Over 148 Years of Service to the Furniture Industry

 Furniture World Logo

Planning For Uncertainty in 2019

Furniture World Magazine
Volume 148 NO.6 November/December


on


 


Downturns can be times of opportunity. We may see one in months or in a couple of years. Either way, it’s best to prepare for uncertain economic times.

 

There are signs that the U.S. economy has topped out. The unemployment rate is at a low, the Fed has commenced a series of rate hikes, the stock market is volatile, and the housing market has started to decline. These signs, nine years since the great recession, along with geo-political elements at play, suggest to me that an economic decline is imminent. It may start in months or a couple years from now, but it will happen.

I don’t bring this up to worry Furniture World's readers. It is to urge them to pay extra attention to certain signs in their businesses and take action to prepare for economic uncertainty.

Downturns can be times of opportunity for furniture retailers. Following recessions, smart businesses often end up in the strongest competitive positions. For example, in the recession of 2007-2009, furniture retailers that made good choices and outlasted failing competitors, inherited customers, strong employees and superior suppliers.

What To Look At

Studying key performance indicators (KPI’s) is always important. It is the business equivalent of a doctor checking a patient's vital signs. In the macro-economy a recession is defined as two consecutive quarters of negative GDP growth. In the stock market, a correction is defined as a negative move of over 10 percent from a recent high. With these definitions in mind, look for consecutive periods of negative results for the following three KPI’s: Traffic, Average Sale, and Inventory to Sales.

KPI #1: Traffic

In-Store Traffic: Digital traffic counting is the ultimate unbiased measure of growth and decline. As an analyst, I make a point of not accepting what any retail executive says regarding their store's traffic numbers. That's because traffic numbers, to be accurate, must be measured via visual computer analytics.

Assuming you have technology in place to measure traffic accurately, first chart monthly traffic for the prior rolling 12 months.

The first part of the selling equation is traffic (traffic x average sale x conversion rate). If you find that you experience growing or flat traffic from one month to the next, you don't need to worry yet about a recession impacting your business. If, however, traffic declines over several periods, your business may be experiencing recessionary pressures. These may result from a variety of internal and/or external sources such as:

  • Internal, controllable traffic reductions such as irrelevant marketing or poor customer experience.
  • External, non-controllable factors such as competition or political-economical circumstances.

Either way, when consumers are insecure about shopping, traffic declines over time.

If you want a measure that factors out monthly traffic peaks and valleys, figure your monthly average traffic for the prior three month period. If your traffic was 2,000 people in September 2,100 in October, and 1,800 in November, your average monthly traffic would be 1,967=2,000+ 2100+1,800/3. It's also a good idea to average the prior three-month period to avoid knee-jerk reactions based on emotion. If the trend line continues to fall over two quarters, your business may be experiencing recessionary forces.

It is also a good idea to compare your current year's traffic chart with numbers by month for the previous year. The main purpose of this is to eliminate any seasonal business factors.

During the last recession, traffic counters were less common. As a result, businesses were slow to act, with many disastrous consequences.    

 

During the last recession, traffic counters were less common. As a result, businesses were slow to act, with many disastrous consequences. 

During the last recession, traffic counters were less common. As a result, businesses were slow to act, with many disastrous consequences. Traffic counting technology is a huge advantage that smart businesses can easily put in place today.

Website Traffic: Many businesses are experiencing natural in-store traffic declines due to increased website use. For this reason, perform the same calculations for your website. If your media strategy has not changed, and you are experiencing continual declines you may be facing recessionary pressures.

 

KPI #2: Average Sale

Your average sale is an indicator of how much a typical customer spends. Given a consistently performing sales force this number should not decrease from month to month. Any single month, however, may vary. That's why, just like you did for your traffic numbers, the average sale metric should be tracked over the past 12-month period and compared with previous years. Also calculate your average for the past three months and compare that with the same period in the previous year.

Low traffic numbers may be offset by a higher average sale metric or improved conversion rates. The time to really take notice is when both traffic and average sale numbers are in decline. If this is your situation, your business is in recession and it's time to take action.

KPI #3: Inventory

Over-inventory is an indicator and also a bi-product of recessionary pressures.

There is a time lag between when products are purchased and delivered. Purchases made just before a business slow-down can cause inventories to sling-shot up as a percent of sales, resulting in cash shortages.

Calculate inventory dollars divided by written sales volume each month for the prior 12 months. If you see consistent increases without any changes in standard purchasing practices, your sales are likely at levels that do not support your current inventory levels. 

Defensive Actions

If all three of the above KPIs for your operation point in an adverse direction for two consecutive quarters, and you experience an over 10 percent decline in written sales volume, your business is in recession and fast corrective, defensive actions should be considered.

All successful multi-generational businesses have weathered one or more recessions. Some do it better than others. Following are some actions furnishings businesses should consider, depending on the unique situation, to sail through turbulent waters, come out healthy and ready to thrive.

Think Fast: Closely tracking the important KPIs will have no effect on your business. Taking informed action will! This is true for any economic condition and for all businesses. Owners and managers who make fast, educated decisions, come out ahead. They are the market leaders. Those who are indecisive and slow, become market laggards.

Limit Vendors: Become more important to fewer suppliers. This can set you up to potentially get better rates and benefit from a streamlined supply chain. Your inventory will go up per supplier, but down, overall.

Buy Slow: If your business is in recession re-buy items based on written rates of sales.

Renegotiate Rent: Whatever you pay for rent, when traffic and volume per customer declines, your space is simply not worth as much. Although re-negotiation mid-lease is not always possible, it is worth a try. Some landlords will make accommodations regarding this monthly expense. Ideally, your landlord will act like a partner in your business. But even a tough one may realize that it's in their best interest to work with you since it can be hard to re-rent in a slowing economy.

Shed Weakness: Employee cost typically makes up around 20 percent of sales. If sales take a consistent downturn, your comfortable percent of spend must remain constant to retain profitability. Keep your top performing people. Weak performers in all departments will normally need to be removed.

Double Follow-Up: Should your traffic wane, it's a good strategy to significantly grow follow-up efforts to your existing customer base. Also consider upscaling prospecting in a way appropriate to the current state of your business.

Increase Margins: It is good idea in any economic situation to grow margins. If sales trend down due to factors that have nothing to do with pricing, you can augment profitability and decrease your break-even point.

Employee cost typically makes up around 20 percent of sales. If sales take a consistent downturn, your comfortable percent of spending must remain constant to retain profitability.


Employee cost typically makes up around 20 percent of sales. If sales take a consistent downturn, your comfortable percent of spending must remain constant to retain profitability.

Adjust Advertising: If your current level of advertising spend is not producing the same traffic, do not increase it. Consider advertising expense as a variable expense when sales decline and a fixed expense when sales grow.

Trim Operating Costs: At least once per year, perform a detailed review of operating expenses. Classify each expense as: critical, highly beneficial, optional or wasteful. Eliminate waste immediately. Reduce optional expenses that have a vague return of value. Renegotiate when possible.

Reduce Square Footage: If possible, consider subleasing portions of buildings and shuttering surplus space altogether. Refine Selling Systems: Take a close look at the ways you sell so you can become ever-more efficient and effective with each sales opportunity. It is possible to increase revenue per guest (traffic) even when traffic declines.

Keep Cash: If you expect a downturn, leave profit in the business that would normally be distributed.

Keep Net Income Goals The Same: Consider using a bottom-up budgeting approach. This puts profit first, rather than sales. The approach starts with the dollar profit necessary to maintain a healthy business. Then figure out the expenses, margins and sales levels necessary to produce that profit. It is generally a more conservative approach to budgeting using prior year’s sales volume.

Consider using a bottom-up budgeting approach.
This puts profit first, rather than sales.

Expand: If you have an aggressive business model and are committed to expanding, your most important consideration should be occupancy cost for the best location. Only do a deal on a retail space if it is in a highly desirable location and the all-in occupancy cost is under 10 percent of the worst-case sales volume in a recessionary period. Otherwise, walk away! If your worst-case sales volume is $2.5 million, occupancy should be under $250,000 for the same period. In this way you should be able to weather any economic storm, afford good people, market properly, and make some nice profits when good times return.


If your worst-case sales volume is $2.5 million, occupancy should be under $250,000 for the same period.


Conclusion

Track the key performance indicators, Traffic, Average Sale, and Inventory to Sales. Then take fast and appropriate action. Doing this will boost your competitive advantage and keep your business healthy and prosperous in tough times and beyond.

 



David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.

Read other articles by David McMahon