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Surviving 2009: Cost-Cutting, E-Commerce Considered Critical

Retailers will need to cuts costs, bolster online operations and build a platform of mobile phone-based shopping tools to stay competitive in the new economic environment.

According to a host of recent strategic retail planning reports, these actions, along with layaway plans and loosened return policies, will help dealers attract and keep cash-strapped customers amid what Best Buy CEO Brad Anderson described last month as a new reality for retailers.

Dealers should also be cognizant of a pending piece of federal legislation called the Employee Free Choice Act (also known as the card check legislation amendment), which could make it easier for employees to unionize and further squeeze earnings.

Here are key areas for retailers to consider when mapping out their near-term strategic plans:

Cost cutting: According to Gartner, the Stamford, Conn.-based IT research and advisory firm, half of the world’s top 10 retailers will slash capital expenditures by as much as 50 percent this year, a prediction partially borne out by Best Buy’s announced plans to cut investment spending by half this year, and to substantially reduce new store openings here and in Europe.

Big retail chains are also conserving cash by cutting dividends and selling real estate and shares, Gartner said in its report, Predicts 2009: Hardships and Opportunity for Retail. The group’s advice: do likewise, by scaling back or curtailing business and IT projects where there is no direct return on investment affecting top issues for consumers or associates.

Suggestions include limiting new store openings and delaying store refurbishments and major projects such as new distribution centers or global sourcing networks.

E-commerce: Online retailers will fare best this year as consumers seek good value and convenience for holiday shopping and purchases throughout 2009. Gartner said sales trends indicate a flat year for e-tailers compared to same-store sales declines for the brick-and-mortar channel, and believes that storefront-based businesses can best compete by integrating their Internet and showroom operations to permit online ordering with in-store pickup. The option provides consumers the best of both channels, positions a company’s Web site and stores as two ways to buy from the same retailer, and can be a potential differentiator during this challenging economic cycle, especially for last-minute shoppers with concerns about delivery during the holiday season.

But providing this service can be daunting. Typically, online systems are separate from in-store systems, and integrating the two could produce accounting, inventory management and/or merchandising issues, Gartner said. One interim alternative is to offer customers the option of having inventory shipped to their nearest store for pickup after a few days, although retailers should ideally look for ways to reconcile multichannel sales after the fact and fulfill online orders from in-store stock to maximize customer value.

Ironically, the multichannel model doesn’t necessarily work for online retailers that open brick-and-mortar stores. According to research by professors at MIT Sloan School of Management, e-tailers that open a physical store during the holiday shopping season could see more than a 15 percent decrease in online sales. Their reasoning: The opening of stores triggers the requirement to charge online customers sales tax in the state where the store is located, which can affect online sales as customers search for better prices elsewhere.

“On the Internet, we found that when sales tax was charged, demand dropped about 16 percent,” said Professor Duncan Simester, co-author of an MIT study. Duncan and his colleagues cited Gateway Computers, which closed all of its retail stores in part because of the requirement to charge sales tax for online sales. That hasn’t deterred Systemax, however, a direct-sell computer manufacturer that is building out a retail presence for its TigerDirect and CompUSA catalogs and Web sites under a concept called Retail 2.0, which it describes as a hybrid of brick-and-mortar and online shopping.

Mobile retailing: Consumers, retailers and comparison shopping sites will increasingly turn to the mobile phone as a major shopping tool that can access the inventories, promotions and locations of nearby stores, Gartner said. Adding momentum to the trend is the advent of the iPhone and similar devices, which have changed the way consumers use their handsets and have inspired retailers and marketers to develop mobile shopping applications that can take advantage of smartphones’ enhanced form factors and faster data speeds.

Over the past two years most retailers limited their mobile phone efforts to m-commerce, which allows consumers to make purchases directly from their phones. But the real opportunity, said Gartner, and challenge, will be allowing consumers to check pricing, inventory and promotions at the local store level from their handsets. Only a small number of retailers will get it right this year, the group predicts, although mobile retailing will become an increasingly common way for retailers to support their physical stores, which still generate 80 percent to 90 percent of sales.

Retailers will need to focus on how storefront and Web channel revenue is affected by the mobile phone and to develop ways of generating mobile channel revenue, although much of that will be cannibalized from online revenue, Gartner said.

In a variation on the phone-based marketing theme, Gregg Throgmartin, store operations senior VP for hhgregg, recently used a permission-based voice messaging system to alert customers to a sales promotion. The calling campaign, provided by Indianapolis-based Vontoo, reached over 1,200 customers in five minutes, had a 3.5 percent conversion rate, and resulted in an average customer sale of $1,697. Total revenue derived from the calls was $63,690, and the total cost of the campaign was less than $100.

Layaway: The old-fashioned layaway plan is experiencing a comeback, as evidenced this past holiday season at Sears and Kmart, prompted no doubt by consumers’ tighter budgetary restrictions. According to Tony Gao, Ph.D., a marketing professor at Northeastern University’s business school, layaway plans could help boost traffic, sales and customer loyalty. Specifically:

  • certain customers would be able to buy merchandise that they would otherwise be unable to, translating into more sales and greater customer loyalty;
  • the added return trip to the store to retrieve the merchandise after all payments are made increases traffic and the odds of an additional sale; and
  • layaway is a less risky financing alternative for retailers than credit cards. Card holders can default on payments and declare bankruptcy, causing major losses to issuers. In contrast, retailers set their own rules for layaway plans and still hold the merchandise should the customer default on payments.

Return policies: Many retailers are softening their return policies as a way to provide good customer service. According to the National Retail Federation’s third annual Return Fraud Survey, completed by 82 retail loss prevention executives last fall, the number of retailers who said their return policies would loosen during the holidays tripled from 3.4 percent in 2007 to 11 percent in 2008.

Common changes included extending the allowable timeframe for returns and being more flexible to customers without a receipt as retailers get a better handle on detecting and preventing return fraud.

“In a year when practicality is paramount, many retailers are making return policies more flexible for customers,” said Joe LaRocca, the trade group’s loss prevention VP. “Retailers seem to be finding a balance between providing good customer service to shoppers while preventing criminals from taking advantage of lenient policies.”

Card check legislation: Unionizing employees would be easier under the proposed Employee Free Choice Act, which would do away with secret ballots and allow the formation of a union if more than 50 percent of workers sign an authorization card. Retail analyst Michael Lasser of Barclays Capital theorized that an increase in unionization could lead to a meaningful rise in labor expenses for large retailers, which could squeeze margins and crimp earnings.

According to Lasser’s calculations, assuming that 50 percent of a retailer’s labor force is unionized, and the unionized workers receive a 20 percent pay increase, the average hardline retailer could see a 10 percent to 30 percent decline in earnings per share in 2010, assuming that none of the expense is passed along to consumers.