Retail industry turnarounds and the post-pandemic market

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At the outset of 2020, the retail industry was expected to see a 5% rise in sales. Canada’s unemployment rate was at a 45-year low of 5.7%, and consumer spending was looking promising, with a 1.4% year-over-year gain following the holidays.

I’m sure you can see where we’re headed.

As soon as the COVID-19 pandemic hit Canada, the retail landscape irreparably changed. Today, it’s estimated that the economy will contract by 20% annualized in the second quarter, and that non-essential retail will take a substantial hit.

28% of Canadians report that their current financial situation is worse than this time last year. 68% intend to improve their cash flow by limiting household expenditures. Add this to the fact that many Canadian retailers have been ordered to close for at least a period of time, and the outlook is less than sunny. During the first quarter of 2020, prior to the pandemic, between 450 and 700 retail stores had closed or were closing. Discussion around the fate of bricks-and-mortar retail has been grim for some time, and once COVID-19 began, 66% of Canadians predicted that they’ll be visiting shopping malls less often as we head into the future.

Arguably, there has never before in history existed a time where retailers had more to gain from effective corporate turnaround management. 2020 has brought our economy to a pivot point; a mandatory pause in which retailers need to be examining their current processes and adjusting for a future that will undoubtedly look very different than the past.

Common factors in retail failure
Though the details always differ, post-mortem analyses of failed retail operations tend to share some commonalities:

– Failure to engage an experienced turnaround manager to lead a return to profitability
– Failure to quickly arrest cash hemorrhaging
– Failure to engage merchandisers to refocus strategy
– Insufficient focus on core business strength
– Closing too few stores, too slowly
– Failure to rationalize the administrative structure of the operations
– Failure to integrate different concepts in the same information management system
– Disastrous acquisitions

Similarly, there are many shared tenets of successful turnarounds that today’s retailers need to keep front of mind in order to stay afloat during these trying times.

Repositioning
Many retail failures are caused by rapid expansion, mismanagement, or too much leverage. A significant number of failures occur as a result of misstep with the market and losing touch with the client base that brought the retailer its initial success.

The task at hand becomes restoring the customer’s confidence and recreating interest in the company’s product lines. In today’s current economic climate, consumers are clearly stating that they expect retailers to be following health and safety guidelines. 85% of Canadians expect retailers to increase the cleanliness of their stores, and 75% will require hand sanitizer in-store. 69% want retailers to offer employees paid sick days to ensure that those who are infected will remain at home.

The key in retail turnaround lies in understanding where mistakes were previously made and establishing whether a core business remains. In the case of the COVID-19 crisis, retailers need to take into considerations their struggles prior to the pandemic as well as their current struggles pertaining to mandatory closures.

Abandonment of unprofitable concepts needs to happen swiftly, without waiting for a replacement. Discontinued businesses can be put into the hands of a liquidator to maximize value while freeing up scarce resources of experienced merchandisers who can devote time to introducing new products. Stores should avoid products with a long-term potential that will not produce immediate cash flow. Sometimes this may mean joint venturing new concepts with manufacturers, importers, or other creative groups.

The turnaround experience is not just a matter of simple cost reduction and retention of professionals with experience. It’s imperative to hire proven industry merchandisers who are in touch with current market needs and online sales trends, and who can create effective strategies. Management shouldn’t be afraid to get creative and aggressive in rebuilding sales activity while also being cognizant of the need to satisfy lenders, creditors, and other stakeholders.

Management
Management shares responsibility for difficult times in retail concerns. While senior management often is responsible for the financial position, middle management will often have considerable strength in the day-to-day operations. Strong managers are always in short supply at the middle management level in retail. Middle managers who are well qualified are quick to be placed elsewhere, and unless they are incentivized to stay, they’ll be tempted to jump a sinking ship. This includes personnel at the corporate level, and at the store locations.

Troubled retail concerns should replace senior executive management for several reasons: They are often responsible for the situation in the first place (though obviously COVID-19 did present unexpected and external challenges). Senior retail executives tend to be so sales-focused that they may not have the skill required to negotiate a turnaround. Bankers and trade creditors often base their decision to finance a retailer supported by  an assessment of a management’s ability to undergo a turnaround. It is sometimes the case that creditors will be impressed by the hiring of seasoned retail merchants to quarterback the going forward plan. Creditors will look for proven turnaround experience, crisis management talent, and trial by fire type ordeals.

Operational issues
Retailers are financially different from industrial entities in that they have two classes of creditors: trade creditors and customer creditors. Trade creditors understand the nature of a troubled company and potential loss or bad debt. If a business is sold or restructured, the trade creditors can continue to do business with the new entity. Customer creditors comprise a different category. They are unsophisticated lenders to businesses and aren’t appreciative or cognizant of financial insolvency. A considerable amount of negative publicity can occur as a result of failing to recognize the difference between the two.

Efforts must be made to ensure that the business remains focused on its customer base during this trying time. Salespeople (in situations where the retail location is allowed to be open) will have a significant impact on customer loyalty. It’s the turnaround manager’s responsibility to ensure that staff remain sufficiently motivated, and that they understand the necessity of projecting positive outlooks for the company’s future. In this respect, it’s crucial that senior management communicate the company’s state of affairs to the staff, and the plan to deal with the identified issues. A clear vision will go a long way in maintaining and improving employee morale.

During the COVID-19 crisis, employees will need to feel safe in returning back to work, so the health and safety protocols will need to be sufficiently examined and adjusted.

Ordering and supply chains
In the wake of the COVID-19 crisis, supply chains have been thrown completely off course. Waves of the pandemic have affected a number of manufacturing hubs in China. Layoffs and mandatory closures have affected delivery times. Further, retailers have had little to no advance warning of store opening and closing regulations.

Retailers who have been closed for an extended period of time due to government regulations may find that they can suddenly reopen, and will have to scramble to place new orders for merchandise. Retailers with seasonal products may find that they have an excess of last season’s items that can no longer be sold.

An experienced turnaround manager will be able to assist in crafting a strategy that can temper the blow of bloated late-season inventory while also leveraging supply chain relationships to purchase an effective number of new products. This is an unprecedented time, and those who are willing to be decisive, aggressive, and creative will survive.

Information systems
One of the most important tasks of a turnaround will be in evaluating the effectiveness of current information systems. These systems manage a complex array of information including SKU’s, purchasing information, commissions, transfers, reorders, and salaries. The system must be uniform throughout an operation. The gathering of reliable data for analysis will be of critical importance during a turnaround; information is the lifeblood that will allow creditors and potential investors the opportunity to make informed decisions.

A skilled turnaround team will have an understanding of the latest technology platforms, enabling them to accurately assess whether the retailer’s current system is sufficient for future growth.

Landlords
Management in a troubled retail concern will need to examine overhead, with the goal of closing unprofitable stores and reducing the drain on needed cash flow. Not only will this reduce the cash investment to stock inventory for those locations, but it will also permit the sale of inventory to produce immediate cash flow.

Understandably, landlords have concerns about their retail tenants suddenly liquidating and closing locations. That being said, in the wake of COVID-19, the Canadian government has introduced some protections for landlords and support for small businesses. Though such funding is in no way sufficient to mitigate loss entirely, these protections are worth considering.

Turnaround managers will need to take into consideration the prior best practices for abandoning leases, as well as new protections that have recently been introduced.

Seeking expert guidance
The COVID-19 crisis has brought us all into unchartered  territory. There are many unknowns, and all that we can do is make the best decisions possible with the information we do have available. Data is suggesting that consumer behaviour will permanently change following the pandemic, as buyers have established new habits pertaining to online shopping and ordering, and in some cases adopted brand new hobbies and interests as well. While brick and mortar retail still has a future, notwithstanding the trend to on line estores, it will require new think and creativity to attract customers to mall locations. Further, there is a need to ensure there is added growth and each selling method is not cannibalizing the other.

There is still a majority of customers at present who want to see items prior to purchasing. In addition, returns of on line ordered product remains unacceptably high.

Sum have suggested using brick and mortar locations as showrooms. Only the most highly profitable luxury brands can afford this type of model.

Others has experimenting with selling higher margin product lines at fixed locations with less profitable volume driven products on line .

In order for struggling retailers to stand the test of time, it’s critical to adjust strategy to meet the needs of the consumer of the future, supporting their desires by transforming the retail offering to match the new standard of shopping.

A skilled turnaround manager will be able to provide both historical knowledge and forward-facing creativity. Having successfully forged the paths of previous retail concerns, this manager will be able to provide a third-party perspective to align your company with the needs of the future.

The team at Zeifmans has successfully assisted many clients through corporate turnaround actions, leading them to greater sustainability and mitigated losses. If your retail operation is struggling during this unprecedented time, reach out to our team to get a conversation started. Together, we can help.

Supplemental insights

The Restart: More Challenging than the Shutdown

The Restart Part 2: The Automotive Industry’s Challenges

Corporate turnaround insight for Canada’s struggling hotel industry

Navigating supply chain management and distribution during crisis

COVID-19 Business Survival Strategies