How to Avoid and Address Common Pitfalls in the Retail Industry

Retail is akin to war games practiced in the military with traps designed to test your skills and produce failure for the unwary. The challenge is to see them coming and find the safe harbors. Our latest blog delves into insights from our turnaround professional and partner, Allan Rutman at Zeifmans who helps us understand its intricacies that become paramount in navigating common pitfalls. Our focus goes beyond the surface, shedding light on what makes the retail landscape truly distinctive. 

Join us as we unravel the challenges unique to the retail sector, exploring why it stands apart from other industries. With Allan Rutman as our guide, we’ll navigate through the nuances of a business-to-consumer dynamic, shedding light on the direct relationship between retailers and consumers. Discover the distinct demands and perspectives that shape the retail market and gain valuable insights on where to focus when a retail business finds itself at a crossroads.  

What are the commonalities amongst retail businesses? 

Although there are a variety of industries in the retail realm such as jewelry, clothing, electronics, food and entertainment, there are also various options for payment transactions. These include storefronts, mall outlets, warehouses, and online platforms. Despite the array of choices and industries within retail, there are notable similarities that thread through these businesses. One commonality is retail’s focus on the consumer base and finding demand in a niche market. Furthermore, as turnaround professional Allan Rutman stated when speaking about the success of retail businesses, “To ensure continued success, maintaining and adding to the consumer base is critical. Many retail concepts lose their popularity over time due to shifts in customer taste or demographics.” To add on, except for businesses with online-only operations, they all interact directly with customers in fixed locations. As a result, as the business grows and expands in a multiplicity of locations to fulfill the primary objective of maximizing sales per customer, some locations can be very profitable while others may be money losers.  

Why do retail businesses fail? 

There are several factors that play a role in the ultimate demise of a retail business including poor financial management, inventory management issues, location issues, and unclear branding towards the consumer. One of the primary reasons we see retail businesses fail is rapid expansion with poor financial management skills which result in insufficient capital to fund growth. When stores are profitable and make money, banks are more inclined to finance a business, however, it is easy to get overleveraged. When businesses open various locations, it is critical that they accurately calculate the capital to invest in the inventory for the new locations. Specifically, if supplies are ordered from oversees, the planning stage extends significantly longer. The orders must be placed well in advance as there will be extended delivery times and financial pressure as often your letter of credit will tie up capital for many months prior to the arrival of merchandise. Consequently, as you increasingly utilize international channels for procuring products to enhance profit margins, it is imperative to establish robust financing mechanisms to successfully realize this objective and mitigate the risk of business decline. 

The basis for retail growth and success is entrepreneurs creating a concept or several concepts that expand over time. Those concepts typically take off leading to the opening of multiple locations, however, the concept itself sometimes decreases in popularity and wears out which results in less foot traffic and conversion at the store level. Keeping this in mind, another common successful retail business model is opening different concept stores in the same mall. However, over time, this can present a challenge to keep each business aligned and associated yet separate to avoid consumer confusion around what it is that you are selling. Confusion can arise when businesses try to consolidate, for example by eliminating one or more of these concept stores, while trying to retain several different concepts in the remaining stores. When this occurs, your branding must communicate effectively with your consumers to avoid confusion and to maintain its’ value. You need to ensure different brand concepts when consolidating in the same location don’t clash, for example appealing to different age groups and lifestyles. If your business depreciates in value, it will have a direct impact on your sales and consumers.  

How to regain control of the checkbook 

Consistently collecting relevant and reliable information is the key to identifying areas requiring attention. This will provide you with the opportunity to experiment with test-marketing new products and to maximize profits by cutting back on expenditures that are impacted by not having enough resources invested in them. Reliable daily financial management information is critical to determining your profit margins, including key performance indicators such as conversion rates and average dollar per sale as the nature of retail is that it’s top line focus instead of bottom line. It is crucial to have data such as profitability by individual store including overhead costs such as expenses, and labour costs, as well as product data by SKU. With this information in hand, you can identify low-profitable stores and products and then evaluate if they need to be eliminated or if there are factors that could be adjusted, such as negotiating a rent reduction that would improve their profitability.  

It is imperative that you adjust and evaluate your range of products and mode of operation, moving swiftly to manage finances and focus on the products that generate the highest quality output. To add on, it’s important to have a core product line to analyze in conjunction with the management. Essentially, you must focus on what made you profitable and grew the core business and understand whether the core business is still there and generating profitability so that you have something to fall back on and allow you to expand. Another important step to take is speaking to the staff directly to figure out what the morale is at the head office as well as at the store level. When doing so, Rutman suggests thinking of the following questions when collecting your data: 

• How effectively is upper-level management overseeing the well-being of their staff, and are they effectively communicating appropriate messages to them? 
•  To what extent are staff members optimizing their sales potential, and are there any challenges in the current dynamics between management and both labour and sales staff that may be exerting a notable impact on overall performance? 

With these questions in mind, the truth is that people who are unable to perform well in times of crisis are not going to be survivors.  

Moreover, all issues need to be addressed as most issues are often interrelated. However, at the end of the day, cash is king, and you want to regain control of the checkbook to rationalize expenditures to determine what resources are available and how to add to them if inadequate for maintaining viability. There are different ways to do that: supplier indulgences, store closures, payroll reductions, sale of redundant assets, product changes, local suppliers etc. 

Despite the retail industry facing heightened financial challenges in recent years, it is essential to recognize the sector’s inherent high turnover. This reality underscores the difficulty in retaining staff, as they can readily secure positions elsewhere. Consequently, fostering robust communication with employees becomes pivotal. Motivating them by instilling confidence in the continued viability of the business and demonstrating a proactive plan reinforces the organization’s commitment to their well-being and tenure. 

How Zeifmans can help your retail business succeed 

Engaging in an open dialogue with a Zeifmans turnaround specialist might be the first step towards a fresh and practical path ahead if your business is experiencing any of the issues previously mentioned or is about to navigate turbulent waters.  

Feel free to email us at info@zeifmans.ca or contact Allan Rutman, Turnaround Management and Insolvency Advisor/CRO directly at 416.861.1487.   

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