusing on such aspects as procurement; IT; supply chain, logistics and distribution; merchandising; sales/pricing and promotion strategies; administration; finance, etc. We have significant commercial experience in driving performance improvement initiatives across the retail and consumer goods sector.