And below is part two, featuring advice from Greenlit Brands CEO Michael Ford, former Target Australia CEO Launa Inman and Camilla CEO Jane McNally about the lessons they learned during the Global Financial Crisis of 2008 and how they apply to the current environment.
CEO, Greenlit Brands
Experience: We all experienced the GFC – I was CEO of The Good Guys at the time – and the principles of dealing with a downturn are pretty much the same, except in the current situation, we have the added benefit of a more dynamic channel in e-commerce.
Approach: The Good Guys had a phenomenal sales culture that we benefited from enormously. We also had a forensic focus on our inventory stock turn. Suppliers were going broke left, right and centre, so it was all about the efficient management of inventory. In those days, we used very strict criteria around stock turn or inventory turn – that’s the rate and profit margin at which you generate working capital.
Of course, we also had a very stringent focus on expenses. Some of your variable expenses like marketing come under scrutiny. You negotiate very hard with landlords on rental renewals. You look at all of those controllables very closely. But the biggest risk is buying and the efficient management of our working capital.
Advice: Any CEO is measured by the profit margin they generate from the turnover of their inventory, so it’s critical to always measure your return on working capital.
One of the concerns analysts have about the current market is that some retail brands are getting over-inventoried, or overstocked. That’s really dangerous because if you’re not selling stock at the appropriate margins – and bear in mind that margins are very much under pressure in the current climate due to excessive freight costs and rising inflation – then the only way to get rid of your inventory is to discount it.
We’ve seen that happen in the US, where Target has recorded two very poor quarters, and Walmart is not reporting solid results because they’ve lost control of their working capital.
Some of these retailers have gotten into trouble because they foresaw the challenges of the supply chain – the shortage of containers and container ships – and they overspeculated on their inventory, which is just a gamble. It’s like going to the roulette table and betting on odds that are not going to deliver. They committed to a speculative view that the market was not going to change, and there were not going to be more containers or container ships, and therefore, decided to buy inventory to stock their shelves, because you can’t make sales if you don’t have inventory.
But you’ve got to be very careful because if you over-speculate on your inventory and your inventory builds up, then you’ve got to discount your inventory to generate cash. It’s a vicious circle, and your earnings go out the back door when you lose control of your margin.
Of course, you also have to manage costs, but that’s always important. Whether you’re pre-crisis, in the crisis, or post-crisis, you have to be very conscious of your costs and manage them judiciously and efficiently. But managing your working capital in this environment is probably more important than showing agility through the reduction of overhead and expenses. It’s the secret sauce.
Non-executive director, Super Retail Group, and Chair, Melbourne Fashion Festival
Experience: I was CEO of Target Australia during the GFC. It was a very challenging time because, similar to now, the entire world was facing a potential recession and crisis. The governments initially stimulated the economy, so there was a huge uplift in consumer spending, but once that was spent, there was the reality of living on what one earned and being employed was key.
Liquidity was an issue, property prices dropped and with it consumer confidence and the Australian dollar dropped dramatically against the US dollar.
Approach: As a retailer, we considered our strategy carefully and studied what was important to our consumer. Today, with data analytics, shopping habits are far easier to assess. Traffic is key, whether it be online or in the store, and the experience has to be seamless. We spent an enormous amount of time in the stores, as online had not really gained huge traction then. We spoke with customers, watched them shop and planned accordingly.
Some key things were evident: It was the end of the winter season and consumers were unlikely to buy more winter product unless it was on sale. With liquidity being key, we knew that if the product was not selling now, it would not sell in November, being summer, so we had to take the markdowns and be ruthless.
All too often, especially if there are supply chain challenges, retailers will be reluctant to take the deep markdowns required to clear the stock. Unless the product is truly classic and can be packed away for another year or season, you need to be bold and take the markdowns now. Cash is king.
Advice: Really understand what you as a retailer are famous for. What do customers immediately think of when the name of your brand is mentioned? Target, at the time, was all about childrenswear. Regardless of recessions, children still grow and require clothing. We really concentrated on the category and defended our market share at all costs.
We knew our value proposition was one of great style, great value and great quality, and we did not deviate. This was more important than ever. People might have been buying less, and wishing to pay less, but it did not mean they were not still seeking style and quality and wished to look good.
Stock up on key items and ensure your size curve is appropriate for online and every store. Know your demographics. All too often a sale is lost because the size is not available.
Do not go too basic. There has to be a reason for the customer to update their wardrobe. Drop in exciting product regularly to encourage repeat traffic. Watch your inventory and most importantly watch your expenses.
Buy forward cover wherever possible. With inflation you need to know what you are going to land the goods at. The Australian dollar is likely to yo-yo around with the uncertainty ahead. Remember you are in the game of retail, not in the game of financial speculation.
If you have commenced a capex spend, endeavour to finish the project. Technology and data analytics are not something you should be cutting back on. Reassess your expenditure priorities and focus on those that will give you the biggest uplift.
Finally, and most importantly, be upbeat with your people.They are key to the organisation getting through the challenges, and the front line people are so important. Every customer should have a good experience and a smile – and pleasantries cost nothing!
Experience: I clearly remember the 2008 GFC. I had just begun my first CEO role in a listed business, which had substantial underlying losses, no committed bank facilities and a large number of unoccupied leases. It was certainly a learning experience/trial by fire, and one which we were fortunate to survive.
Approach: Taking over a loss-making business during the GFC presented several major challenges. The primary ones being a run on credit, keeping the team stabilised through a time of necessary cost constraints and cutting, and, at the same time, innovating for business turnaround.
I remember vividly driving home one day and manually calculating if we would make the 2000-person payroll next month. That’s stressful (we made it FYI)!
What our team developed through that period was an almost “war time” sense of bonding, closeness and surviving against the odds. That extraordinary pressure brought clarity, vision and focus. We moved mountains on a tiny budget. For example, I remember buying a basic second-hand web platform for £5000 in 2009, and the team then developing it on a shoestring to become 15 per cent of the business mix within 18 months.
Clear communication, and generating that team spirit and motivation, were vital to survival. Equally, keeping all financial stakeholders informed and on side with plans. Financial innovation and a different way of doing things – became just as important as range re-invention.
More recently, at Camilla, we found ourselves navigating seriously uncharted waters (alongside the rest of the world). In all our “risk ratio” matrices, a global pandemic was almost non-existent until February 2020. Now it will remain a permanent feature – even if it is about to be overshadowed by global recession and climate change.
I confess that Camilla Franks and myself experienced a ‘couple’ of days of quiet panic – but then we resurrected that survival spirit and decided to embrace the necessary change and adjust our core ways of operating. We have an exceptional and supportive team at Camilla and place great emphasis on group leadership and joint accountability. Over time we have developed our own communication shorthand, and that’s enabled us to align and make decisions quickly and decisively.
Everything from supply chain, to design process, to the way we connected with our customers and nurtured our workforce, was evolved to face this new reality. What we perhaps didn’t anticipate, was that we would come out the other side of this challenging time with burgeoning new categories, more efficient processes and platforms, and a community which was more connected than ever.
Advice: Communicate very regularly to your whole team (livestream is a godsend for remote members). Be honest and transparent at all times – even if you are delivering tough news. This not only helps to maintain trust, but also a problem shared can be a problem halved. You can’t afford to be opaque when people are afraid, or they will create their own version of the truth.
Keep your stakeholders and business partners close and onside in the good times. They will be much more likely to support you in the bad. It’s a well-used phrase, but cash really is king in recessionary times. Use it as both a defensive and offensive weapon. Some of the best deals – leases or software for example – can be made in the toughest times.
Develop a fast and agile way of working. Crises are never singular – you have to be prepared for some rapid decision-making and response. Shorten decision flows and empower your teams (whilst keeping one another informed). Be adaptable, open-minded, and trust your teams. Encourage innovation.
Be kind to yourself. The responsibility can feel overwhelming. There will be many long and sleepless nights, but lean on your network as well as your team. Organisations such as the ARA [Australian Retailers Association], for example, provide a safe haven in which to brainstorm ideas, learn from others’ experiences, and reduce isolation.
Attitude is everything in a crisis, and my advice is to operate with confidence, learn fast, stay true to your brand and customers, and empower the magnificent humans in your business to be brave.