improve—in fact, it only gets worse.
Instead of taking inventory away, the
retailer should consider that if the
store is performing poorly enough to
justify a reduction in inventory, it may
make more sense to close it now.
A better idea may be to close the
underperforming stores and use the
cash generated, or as much of it as
is permitted, to focus on product-
related solutions. As stated earlier,
retail is ultimately about the product,
and having the right merchandising
team is especially important. When
analyzing inventory reductions or
allocations, a retailer should ask:
• Do customers want what we sell?
• Is the mix right?
• What products drive traffic?
• What products turn fast?
• What products drive gross margin?
• What are the cross sale synergies?
• Is there a private label strategy? If so,
is it adding enough gross margin?
Is the percentage of private label too
high, too low, or just about right?
Measure marketing effectiveness,
and then measure it again—every
change to marketing has an impact.
There are several recurring themes in
the marketing area. One is to “make
a splash,” to generate excitement
and get customers back in the
stores. That’s a good idea, but is the
underlying problem fixed? If not, even
if the marketing works well initially,
customers will recognize that there is
no change, which will likely exacerbate
the problem. What is the retailer doing
differently? It must not promise a better
experience if it’s a work in progress.
It seems everyone agrees that Radio
Shack’s Super Bowl ad was very well
done, but did it help the struggling
retailer? Was the company actually ready
to invite customers to see the changes?
Another idea struggling retailers often
pursue mirrors the ill-advised inventory
strategy referenced earlier—reducing
marketing for underperforming
stores. As with inventory reductions,
however, reducing or eliminating
marketing will negatively impact sales.
Of course, the savings in marketing
may exceed the sales decline, but a
retailer should be careful. It seems that
the stores that receive less marketing
are the same ones that also receive
less inventory, so these stores get
the double performance challenge
of improving performance with less
inventory and less marketing—and
probably less payroll as well. Again, a
retailer should consider whether closing
these stores now rather than waiting
makes more sense in the long run.
Retailers, especially larger retailers,
may also consider whether to
reallocate the marketing expenditure
to a heavier reliance on broadcast
messaging. This may or may not make
sense. Before embarking on a costly
reallocation, a retailer should be sure
to do everything it can to measure
marketing effectiveness by medium:
broadcast, direct mail, flyers, social
media, billboards, etc. It is often difficult
to measure marketing effectiveness,
but one should be skeptical that
going to a more expensive medium
will necessarily increase traffic.
Don’t set stores up to fail—make the
decision that gives them the best
chance of achieving sustained success.
Most distressed retailers are well
aware that they have stores that are
significantly underperforming or
even losing money on a four-wall
basis, but it is not unusual to hear
subjective rationalizations for allowing
those stores to remain open, such as,
“I hear our competition is moving.
That should open this market back
up to us.” There may seem to be a lot
of persuasive arguments for keeping
underperforming stores open,
particularly during the resistance
to change phase. But when four-wall cash flow is negative or in the
vicinity of negative, it is very risky
to place hope in these stores.
Remodeling is another solution that
retailers often consider and, to be
fair, that can be appropriate. Again,
though, a retailer should be cautious.
Is the absence of a recent facelift really
the reason that sales are slipping?
If so, then a well-planned, market-specific remodeling program can be
effective. If a remodeling program is
started in the early stages of distress,
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