Investing in an Economic Downturn


Isaac Krakovsky, Vice President, SAP Retail Group

The official definition of recession is when GDP growth is negative for two consecutive quarters or more. Many experts say the United States is actually in a recession now: GDP is slowing, businesses are expanding more slowly, employment is falling, housing prices are down, and gasoline prices are rising. These are certainly not indicators of a growing economy.

The impact of recession on retailers is multi-layered. It causes the size of the overall retail pie to shrink as consumers are delaying or cutting back on purchases, and allocating more of their disposable income towards increasingly expensive necessities such as gasoline and food. It challenges CIOs to deliver projects that have a high degree of certainty on their stated Return on Investment. The typical response for a retail organization in this environment is to cut back on capital projects (investment), slow down store expansions and remodels, reduce staffing at the stores, and begin a cycle of promotional activity aimed at bringing in more customers - at the expense of margins. All this is an effort to wait out the recessionary storm.

Best-run retailers see an opportunity. They realize that now is the time to increase spending on in-store training to increase the conversion rate of shoppers into customers. Retailers that improve customer service levels at the store, in the call center, and on-line are much better positioned for a bigger share of the consumers. wallet in tough times.

In the scramble to find ways to increase revenue, retailers are looking to improve their multi-channel experience or create an e-commerce site if one doesn.t already exist. Web stores typically generate more revenue than the largest retail store in a chain. In a recent research report sponsored by SAP from Retail Systems Research, indicated that 62% or retailers responded that Multi-Channel customers are more profitable than single channel shoppers. Retailers need to deliver a consistent shopping experience and customer service level across all channels to cultivate more of their customers into multi-channel customers.

Scheduling customer service staff in all channels of the retail business becomes even more critical during recessionary times. Employees are the 2nd largest expense for retailers after inventory. Optimizing the workforce to ensure that staffing aligns with traffic flow is something that should be on every retailers list of focus areas. An optimized workforce will able to help retailers reduce overstaffing and understaffing to support customer service and operational in store tasks.

In an effort to bring more shoppers in the door, retailers become more promotional in a recession. Without a concerted effort of; focused optimized promotions; an efficient supply chain delivering the right inventory levels; and flawless store level execution, these efforts can be less than effective. Recessionary times require precision marketing, not a shotgun approach.

All of these opportunities require new or changed process disciplines combined with technologies that may or may not already exist within the organization. This is the inflection point. Best-run retailers will seize the opportunity to leapfrog their competition and bring the best technology solutions into their organizations at a time when other retailers are cutting projects and standing still.

As the Fed responds by lowering interest rates, credit becomes cheaper. This is when best-run retailers will make the investments in capital projects that drive revenue and cut costs. Scrutiny on ROI is critical and these initiatives should be able to deliver significant value.

Investing in a downturn may seem counterintuitive but if retailers invest now, they will be in a great position to capitalize on these investments when the market turns around and will be ahead of any competitors who decided to cut costs and wait out the storm.

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