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Survival steps for retailers in today’s economic environment


March 24, 2009
By PricewaterhouseCoopers LLP

March 24, 2009, Toronto – In order to help retail companies manage
through the downturn, retail advisory firm Karabus Management, a
subsidiary of PricewaterhouseCoopers LLP (PwC) Canada, today announced
critical next steps retailers should take in order to meet the demands
of this challenging economic environment.

In order to help retail companies manage through the downturn, retail
advisory firm Karabus Management, a subsidiary of
PricewaterhouseCoopers LLP (PwC) Canada, today announced critical next
steps retailers should take in order to meet the demands of this
challenging economic environment.

“The majority of retailers have already taken initial actions to reduce
overhead costs and eliminate most discretionary capital expenditures,”
said Antony Karabus, CEO of Karabus Management. “Unfortunately, as the
retail landscape continues to remain uncertain, this may not be enough
to satisfy investors or compensate for the dramatic fall-off in
consumer spending, coupled with the substantial debt many retailers
have taken on as a result of leveraged financial transactions. To
successfully navigate these unchartered waters, retailers must operate
much differently than ever before and take the difficult next steps in
order to succeed and grow in today’s environment.”

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Christopher Kong, leader of the PwC Canada Retail and Consumer Practice
further comments, “If retailers act quickly and review and address
their operational and financial performance to reflect the changing
economic environment, they will be better best positioned for
survival.”

Recommended “next steps” for survival include:

Take costs even lower – Align costs with lower demand by
establishing targets for reduction that total at least 10% – 15% of
total cost infrastructure expenditure. Use approaches that ensure
sustainability of a company’s ability once they emerge from this tough
macro economic climate

There are three approaches retailers should consider:

Reduce costs with a bottom up view. Cost optimization can not be a
reactive one-off initiative.  Operational excellence demands a
bottom-up analysis of every cost in every area with no exceptions or
sacred cows. This is an ideal time to re-assess real estate strategies
and store portfolio profitability and then develop a strategy for
renegotiating leases.

Eliminate all discretionary spend. In the key areas of
marketing/advertising, travel, utilities, store wages and other areas,
retailers should conduct a rigorous review of spend that is least tied
to short term sales.

Consider firm-wide pay reductions for staff at certain compensation
levels.  Significant savings can be realized without people losing
their jobs.  This is a good short term move without losing
sustainability of operations.

Reduce inventory strategically and improve gross margin return on inventory investment simultaneously:

Eliminate fringe businesses and merchandise items – Tough economic
times require a definitive merchandising point of view. Retailers need
to truly focus on their differentiation in a way that will drive
traffic and sales. Further, they should explore and implement creative
solutions with vendors to reduce their cost structure. Focusing on the
most profitable areas of merchandise is probably more beneficial than
wholesale cuts across the board.  

Manage Open-to-Buy (OTB) flexibly – Re-engineering the merchandise
planning and OTB process to move a greater percentage of purchases
closer to or even in season will help retailers manage risk. There are
significant opportunities throughout the supply chain, which should
afford retailers much greater flexibility in purchasing activities.

Impose greater markdown disciplines – While capital is tight, this is
the time to apply science to markdowns to better manage inventory and
margin risk. Markdown optimization technology, supported by changes to
processes, provides Merchants with more accurate, timely and granular
information about consumer demand. Retailers that are using this
technology – and are changing age-old merchandising practices, further
defining roles and skills and creating accountabilities – are getting
impressive results.
 
As the difficult environment continues to demand that retailers seek
new ways to improve cost-efficiencies, Karabus Management continues to
assist numerous chain retailers in uncovering hidden value in their
cost infrastructure, working capital and their merchandising margin and
inventory optimization, coupled with getting most value from their
installed application systems.


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