Editor’s Note: In the first part of this series that appeared in the March/April issue of FURNITURE WORLD (posted to the marketing article archives on www.furninfo.com), a model of the balance of power between big box and independent retail stores was advanced. Each serves to keep the other healthy. Either can find themselves getting “fat” or “starving” to death. Part two continues with a discussion of the more practical aspects of day-to-day survival in the wild world of furniture retail.
Surviving The Coming Famine
In order for predator (big box) stores to survive the coming famine, they are going to have to become energy efficient. Those that wait until lean times to start working toward this goal will die off along with prey stores. Which leads to the obvious question, “What is energy efficiency for a predator?”
Energy efficient predators have higher close rates. This means they must get better at converting their walk-in traffic into buying customers. Right now, with high levels of advertising-driven walk in traffic, low close rates are acceptable, but when the famine comes, the cost of bring in customers is going to go up exponentially.
Smart predators track the cost of every up. Once the famine starts in a market area, those retailers who pay attention are going to see a geometric increase in value for each opportunity compared to the values being placed on them now.
Once the cost per UP starts rising, it can be an early warning sign that famine may be approaching your particular grazing field.
The early signs of an industry wide famine are everywhere:
- “Emergency Inventory Liquidation!”
- “50% to 70% Pre-Holiday Sale.”
- “Floor sample Sale 25% to 70% off on all Floor Models.”
- “Year End Clearance Sale.”
- “Manufacturer Authorized Inventory Liquidation.”
- “Going Out of Business”.
The retail herd is too large. There are too many stores carrying inventory, and too much of the same inventory. When products aren’t differentiated, members of the herd tend to increase their focus on price competition. Competing on price weakens the herd. A weak herd is slow, defenseless and vulnerable. The Serengeti is over grazed. With the famine approaching, safe havens from predators will start to dissapear.
In tough times, as prey store herds get smaller, once protected markets get weaker, and stores begin to do the kinds of things that accelerate their demise. They have sale events and cut the wrong expenses. They search for cheaper merchandise to help them drop price points. They bleed and get weaker as predators move closer to their formerly safe and hidden markets.
Many smaller markets that used to support a herd of smaller stores can, realistically only support one full line niche player. That means that some stores must die in order for one to survive. No one wants to hear this, but there is a precedent for this forecast in the auto indust
Domestic auto dealers have multiplied themselves into trouble. Using the Sacramento market as an example; there are 12 Ford dealers in a 60-mile radius of downtown. It’s bad enough having to compete with the competition. Just imagine how difficult it would be to compete with the same franchise, carrying the same products in the same trading area.
The “auto herd” leaders have been forced to take action. Earlier this year, GM, Ford, and Chrysler announced plans to reduce the number of retail auto dealers by 13,000 to 15,000 in an effort to stop overgrazing and strengthen the surviving members of the herd.
A similar survival drama is being played out at all levels of the furniture industry. Both predator and prey numbers are too large. No longer does size guarantee survival the way it once did. The only thing that will protect companies at all levels in the food chain from extinction during the famine will be their ability and willingness to evolve.
"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." - Charles Darwin, British naturalist
The retail world is changing at a rapid pace, and there is a mistaken belief that size and resulting economies of scale, can insulate the big players form those changes. If that were true, dinosaurs would still be walking the earth.
Consider an operation that does $10 million in volume; to an operation doing $50 million it is prey; to an operation doing $5 million it is a predator.
In some markets, there are retailers who are pure predators, retailers who are pure prey, and a large group of retailers who are both. For the group that is both predator and prey, the coming famine will either be the best of times or the worst of times depending on their levels of agility and energy efficiency.
Agility and Energy Efficiency have a common denominator – time. Time is the one resource that all stores have in equal measure. It is the one resource no store, no matter how deep its pockets, can buy more of.
How you use time determines your level of evolution. Many activities in retail stores waste time. For most stores, there is never enough time and money to do things right, but always enough to do things over.
Stores must look for ways to do MORE, with LESS, BETTER and FASTER. A lot of eyes glaze over when store managers hear about the subject of time utilization, but by not valuing time, they often mistake activity for accomplishment. That lack of value attached to time is why the Return on Investment made in many furniture stores is so low.
Consider this example of two stores doing approximately the same sales volume, both carrying merchandise with the same price points, and both located on the outskirts of a major metro market.
Both are dancing with predators. One has less than a one-percent net before taxes; the other has a very impressive double-digit bottom line. What is the difference?
The one with the low net is most likely doing the same things they have always done… but better. The one with the double-digit bottom line is evolving. This store is looking at every process in the store and is applying the “time value of money” approach to each process. They are looking for ways to do more with less, better and faster.
Just like the low net store, they are in a knife fight with several predator stores, but being lean and fast, they are more AGILE than the predators. They are staying outside the grasp of the predators by refusing to engage in price wars.
Just like other stores in the market, volume is down. But unlike the other stores, they focus on improving the customer shopping experience and on becoming ENERGY EFFICIENT.
Yes their traffic is down; but the sales team is closing a higher percentage of the people that do walk in, at higher profits. This is helping the store to stay strong and survive in a tough market.
The Process of Natural Selection
The competitive climate in retail furniture today is nothing less than a “Darwinian Process” to select the most evolved business models. The results so far are showing that companies that are doing “the same thing as before, but better,” are not going to be leading candidates for survival.
Too many retailers get confused about the difference between incremental improvement and evolutionary improvement. Doing the same things, but better, is incremental improvement. Going from a “manual” inventory control system to a “computerized” inventory control system is incremental improvement. You are just doing the same thing better.
Going from a “fixed location” retail model to a “virtual location” web based retail sales model is evolutionary improvement. Going from a “stock inventory” based business model to a “no stock” inventory based business model is an evolutionary improvement.
This kind of evolutionary change is vital. Jim Collins, in his book “Good to Great” credits the ability to learn and change as being one of the key factors that help companies thrive in tough times.
“If you don’t like change, you’ll like irrelevance even less.” -Jim Collins, Management Consultant/Author
They say that tough times bring out the worst in people. We are headed for tough times. Now is the time to ask yourself where you are on the food chain, and here are a few indicators:
- If you are so involved in day-to-day operations that you can’t leave your business for two weeks without some form of periodic contact, you are a prime candidate to become a prey store.
- If the only thing keeping you in business is the fact you own your real estate, you are a prime candidate to become a prey store.
- If one of your core beliefs is that you can’t find and hire good people in your market, you are a prime candidate to become a prey store.
- If you could make more money in “tax free” municipal bonds than you are making on your inventory, you are a prime candidate to become a prey store.
- If your marketing calendar is primarily made up of “price focused” sales events, and a lot of them, you are a prime candidate to become a prey store.
- If even one member of your sales team is holding you hostage, you are a prime candidate to become a prey store.
- If you, as an owner or a manager, are in the top twenty percent of salespeople in your store, you are a prime candidate to become a prey store.
- If you have more than 20% product overlap with a “big box,” you are a prime candidate to become a prey store.
- If your cash reserves are down to less than sixty-days or you are pushing out your payables to the max grace period, you are a prime candidate to become a prey store.
- If you don’t spend time improving yourself by going to conferences, seminars sponsored by industry organizations, and attend just as many sponsored in other industries, you are a prime candidate to become a prey store.
Have What It Takes To Evolve?
To evolve, you need to think outside the box, transcend your comfort zone and think the unthinkable. You need to be willing to listen to new ideas without running them through old belief systems.
Right now the software industry is reeling from the effects of salesforce.com which came up with a business model to “rent application software” in 1999. When other software companies looked at the model, they dismissed it saying, “no one will rent software, they want to own it.”
What they were really saying is we would rather “make one big sale, than a whole bunch of little sales.”
Today one of the biggest challenges to Microsoft, Oracle and other software providers is how to stop or contain the rapid growth of the “software rental” market created by Salesforce.com and host of other Application Service Providers (ASP) that has accelerated with the entree of Google and Yahoo! into the ASP game.
Historical comfort is one of the leading causes for lack of evolution. The old “We have always done it this way.” excuse breeds complacency. Most of the furniture industry is still using 20th century business models and suffering because of it. As an industry, we are so busy fighting each other that other retail verticals are taking money out of our pockets without us knowing about it.
The evolutionary challenge before you is to learn how to do 21st century retailing. Learning is an evolutionary process, the more you learn, the greater the chances your store will be one of the survivors. America’s first management guru, Peter F. Drucker said, “We now accept the fact that learning is a lifelong process of keeping abreast of change.”
And to make matters worse, evolution is a race. It is a race to see who can learn the most in the least amount of time, and begin implementing more lessons with less fall back, better and faster than other stores that are also learning and implementing.
You can’t talk honestly about survival with your employees for two reasons; the first is you may scare them and start a panic that could paralyze your business. The second, is the fact that most employees are too intimidated to give you the full benefit of their honest opinions.
Many owners are competitive, and this is good because competition drives the desire to evolve. The first step is to take time to talk with knowledgeable people from outside your business. I don’t say that just because I am one of these people, I say it because you need to get an outsider’s perspective to get past the most common cause of business failure – myopic vision.
It doesn’t matter if you are a predator, or prey or both. The most important thing you can do is to start investing in a process that will result in evolutionary change for your business. It is one thing to intellectualize about the “survival” tension between the predator and prey that helps stores remain quick, lean, and healthy. It is quite another to focus on increasing your agility and efficiency so that you can remain toward the front of your pack.
Ken Guerrero is a Consultant providing strategic and tactical consulting to help storeowners take their retail game to the next level. He has worked with many furniture stores and performed process analysis and process design for a number of Fortune 5,000 companies.
In addition to his operational consulting activities Ken has created a new sales training program called Buyology 101 which focuses on teaching salespeople how to diagnose a customer’s buying process. Once the buying process is understood, the salesperson can adapt his/her style to support the customer’s buying needs.
For more information about operational analysis, strategy development, sales, warehouse or customer service training programs contact ken at firstname.lastname@example.org.