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In a survey of chief financial officers from 35 national retail chains conducted by the Karabus Management consulting firm of Toronto, 90 percent of cfo’s were able to reduce their inventories on a comparable square-footage basis by midsingle-digit percentages to 15 percent. There was unanimous agreement that receipts would be cut materially for spring based on the “universal recognition of near-term lower consumer demand,” the study found.
Among the highlights of the survey:
• Nearly all cfo’s report cuts in capital expenditures for next year.
• A majority of these executives are revisiting their real estate portfolios.
• A third are seeking to renegotiate rental agreements.
• Nearly all were looking to reduce transportation costs through renegotiation.
Of the 35 retail organizations participating, 29 were specialty stores focused on apparel, jewelry or footwear, and the remainder were department stores. Annual revenues of participating retailers ranged from $250 million to more than $20 billion.
A quarter of those interviewed said they’d canceled orders from suppliers based on the lateness of the vendor. All but 3 percent said they felt margin pressure based on the need to take markdowns earlier, even though most were unable to cut inventories sufficiently to match the drop in demand among consumers.
Antony Karabus, chief executive officer of the firm which bears his name, commented, “Given the concerns regarding women’s apparel this holiday, a number of retailers surveyed described how they were cutting out weaker brands and focusing more on accessories, which were performing well.”
The downturn has put more pressure on stores’ supply chains “as the margin for error is now much lower,” he said. “There is significant work under way to reduce in-transit times and ‘just-in-case,’ as opposed to ‘just-in-time,’ inventory.”
Three-quarters of respondents are working diligently to flow receipts of replenishment items closer to need and are working with suppliers to establish more favorable receipt dates.
Ninety-five percent of those surveyed are reducing capital expenditure budgets for 2009, with cuts, on average, ranging from 10 to 25 percent.
Six out of 10 cfo’s said they either have undertaken or will undertake comprehensive analyses of their real estate portfolios and plans for new stores, remodels and relocations. One-third of that group is “aggressively” pursuing landlords for rent renegotiation, with some willing to vacate existing space if relief isn’t provided. Three-quarters were “meaningfully raising” the performance criteria for remodels and relocations.
In another illustration of how the push for square footage and market share has been replaced by the need for cash conservation, only 25 percent said they were working hard to take advantage of real estate deals to increase share, as opposed to 80 percent who said they are slowing the pace of expansion when new hurdle rates can’t be met. The executives expect more deferrals and cessations of planned mall developments because of the problems developers and landlords are having.
Asked if they were rebidding transportation contracts to offset rate increases associated with benefits and energy costs, 95 percent responded affirmatively.
While marketing and advertising costs have been among the first to feel the sting of reductions, the Karabus study suggested the approach to these cuts has been strategic in nature. Seven out 10 respondents said they are “critically evaluating” zip code distribution, methods of distributing circulars to homes and the size and frequency of those circulars. Half the retailers with circulars and-or catalogues believe that up to 10 percent of that distribution was producing little return.
The cfo’s were open to new media, however. Fifteen percent said they are increasing their spend on social networking sites as well as analyzing their media mixes harder and issuing more e-mail blasts to attract business to their Internet sales channels, which continue to grow. And the same percentage reported they are shifting more of their marketing budgets to loyalty-related initiatives to get more of their existing customers’ available retail dollars. About one in 10 said they were working on CRM, or customer relationship management, initiatives to create more accountability at the store level for “outbound outreach to customers.”
The study partially debunked the theory that high-cost retailers generate the best profits. Some of those retailers in the top 25 percent of margin and-or comparable-store sales performances had the lowest cost structures, Karabus noted.
“The best managed retailers are now saying that ‘minus 5 percent comps is the old plus 5 percent’ and are now planing materially lower overhead structures accordingly in order to position 2009 for the best possible year given the economic times,” he added.