How to cope during 'normal' times.
Furthermore, it tends to be a period of consolidation rather than growth with weaker areas of operation being closed or sold off. The huge corporate write-offs of the fourth quarter of 1983 are the results of this type of reasoning.
How should management react to the return of normal times? With profits on the rise, it is a pleasant time, but it's also a very delicate period for management. You should retain much of the tough attitude that resulted in stripped down costs, yet it is an ideal period to take advantage of opportunities that have opened up during the recession. Stated another way, you need to remain hard nosed, but you also should have the courage to risk capital and expense dollars on new opportunities.
Keep lean and mean. Here are a few ideas: * Return on Equity
Let your people know that a treasure chest has not opened just because profits and the future look brighter. Stress return on equity. Before approval is granted for any new major investment, make your employees submit a pro forma P&L that produces a 20% or more ROE in the third year. Consider making the ROE doubly important by making it the basis for long-term bonus payments. Talk it up. * Overhead Containment
Keep the lid on overhead. Make your people recognize the total cost of new employees rather than talking about only salary dollars. A $30,000 salary will suddenly loom as a $45,000 cost. Don't even discuss the addition of another supervisory level. That kind of move signals to the troops that an easier expense attitude is here. * People Budgeting
Let your people know that you are serious about holding the people line. Require a budget of all new salaried positions that are recommended for the coming year. Salary and total costs along with the need and justification must be submitted. Let them know that in cases other than real emergency situations, requests for additional personnel not included and approved in the budget will receive a negative answer.
If you can hold the line, being mean and lean will accentuate your profit growth. Take Advantage of Opportunities
It is difficult to be a hard nose on expense control while at the same time being open to new, rather risky opportunities. But the management that has this ability is the one that will move into the lead during the coming few years. It must be kept in mind that there are two types of risks available: the "reasonably sure" bet and the true risk move. Because of the major uncertainties that still exist in the economy, my inclination would be to concentrate on the "reasonably sure" bets for your investments and expenditures.
Let's consider some potential moves. * Remodels and Enlargements
We all know that well thought out remodels and enlargements of existing stores are the closest thing to a sure bet in retailing. They are expensive, but you are dealing with a low initial rent structure and with a known volume from an existing customer base. Often these stores are in areas with little land availability, thus insuring fewer competitive changes in the future. Moving rapidly with this approach fits a management that has high ROE demands and an objective of maximum volume and profit per store rather than increases derived by an ever increasing number of stores. * Mergers
Acquisitions should be considered in light of the more liberal attitude toward them existing in the federal government. While they are less certain of success than remodels, mergers with like kinds of retailers, especially in areas of your current operations, can greatly improve your efficiencies. Over recent years companies like A&P, and more recently Grand Union, have sold off large chunks of their problem stores. Aggressive managements operating in these areas are taking advantage of a relatively sure way of further improving their productivity. A basic truth is that superior real estate locations are the key factor to retailing success. Many mergers are simply huge real estate deals that help companies produce coverage that could be impossible to achieve otherwise. * Customer Attitude Studies
A sure bet is money wisely spent on getting to know your customer. Implementing merchandising and marketing strategies for new stores without customer input is pure foolishness. If these studies were cut off by the recession, reinstate them. They are essential. * Vertical Integration
When you have the volume and expertise, any time is a good time to install basic manufacturing that will broaden your vertical integration. Don't get fancy and attempt to build the Taj Mahal. Nor should you consider producing anything but basic products at the start. If you do this wisely and have the required volume, this should produce results exceeding your ROE objectives. * Service Departments
I have seen several companies that have launched into combination service deli/bakery departments, adding this responsibility onto an already overloaded meat supervisory staff. This is frugal, but not too logical. These service departments require large sums of money and store space, are highly technical, run with very high payrolls, and require consistent product quality. Money invested in a highly skilled supervisory technician should receive quick and positive consideration.
I believe, at this time, true risk ventures should be studied even more than usual. Things like acquiring a new business foreign to your operation should rank well behind some of the above-mentioned "reasonably sure" bets. Now is the time to maximize on the areas in which you have meaningful positions and where your people's expertise lies.
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|Date:||Apr 1, 1984|
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