Getting more juice from a profit squeeze
|Should you cut costs or boost sales during a recession? Smart operators do both.|
It is a pretty tough environment in retail right now. Sales are down and costs are up. Profits are being squeezed and maybe your trade creditors are putting the squeeze on you by contracting terms. Your secured lender may be increasing interest rates and reducing availability under your line of credit. Increasing margins may be a fairy tale at this point. The question now becomes how to maintain market share and the margins you currently enjoy. I see companies react to this situation in two ways; grow sales or reduce expenses. The smart
operators do a combination of both.
Some management teams focus efforts on the top line as a way to "grow their way" out of the situation. In the restaurant business this strategy can manifest itself in several different ways. Some companies resort to heavy couponing. Most consumers like a "deal" and a discount coupon can spur another occasion by the cost-conscious consumer. I like the idea of sending out coupons if the retail business has something new for the consumer to try. I do not like the idea of repeated discounting that trains the consumer to only shop when the coupon appears in the mail or newspaper.
Gene Baldwin is a partner
Adding dayparts is another tactic I see frequently to boost the top line. Why not add breakfast or lunch or both? You have to pay rent anyway, so why not grab the additional gross margin from those incremental sales? The problem comes from adding complexity to your business and putting additional strain on your people resources. I recently had a dinner house chain as a client that added lunch as an additional daypart in all its restaurants. It would have been a good strategy except, about one-third of the stores lose money in the lunch daypart. What is
even worse is that the company did not allow the store to schedule any incremental management labor to accommodate the additional hours they were open. Assistant managers were required to work more hours and since they're paid a salary, labor cost did not go up. In essence, the management team had to work harder for no additional compensation to generate sales that do not make money.
The next step up the sales ladder for this company was to add additional sales opportunities through catering and carryout sales. Finally, they installed a new computer reservation system to boost dinner sales.
So, let's add it all up. The store management team had to increase its hours to accommodate the additional daypart that did not make money, complexity was added to the business from the catering and carryout and staff had to be trained to use the new reservation system. At some point, the core dinner business suffered while margins were being constantly eroded as each coupon-carrying customer walked through the door.
Other companies react to sales and margin headwinds by attempting to "save their way" to prosperity. Labor guides in the store are tightened to the point that customer service suffers. Product quality is compromised in a variety of ways to mitigate the increased cost of raw materials. Employee benefits are curtailed as the minimum wage increases. Then companies fall into the trap of increasing prices to maintain margins. Eventually, all these "margin-improvement" measures take their toll on core customers. As prices go up, service and quality go down and consumers quit coming in. The price value relationship that made your brand
great has been damaged, and hopefully not destroyed.
I am in favor of cost controls in difficult times. My rule is: If you must cut costs; make the reductions as far away from the customer as possible. Start with the home office and use a zero-based budgeting approach in every department. Begin with a list of the things that simply MUST be done in the corporate office and eliminate everything else. In fact, stop doing extraneous things and eliminate the positions of people who do them. It is interesting that the same company that will force a salaried assistant manager to work more hours to add a
daypart sales will not ask salaried people in the accounting department or the human resources department or the purchasing department to work more hours so that office administrative costs can be lowered and the overall profitability of the company improved.
Like everything else in life or in business, there must be balance. You cannot grow your way out of a financial problem and you cannot save your way to prosperity by just cutting costs. There must be a thoughtful blend of the two. Finding that blend is your job as the manager. It is what you get paid to do.