To get a glimpse of the world of retail in these tough economic times, take a read of a new article in the New York Times this morning that highlights the issues facing retailers everywhere.
The article states:
"In most cases, the collapses [of retailers] stemmed from a combination of factors: flawed business strategies, a souring economy and banks’ unwillingness to issue cheap loans.
Bombay Stores decided to move most of its stores out of enclosed malls into open-air shopping centers. It started a children’s furniture business, called BombayKids. And it started carrying bigger items, like beds and upholstered couches, with higher prices than its regular furniture. Consumers balked at the changes, hurting Bombay’s sales and profits at the same time that its expenses for the ambitious new strategies began to grow. The timing was unenviable: By early 2007, the housing market began to falter, so purchases of furniture slowed to a trickle.
The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603.
Same store sales (sales at stores open at least a year) fell 0.5 percent, the worst performance in 13 years, according to the shopping council.
Stores may appear to mint money by paying $2 for a T-shirt and charging $10 for it. But because shopping is based on weather patterns and fashion trends, retailers must pay for merchandise that may sit, unsold, on shelves for long periods. So chains regularly borrow large sums to cover routine expenses, like wages and electricity bills. When sales are strong, as they typically are during the holiday season, the debts are repaid.
Fortunoff, a jewelry and home furnishing chain in the Northeast, relied on $90 million in loans to help operate its 23 stores, using merchandise as collateral. But by early 2008, as the housing market struggled, the chain’s profits dropped, meaning its collateral was losing value and the amount it could borrow fell."
THE REAL WORLD RETAILING TAKEAWAY
Retailers are struggling everywhere for a variety of reasons. Don’t make the same mistakes.
- Flawed expansion strategies – retailers expanded to the wrong real estate and/or retailers expanded their product line up into areas that didn’t mesh with their existing brand. These are both classic retail mistakes.
- Unproductive store locations – many chains are closing hundreds of stores simply because they’re not as productive as they should be (read: they’re not profitable or are eeking out miniscule profits). We’re all in business to make money. Don’t operate a store that breaks even or doesn’t contribute to your corporate overhead.
- Excess inventory – I’ve blogged about this subject before. Make sure you keep your inventory even tighter in a tough economy.
- A tightening economy – retailers in all sectors are being squeezed and haven’t reacted in a timely manner to economic issues. The housing market has caused a slump in any retail concept related to the home. Skyrocketing gas and food prices are impacting everything from clothing to coffee. Every sector of the faltering economy is impacting retail.
The NY Times article does note that "Plenty of retailers remain on strong footing. Arnold H. Aronson, the former chief executive of Saks Fifth Avenue and a managing director at Kurt Salmon Associates, a retail consulting firm, said the credit tightness and consumer spending slowdown have only wiped out the “bottom tier” companies in retailing."