The New Management Environment- A Few Ideas

“All businesses in trouble share two characteristics: denial and perseverance in the face of inescapable change. It’s easy to believe in what worked in the past, and hard to step outside our comfort zone and do things differently.”

It does look as though we have some inescapable change going on. And as difficult as that change is and will continue to be, I’d point out that issues of distribution, hard goods margins, lack of product differentiation and others existed long before the economy went south. Growing sales and free spending consumers made it easier to manage (or maybe ignore) them, but they were there.

Last year, and especially in the fourth quarter, we reacted by cutting orders, reducing expenses, and controlling inventories. That’s what you do when customer demand declines. I guess. Maybe I mean that’s the first thing you do. Some of that attention to detail would have been, and is, appropriate to all business conditions. Perhaps some businesses wouldn’t be having such a hard time if they’d been focusing on those management nuts and bolts all along. And maybe they would have had the balance sheet to take advantage of the opportunities the existing conditions present.

Now, we’re all waiting for the recession to end. And it will end, though I probably think that’s going to take a little longer to happen than some of you do. The concern I have, speaking of denial and perseverance, is that there are still some people with unrealistic expectations as to what a recovery will mean.

So I’m going to give you my perception of what the recovery may look like, what appropriate management behaviors could be if I’m right, and tie it to some interesting emails I’ve received and conversations I’ve had.

I’ve written some of this before, so I’ll be brief. But I’d like us all to be on the same page as far as the expected environment goes.

Growth, when it comes, will be a lot slower than we’re use to. Overall sales increases may be harder to come by, but there will be some fewer retailers and maybe fewer brands to share them. I expect consumers to continue to save. The time it will take to complete the ongoing deleveraging will be measured in years, not months. The Federal Reserve has cut interest rates as low as is possible and done everything they can to expand the money supply. Their goal is to get banks lending and people borrowing. Trouble is, banks are busy rebuilding their capital base, and consumers, having turned cautious, aren’t in a rush to borrow any more money. They’ve got to deal with the mortgages, credit card balances, and car payments they already have.

I think it gives you some good perspective to realize that what got us into trouble in the first place (excessive consumption and debt) is what some authorities seem to be hoping will get us out of trouble. I don’t think that’s going to happen. The Bush tax cuts expire in 2010 and I don’t expect them to be renewed. That’s going to take a lot of purchasing power out of the economy at just the wrong time.

Unemployment, always a lagging indicator (and worse than the number looks when you add the number of part time employed people who can’t find full time work), may be slow to decline. I’m concerned this recovery isn’t going to produce a lot of good jobs.

Well, that was cheery. Sorry. Feel free to send me lots of emails telling him I’m too negative. Hope you’re right. If you do email me out of annoyance, please tell me why you disagree with my analysis- not just that I shouldn’t write stuff like that. Hey- we’re trying to run businesses. We need the best information we can get- good or bad.

I wrote with enthusiasm last month about Gross Margin Return on Inventory Investment (GMROII) as a tool to help you increase those gross margin dollars and choose your inventory more carefully. I noted in that article that taking the best advantage of it required that you had and maintained quality management information systems. Last week, I asked a pretty senior manager of a major brand if they knew about GMROII. “Sure!” they said, “But our systems are so bad we can’t pull out the information we need to really take advantage of it.” That was disappointing.

Especially in a slower sales growth environment, whether you’re a retailer or a brand, there’s a lot of money on the table if you can manage your inventory and improve your inventory turns. There is some expense involved in buying the software and hardware you need to establish or upgrade your systems. But the real costs come in converting the data, training, and making maintenance of the system and its data a priority. I can’t say this strongly enough. You’ve got to have and use good systems. Please make the investment.

My online article on SIMA’s retail study and core snowboard retailers lead to an interesting exchange from a retailer whose sales were down 20% but whose profits were actually up due to better management including ruthless expense and inventory control. Not up a lot, they hastened to point out, but up nevertheless. I believe that kind of result is possible with good management practices for both retailers and brands. However, this retailer pointed out that at least part of their success was due to a level of cooperation and enthusiasm from the staff in controlling expenses that just couldn’t be sustained over the long term.

You know what else you can do? You can remember that nobody who’s a manager in this industry (or, for that matter, in any other industry) has ever managed under these conditions. In a lot of ways, we literally don’t know what to do. You know what the good news is? There are no rules. If change in the business environment is dramatic and long lasting, as I think this is, then you’ve got to blow up your preconceptions, be willing to take new approaches, and bring your entire team along with you.

There’s a limit to analysis. When I did turnarounds, we’d refer to “just working the deal.” We weren’t quite sure what the right thing to do was, or what exactly was going to happen when we took an action, but we knew that not trying some stuff and going along the way we had been was fatal. So what did we have to lose? Question your preconceptions. When Target is hiring team riders, they may need a close look.

One of the best ways I know to do that is to go talk to people you haven’t known for 20 years and who aren’t in this industry. Tell them about your problems, issues, and opportunities and see how they react. We spent way too much time talking to each other. I think that tends to reinforce our preconceptions.

Ed Seymour, the Director of Global Sales for Westbeach, emailed me about an interesting approach they are taking with some of their core retailers. As he describes it, under their Affiliate program, they don’t sell any product to certain key retailers, but end up making more money. I suppose that require some explanation.

They work with each store they have this relationship with and agree on a display and a location in the store. They train a key staff member as their brand champion and share the margin with the store after the product is sold. The store never owns the product. He didn’t tell me exactly how they split the margin.

After closeouts and the end of the season, Westbeach takes back the unsold merchandise and puts new stuff in. Stores with their own web sites can banner link to the Westbeach site. They track sales and share the margin with the store the same as if the customer had made the purchase in the store. They also give the retailer 12% of any product sold to somebody in their area directly through Westbeach’s web site.

Ed says Westbeach gets paid faster, the store is more willing to take risks with merchandise, and Westbeach knows right away when a shop starts to get in trouble.

Consignment, of course, isn’t a new idea. But it sounds like the structure Westbeach has built around it is making it more effective.

If you are uneasy from my description of the emerging economy, maybe my description of what others are doing, and what you can do, will help lift you up. You’ve got to get out of the denial and perseverance way of thinking and find the opportunities that are always out there when things change. Get out there and try some new stuff.