Storehouse: Bottomed Out

Jan 01, 2002 10:30 PM  By

If good sales cover a world of evils, then perhaps falling sales reveal myriad opportunities for today’s retailer. Or so we tell our clients who perceive the need to develop operating infrastructure and enlist the assistance of consultants in both good times and bad.

With industry reeling from the current economic debacle, examples of retail disasters make headlines daily. Some top retail consulting firms are taking defensive measures, conducting layoffs, placing associate partners on leave, and borrowing money in reaction to sizable drops in their client project backlog since March 2001.

Fishing for help

Two things must be considered regarding bad news within the retail sector. First, healthy economies tend to incorporate self-correcting mechanisms. A macroeconomic principle exists that dictates that a rise in the U.S. dollar versus the yen and euro can induce a corresponding rise in the U.S. trade imbalance, which in turn can prompt lower demand and a consequent fall for U.S. dollars. The retail industry, although a lagging economic indicator, is no exception to this type of balancing mechanism.

Second, soft economies, far from dictating a reduction of operational network development activity, rather provide circumstances in which it is advantageous for the retailer to capitalize on infrastructure development.

Take a look at the quandary in which our industry consultants appear to be. Neiman Marcus is rumored to have cut back to use of only one smaller consulting firm in the last few months. Other retailers have followed suit, contributing to an estimated 25% to 30% downturn in the retail consulting support industry alone. Large retail consulting firms are scaling back staff at a record pace.

Typically, these firms support clients on longer-term projects. In robust performance periods, retailers undertake projects that mesh well with the strengths offered by the larger consulting resources. Such initiatives include information system maintenance support; IT development; business/ERP system replacement; activity-based costing and supply chain projects; and business process reengineering programs.

Quit swimming

Now examine the rising client workloads of small and medium-sized development-oriented consulting firms. Whether at the boutique shop of five professionals or at the modest 50- to 80-person firm, retail client project bookings are running at a rate higher than that of even the roaring mid-’90s. Smaller consulting resources are traditionally brought to bear in situations that require close support for a retailer’s in-house team, quick execution, and meeting a defined end time. During softer sales periods, retail companies undertake projects in which restructuring can act as a defensive tactic or a growing retailer can capitalize on the lower cost of resources. These include process improvement, engineered performance standards development, facility acquisition and design, DC retrofitting, and restructuring of transportation systems and terms.

These projects can have a dramatic impact on the cost structure of a retail operation, yet do not require a horde of 20 consultants three years out of college. Good sales do cover a world of evils. As a colleague of mine used to put it, “When the lake water level falls, you quit swimming because it’s a good time to clean out the lake bottom.”

Roger Cunningham is a partner at Atlanta-based distribution consulting firm DCB and Company. He can be reached at rogbc@mindspring.com.