In need of a retail turnaround? How to know and what to do

How do you spot a distressed retailer?In the dynamic landscape of retail, businesses often encounter challenges that threaten their viability and growth. Turnaround and restructuring emerge as critical strategies in such scenarios.

A turnaround focuses on reviving a retail business that’s showing signs of operational or financial distress, aiming to restore its profitability and competitiveness.

This often involves revisiting the business model, streamlining operations, and re-engaging with the customer base. On the other hand, restructuring is a more comprehensive approach, addressing the fundamental financial and organizational structure of the business.

It may involve renegotiating debts, optimizing the supply chain, closing underperforming outlets, or even diversifying product lines.

Both turnaround and restructuring require a deep understanding of the market, a clear vision for the future, and the agility to adapt to changing circumstances.

When executed effectively, these strategies can breathe new life into a struggling retail business, setting it on a path to sustainable success

How do you spot a distressed retailer?

Recognizing a distressed retailer early on can be pivotal for various stakeholders, from creditors to potential investors. Several indicators can hint at a retailer’s deteriorating health. A significant red flag is the presence of County Court Judgments (CCJs) against the retailer, indicating they’ve failed to settle debts.

Winding-up petitions, often a precursor to insolvency proceedings, further underscore severe financial distress. Observing a consistent lack of stock on shelves can suggest cash flow issues or disruptions in the supply chain.

Additionally, a poor credit report, replete with missed payments or mounting debts, offers a clear window into the retailer’s financial struggles.

Collectively, these signs can help in identifying retailers in distress, signaling the need for immediate action or restructuring measures.

How do you turn the company around?

The stories of troubled retailers who have adeptly reversed their fortunes, either amidst or post the global financial meltdown, demonstrate that a quintessential five-step methodology to retail revivals can pave the way for enduring prosperity.

Stage 1: Wake up

The initial step in the recovery process seems straightforward: recognize that your business is facing challenges. However, for leaders used to triumphs, this realization can be a bitter pill to swallow.

Many are in denial. In a survey of over 1,500 executives who’ve been in such situations, a significant portion admitted to either downplaying the gravity of the issue or failing to acknowledge it altogether.

One retail leader, despite his company’s TRS lagging far behind competitors and plummeting by over 90% within a year, was adamant about not labeling it as a “turnaround.” “We aren’t undergoing a turnaround,” he firmly stated.

Data indicates that in most sectors, between 10 to 15 percent of prominent businesses face challenges at any point. It’s crucial to scrutinize your company’s TRS metrics and evaluate if your value proposition aligns with customer expectations. If signs point towards distress, it’s imperative to accept the reality and strategies while there’s still an opportunity to make amends.

Stage 2: Believe nothing, prove everything

Retail executives must delve into understanding the root causes of their challenges, relying on concrete evidence and data. Often, businesses act on deeply ingrained beliefs without questioning their validity, leading to misguided efforts. From our survey, a mere 22% of respondents initiated their turnaround with a diagnostic assessment.

One high-ranking official shared, “We hastily pursued what seemed like the solution, only to later realize our efforts were misdirected.”

A thorough diagnostic significantly boosts the likelihood of a successful turnaround. According to our findings, 60% of businesses that conducted a diagnostic witnessed a successful recovery, compared to a 34% success rate for those that skipped this step.

While it’s essential to identify what’s going wrong, it’s equally crucial to recognize what’s going right. Companies often become fixated on their shortcomings, neglecting the inherent strengths that could aid their recovery. Our studies indicate that turnarounds that assess both strengths and weaknesses have over double the success rate compared to those focusing solely on the negatives.

We advocate for a “blank slate” methodology, which, though demanding, often unveils profound insights. One retailer, upon employing this approach, realized that their leadership team was unaware of the total count of back-office locations or the overall workforce spread across various branches.

Due to fragmented data systems, collating this data was unexpectedly challenging. However, the effort bore fruit: post-assessment, the retailer identified significant efficiency improvement opportunities in several back offices and support functions. Within half a year, they realised tangible cash savings from lease terminations and back-office team consolidations

Stage 3: Act early and aggressively

Once the root issues are identified, retailers must act decisively and with urgency. Specifically, the CEO should assemble a proactive executive team and establish aggressive cost-reduction goals, both essential for the company’s survival.

A significant shift in the leadership team is often required to deviate from previous strategies and decisions. A seasoned CEO, known for leading successful turnarounds, suggests a principle: “For the executive team, one-third should stay, one-third should be elevated internally, and one-third should be external hires. Without such a mix, there’s no real change.”

Upon formation, this leadership team should prioritize cost-cutting. For most retailers, the primary areas to address are administrative expenses, supplier costs, and property-related expenses.

Administrative Expenses: Overhead costs can significantly impact a retailer’s financial health.

Streamlining is essential if:

  • The company has an excessive number of committees or boards, often remnants of past projects or acquisitions.
  • The organizational structure is top-heavy, with a disproportionate number of high-level executives.
  • Managers oversee too few team members, indicating potential organizational redundancies.

Supplier Costs: Negotiating with suppliers to reduce the cost of goods sold (COGS) is a pivotal strategy for many retailers. In challenging situations, proactive and innovative engagement with suppliers can yield immediate benefits.

For instance, a certain retailer faced significant sales drops due to “showrooming,” where customers would inspect products in-store but make purchases on platforms like Amazon using their smartphones, often leveraging the store’s complimentary Wi-Fi. A deep dive into sales data revealed a strong correlation between the retailer’s in-store promotions and online sales. When a product received prime display in the store, its online sales, including on Amazon, surged.

Conversely, when in-store promotions ceased, online sales dwindled. Recognizing this, the retailer engaged its suppliers to secure a proportionate share of the benefits derived from the boost in online sales attributed to in-store displays. Over the subsequent six months, the retailer successfully renegotiated terms with its suppliers, securing continuous financial support that compensated for their promotional expenditures.

Property Costs: With the increasing shift towards online shopping, maintaining an extensive brick-and-mortar presence can become a significant burden for retailers. To accurately assess the future potential of their physical store network, retailers must factor in evolving industry patterns, especially the transition to online sales, when determining store viability.

For instance, a prominent European retailer initiated a transformation plan targeting only the bottom 5% of its underperforming stores. However, upon analyzing emerging trends, particularly the shift from in-store to online purchases, they anticipated a 30% drop in in-store sales across their entire network within the next three years. Further, after considering overheads like IT support for store operations, it became evident that a majority of their stores might not remain profitable in the near future.

This revelation prompted the retailer to significantly expand the scope of its transformation initiative. They embarked on a comprehensive evaluation of their entire store network, essentially starting from scratch, with each store needing to prove its worth. Based on profitability and lease flexibility, stores were categorized into four distinct segments, with a unique strategy devised for each.

Stage 4: Fire on all cylinders

Retail leaders in recovery scenarios frequently prioritize cost reduction. While trimming expenses is crucial during dire times, it doesn’t always tackle the foundational issues that precipitated the need for a turnaround.

In a survey we conducted on business revivals, only a third of executives attributed their company’s distress to cost-related problems. The majority, two-thirds, identified challenges to their business model, such as the emergence of discount competitors or a shift of consumers to online platforms.

However, when detailing the measures taken during the turnaround phase, nearly two-thirds of the actions were cost-centric, neglecting the underlying business model issues. Without strategic interventions, like revamping the business format, adjusting trading strategies, or even a significant overhaul of the business model, the company remains vulnerable to relapsing into distress.

Consider an accessory manufacturer that primarily sold its products to distributors, who then catered to multibrand retailers. While they operated a few flagship stores, they had refrained from venturing into e-commerce to avoid clashing with their distributors and retail allies.

Yet, a deep dive into channel profitability and consumer behavior revealed that the promising avenues for future growth were online sales and their own branded stores. This insight prompted a radical shift in their channel strategy. Implementing this new approach was pivotal to their revival, resulting in a quadrupled share price and a 190% boost in TRS in under two years.

Stage 5: Make it stick

A triumphant retail recovery typically necessitates alterations across a vast network of stores, executed by a large workforce, presenting a considerable challenge in performance management. Based on our findings, while an average executive at the C-level dedicates roughly 15 hours monthly to performance evaluations, this figure jumps to around 40 hours for those overseeing a turnaround.

A strategy that has proven effective in such scenarios is the temporary introduction of a “Chief Restructuring Officer” (CRO) role, usually lasting between 9 to 18 months. Often an external recruit with a rich background in managing distressed turnarounds, the CRO helms the restructuring office, acting as the central hub for all revival initiatives.

Their mandate includes prompting a comprehensive reassessment of the company’s operational framework, urging managers to reevaluate established practices, and challenging preconceived notions about achievable outcomes. The most adept CROs proactively engage with all stakeholders, consistently narrating the transformative journey to inspire their peers.

Acting as an ally to the CEO, the CRO wields the influence and trust to make pivotal decisions (subject to the CEO’s endorsement), ensuring that while the transformation is underway, routine business operations remain uninterrupted.

While such centralized oversight might appear excessive, our experience indicates that in its absence, various business segments might claim successful “turnaround outcomes,” even if the financial statements reflect no change.

Our studies reveal that recoveries steered by robust governance are sevenfold more likely to achieve their objectives compared to those lacking such oversight.

Frequently asked question

What are the initial steps to take when considering a turnaround for a struggling retail business?

Start by thoroughly analyzing your financial and sales data to identify areas of concern. Engage with customers to understand their needs and preferences. Finally, review your business model to ensure it aligns with current market demands and trends.

How important is digital presence in turning around a retail business, and how can I enhance it?

A strong digital presence is crucial in today's retail landscape. To enhance it, invest in a user-friendly e-commerce platform, utilize digital marketing strategies like SEO and social media advertising, and engage with customers online through feedback and reviews. Consider integrating online and offline experiences for customers, such as buy online, pick up in-store options.

How can I optimize my inventory to support a retail business turnaround?

Focus on your best-selling items and reduce or eliminate underperforming stock. Use sales data analytics to forecast demand accurately. Regularly review inventory turnover rates to ensure stock is fresh and relevant to customer needs.

Conclusion

In the ever-evolving retail landscape, the ability to execute a successful turnaround is both an art and a necessity. While challenges are inherent, they offer retailers an opportunity to reassess, reinvent, and rejuvenate their business models.

A successful turnaround hinges on timely recognition of issues, strategic realignment, cost optimization, and unwavering commitment to execution. When approached with foresight, adaptability, and resilience, even the most daunting setbacks can be transformed into stepping stones, paving the way for a brighter, more sustainable future for retail businesses.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.

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