Directors from four UK retailers suggest different ways to mitigate the worst effects of an economic slowdown

1. Act quickly, but not carelessly

Company Oliver Bonas 
Director Tim Hollidge, finance director

Oliver Bonas, a chain of 23 London-based boutique-style stores selling fashion, gifts and jewellery, has been affected by the crisis in the City quite directly—four of its shops are within the Square Mile and others are in parts of London where bank employees may live. "For a lot of us, because we're a discretionary spend, spend is down," says the firm's finance director Tim Hollidge.

It's hard to plan for dramatic reversals of fortune when your business requires a balance of long-term thinking (it took two years to find the site for a recently opened south London shop) and short-term action.

The company's turnover should reach about £9m this year, up from £6.6m last year. Seven stores have been opened in 2008. Expansion, though, is carefully planned. "It's about finding the right sites, not how many," says Hollidge. The company will continue to invest in training, products and stores, and is undertaking a large IT project designed to improve efficiencies.

But, says Hollidge, cash is king. "We've always driven the business by cashflow," he says. He recommends taking advantage of leasing to help manage costs.

The company has switched its focus from furniture (which wasn't selling) to fashion, but that means it needs to have cash to ensure the business is on trend.

"You handle things on a day-to-day basis. Because the market is moving so quickly, you can't sit back and take a three-month view and still be on top of trends. If sales are falling in one shop, you have to be quick to act."

At the same time, though, it's often about fine-tuning your approach rather than doing anything radical. "Retailers have gone from everything going gung-ho to scaling back. You become more circumspect," he adds.
"We've put in place some measures to preserve as much capital as possible. It's Christmas soon. All signs point to it being down on last year and for this to extend into 2009," he says.

Those measures are about sticking to fundamentals. The company now uses one phone line for the tills, alarm and PC. "There are ways of maximising cashflow by using temporary staff, conserving working capital, looking into alternative funding options, such as leasing, and reducing costs," says Hollidge.

2. manage risk and push through change

Company Smallbone
Director Gordon Montgomery, COO and CFO

It's in a sector most often tipped for trouble in tough economic times. But bespoke kitchen-maker Smallbone's half-year results (for the six months ending June 2008) show little to worry about. Revenue was up 14.6 per cent to £30.4m, with pre-tax profits up by a massive 201 per cent.

"The City has an effect on our business to some extent, more outside London than in," says Gordon Montgomery, Smallbone's COO and CFO. Sales are slower in the north, but in the south, the company is still being commissioned for larger projects by the "super rich", making up for any shortfall in aspirational buyers.

Smallbone benefits from longevity (it was originally founded in the 1970s) and has diversified into three separate brands, one a recently acquired US business. It also has a very clear projection of its cashflow, thanks to a long lead-time for project deliveries.

"We're lucky because we have good visibility going forward: it can take six to eight months from order to delivery. So our main concern is our order intake; we can mould the business to some extent to fit the prospects."

Working on this peculiar business cycle allows Smallbone to flag up potential stress points in terms of cost of materials or labour rates. It can also use economies of scale to mitigate against material cost pressures.
But Smallbone also stress-tests its business by running different scenarios through a financial programme. It can then plan several years in advance, or month by month.

Inevitably, an economic slowdown has an effect on
investment plans and how you conduct business. But Montgomery believes the companies that will suffer "will be those that have not considered different scenarios and planned for contingencies".
If anything, he predicts the pressures on availability and pricing of supply to ease off. The biggest unpredictability is the effect on demand.

"It would be silly to predict long term what will happen. But the business is a little more insulated because of it being in the luxury end of the market. The economic downturn will have more impact on disposable spend, such as expensive handbags, as opposed to a 'lifestyle demand'," says Montgomery.

"The key thing we've got is time because of our forward bookings. But it's impossible to have a cast-iron forecast. It's about developing appropriate risk-mitigation strategies and, most importantly, watching cashflow. We're not fundamentally changing too much, and we're always looking for efficiencies."

Montgomery also believes that when times are tough it can be easier to push through change. People, he says, become more innovative and more "prepared to cross political boundaries". "I look at it as an opportunity to get ahead of the game."

And, he says, there are some very practical benefits, as well. "We've been flooded with opportunities for good retail locations. Finding sites was difficult but over the past year, it's become easier, and the pressure to lower rent has risen. For people who can stay the course, the Warren Buffett quote holds true: 'Be fearful when others are greedy and greedy when others are fearful'."

3. Focus on price and choice

Company Asda
Director Andy Clarke, retail director

In September, Asda's market share reached a record 17.3 per cent, according to data from TNS Worldpanel. It's a far cry from the supermarket's position during the 1990s recession, when it was nearly bust. But that experience does it no harm, believes Andy Clarke, its retail director. "There are those who have never had to trade in tough times. We've had to make those tough calls and the 'grey hairs' in management and on the board are an advantage."

The current market turmoil is playing to Asda's strengths, says Clarke. "As a value business, we're in a good place. But that doesn't mean we can be complacent."

Asda is focusing on its core price position and on its operating cost. "We've always had a strong, low-cost attitude to business," Clarke says.
It's also very switched on to customer habits, and Clarke has noticed a change in shoppers' profiles, with people stocking up on payday, then ebbing away later in the month. For smaller retailers, managing costs in relation to that demand change could be a challenge.

As with the other successful supermarket chains, Asda has been catching customers at both ends of the spectrum, offering both budget and premium-priced products. It has seen a 12 per cent growth in AB shoppers and more customers opting for its recently relaunched "smart price" range.

Now into its 2009 planning cycle, Clarke says the firm is assessing whether it needs to be more or less aggressive in any part of its operation. There's also a greater focus on strategic partnerships and on essentials, such as cost management of the estate.

Clarke predicts that spending power is likely to be further eroded by winter utility bills: "Income Tracker did some research for us that found customers had 7.5 per cent less disposable income compared to last year." That figure could decline further. "There's no question the economic landscape will change from a retail, wholesale and supplier perspective," says Clarke.

But as a growing business, Asda will help suppliers to flourish. And according to the company's monthly internal surveys, morale across the 170,000-employee chain "has never been so high", which Clarke attributes in part to a Dunkirk spirit. "In tough times, people pull together. An inclusive culture flourishes. We operate on the principle of 'all colleagues, one team', and hopefully that helps us work together during harder times."

Where retailers are at risk, he believes, is in the mid market. "The High Street is under huge pressure and in the next 18 months, customers will vote with their feet. Those businesses that can demonstrate the ability to save money will win."

4. Offer value and service

Company Brighthouse
Director Leo McKee, chief executive

Discounters tend to thrive in a downturn, which bodes well for Brighthouse, a national retail chain selling TVs, appliances and technology by branded manufacturers. Its customers pay by cash or in weekly instalments using the US concept of rent-to-own.

With 177 stores and 1,800 staff, it's on a growth trajectory. And, according to chief executive Leo McKee, it is "reasonably resistant to macro-economic changes".

Results for the year to March 31, 2008 show turnover up 12.7 per cent to £145.9m, and pre-tax profit up 60 per cent to 20.1m. "It's a can-do climate," he says.

But McKee foresees value being more important than price in winning customers. "I'm very, very keen on value, but people don't necessarily want the cheapest. Research also shows they don't want to spend their money on excess packaging, so we pay more attention to green issues."
Slowdowns, he adds, always sharpen the focus on expenditure. "It's always important to have a high awareness of what's going on externally and of potential pressures on the business," says McKee. "But the essential principles of retailing don't change. Just look at the best retailers in the business, such as Wal-Mart's Sam Walton or Kingfisher's Geoff Mulcahy."

He believes in sticking to tried and tested retailing strategies, focusing "obsessively" on price, product quality and customer service. The company is investing in customer research—with focus groups led by a senior director—and training for Brighthouse managers.

In leadership terms, McKee warns against complacency. "You must be approachable, consistent and visible," he says. He visits each store at least once a year. "Learn from your competitors and what they are doing or not doing. And get employees to believe in the business."

He believes there's an upside to the recession, too. It heightens everyone's sensitivity, and it can make people look again at assumptions. People may be more apt to think through issues and act with "measured urgency," when times are more difficult.

"We've had a long run of positivity, but some of us remember the three-day weeks and oil price hikes of the 1970s. Will things get worse? It would be unwise to believe there will be a short-term recovery. Clearly, even the most robust business will be affected. Will the western world get through it? Of course we will."

The message for management is clear. Understand your customers, be obsessive about delivering value and prune unnecessary expenses.
Says McKee: "What makes a retailer stand out from the rest is a differentiated proposition and a tight management team that operates for the good of the corporation, not for personal gain. It's also important to know what you are and what you're not."

Reasons to be less cheerful

So what are the factors that might trip retailers up?

The predictions are downbeat: retailers from Sleep Depot to Dolcis to Miss Sixty to The General Trading Company have already gone to the wall this year. Rescue and recovery specialist Begbies Traynor predicts a post-Christmas rash of insolvencies for 2009 and has placed over 300 UK retailers on a "critical watch list", meaning it believes they have at least a 70 per cent chance of failure. And insolvency trade body R3, also forecasts a dramatic surge in both corporate and personal debt in 12 months' time.

In an R3/YouGov poll, nearly 15 million UK households—63 per cent—claimed their financial circumstances had worsened in the past six months, thanks to use of credit cards and overdrafts. Nearly half have already adjusted their outgoings to spend less on "nice-to-haves" such as CDs, jewellery and DVDs.

Credit insurers are beginning to withdraw coverage of large retailers and, in its September white paper, accountancy firm KPMG and SPSL Retail Think Tank (RTT) claimed that three indicators of UK retail health—demand, margins and costs—had dropped to their lowest level in two years.

Malcolm Pinkerton, senior analyst at Verdict Research, says consumer confidence is affected by tougher lending criteria at banks. He predicts Christmas will be "later" this year as retailers cut back on spending by hiring temporary staff later in the season. 

Few foresee an end to the austerity until 2010, but Pinkerton warns against assuming there will be massive casualties. "All retailers will have some sort of plan, and the better ones have robust balance sheets. The big UK players are not heavily indebted and not exposed in the same way as the banks were."