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Impact of economic slowdown on retail scenario
Submitted by bhanu on Wed, 02/18/2009 - 16:21.
Compare the exuberance that existed in the retail sector one year ago to the extreme cautiousness of the present date. These days, the newspaper are constantly flooded with the bad news from this sector, like the continuous scale downs, incomplete projects, retail chains going bankrupt, inability to meet the expansion plans etc. It’s a common understanding that retail business goes down or up in line with the overall economic sentiment. In fact retail sales figure works as a leading indicator for the economic scenario as it can be taken as a proxy for the overall consumer sentiments.
First, lets think about the factors that forces the retail sales to go down:
Weaker sentiments: Customers are unwilling to make those hefty purchases. The value consciousness increases and the customer starts avoiding things that he or she might not use in near future.
Liquidity Crunch: Due to the uncertain environment and bank’s reluctance to lend at a favorable rate (coupled with the fact that raising equity is almost impossible due to equity meltdown), the retailers find themselves cash-strapped. Forget about any expansion, they are having hard time even in arranging for the working capital
Profitability squeeze: As customers become more value conscious and sales starts falling, the immediate reaction is to drop prices, thus squeezing the profit margins
But it’s not that the picture is absolutely gloomy. There are areas of respite as well; people are not going to cut down on the very essential items. Now this perception of what is essential and what is not might change from one person to another, but there is nothing to deny the fact that there are a few product categories which are considered to be essential by the mass. An interesting report conducted by BIGresearch in the US gives an indication of this differentiation.
This makes a lot of sense In the American context; Indian consumer also has a similar mental list, though the exact items and their order will be quite different.
Retailers who deal with such essential products could never see the exponential growth rate and margins that those swanky high end fashion retailers enjoyed. But now is the time when such retailers won’t feel that much pinch either. In fact those who go all out in delivering more and more value to their customers in such troubled times through refining the pricing, assortment and experience to suit the current scenario are likely to break out and emerge much stronger after this slowdown phase.
This scenario is depicted briefly in the graphics below, which I believe is self explanatory:
Not only such breakout possibilities but there are some guaranteed soothing factors helping all the retailers in general, like the lower rentals and the stabilized(and even decreasing for some shrewd companies) salary expenses.
In fact bold retailers can use such times for some internal transformation exercises and make themselves as efficient, lean and flexible as possible. Employee resistance to change is at an all time lower level and top management is not engrossed in those maga and hectic expansion plans, there is no better time to put your house in order, before the guests starts coming in again, perhaps in just about an year from now.