Remember when business was all about making a profit, and strategy was the plan to achieve that?

Remember when business was all about making a profit, and strategy was the plan to achieve that?

Today’s competitive landscape is very different to the one we used to see and many of the fundamental givens simply are not any more.

A number of profitable companies have gone to the wall and strategy is often an academic luxury too disconnected from daily trading.

Most non-food retailing has a lumpy, seasonal profit line which ebbs and flows.

A number of months in the year are frequently loss making and a combination of tight cash management and bank support allow the retailer to trade through.

With aggregate consumer demand flat at very best and in minus territory across many markets, some retailers now have revenue lines way below expectations.

Meanwhile, costs are almost certainly rising. The need to manage cash has become the number one preoccupation of the chief finance officer. Banks are increasingly nervous of businesses that regularly miss their
revenue forecasts.

Indeed, the art of forecasting in general has become far more difficult, as the Government has found with its growth (or lack thereof) projections.

Having a strategy is fine, but if some of your key competitors have just launched a sales promotion what do you do? Spending has become much more finite. If your customer spends at a rival instead of you, that spend is lost in a way it never was during the golden economic period pre-Lehman. So the pressure to forsake the strategic plan in favour of short-term expediency is intense.

A central issue with today’s retail models concerns stock turn. When demand was strong and driven by increased sales volumes, buying the optimum amount of stock was relatively easy. And the consequences of getting it wrong were also relatively minor.

Managing slowing stock turns effectively is a critical characteristic of today’s successful retailer. And the consequences of not doing so can be seen right across the trade in the plethora of (very often unplanned) sales promotions. These erode margins and undermine the brand strategy you might love to be following but feel you cannot afford to.

Buying the right quantities of the right (relevant) stock is to a large extent a function of how well you understand your market and your customers.

Costco is a great role model. With just 3,500 SKUs, product categories are highly focused with none of the over-ranged ‘choice’ commonly found in so many stores. With a gross profit margin of about 13%, the model can afford no fat whatsoever and can only carry fast-moving winners.

Understanding your market is a prerequisite of being able to set your own competitive agenda. There are many things a company may end up having to cut back on to preserve cash flow, but cutting back on understanding the customer and building that understanding into the decision-making heart of the business would be a very false economy.

  • Richard Hyman president, PatelMiller