Economic Trends and Retail Business

A quick survey of the recent headlines in newspapers and business news sites show that two of the most popular topics are the cost of oil and whether on line retail will cause brick and mortar stores to fade into history.  While many retailers may feel immune to these trends, history has shown this not to be a wise business strategy.  Everyone is familiar with the effects energy costs have on their business but recent market activity is scary.  An article on Bloomberg points to trends that any time energy costs increase by greater than forty percent, a recession is close at hand.  We have all types of economic forecasters telling us we are coming out of the 2008 economic turndown but energy costs have risen forty seven percent since October.  If we want to blame that on recent sanctions against Iran, we can but inventory levels have been increasing.  True, gasoline inventories have decreased as pipelines actually struggle to move raw materials to refineries but we all know eventually the higher cost of crude will move into an already bottlenecked refining process.  As these costs eat into the disposable income of our customers we know that our margins and sales will be squeezed.  Convenience retailers may think they are immune since we deal in consumables but again history shows our customers are becoming more disciplined and better informed.  Margins are already squeezed as consumers seek the lowest price and are willing to plan their purchases accordingly.  Traditional low margin destination purchases such as beer and cigarettes may continue even as the consumer trades down to lower priced brands but impulse products will suffer, lowering the average ticket and average margin of the purchase.  How will retailers offset these decreasing revenues while absorbing the higher costs of fuel, energy and wage pressure?  Now more than ever, companies should be looking at strategies to increase revenues and margins.  Most retailers have already cut operating expenses significantly and are reluctant in today’s market to increase capital expenditures unless a “guaranteed” return can be demonstrated.  Making a store seem new and pretty may have a temporary lift but customers soon grow to expect that presentation as a given and without new revenue streams, the retailer suffers.  How many beautiful operations have called it quits lately?  There are some fragmented markets that survive due to lack of competition but globalization of markets will soon eliminate this as chains with better operating scales chip away at these markets. 

On line retailing may seem to be impossible for some retailers, especially convenience stores but government and creative lobbying could soon change that.  Witness the recent ruling for on line lottery sales.  Although it is a low margin service, we all know the draw lottery has provided.  What would happen if a customer is allowed to shop on line for the best gasoline or cigarette price and then make the purchase and only accept the actual physical delivery at a retailer’s location?  Sound far fetched?  Why?  Freshness, interstate trade regulations and method of payment are the only real hindrances to this business model.  Paying for $50 of gasoline on line and simply entering a pin at a dispenser would not be very different than purchasing other commodities on line in the form of a futures contract and just accepting the delivery rather than trading the contract.  As a matter of fact, let’s take it a step further.  What is to prevent a customer from purchasing fuel on line and submitting it to an auction site?  Think of ebay for convenience.  Could be scary but as customers demand alternatives to existing business models, market resources could and will create a system to satisfy those demands.  “Blue Ocean Strategy” by W. Chan Kim and Renee Mauborgne demonstrate quite effectively that as markets become more competitive, the waters become bloody as everyone strives for operational efficiencies.  Earnings calls by Susser and articles on chains such as Huck’s show that retailers continue to cut a few basis points off operating expenses by investing in IT systems and soliciting suggestions from front line workers but these will soon be copied and become the norm rather than an edge.  The premise explored in Blue Ocean Strategy is rather than focus on the bloody red ocean, find something new.  Innovate.  Move away from the sharks and demonstrate the value to the customer.  Retailers are spending money on loyalty programs when it has been consistently demonstrated there is very little loyalty left in the market.  Everyone else has a loyalty program.  I had to hold back laughter when being presented a loyalty program and I asked the salesperson to tell me what would prevent this from becoming a commodity and costs of maintaining incentives to the customer would just escalate?  His answer?  Everyone else has one, you need to have one.  Maybe the worst reason in history to participate in a program.  How long will that curve last?  Rather than invest in loyalty, why not use a website to allow customers to purchase fuel at current prices and hedge against cost increases?  Fear?  Lack of technology?  Just don’t know how to do it?  All of those could be resolved.  Your margin is locked just as if they purchased it in the future and the customer would know what their budgeted expenditures are.  Is that a value?  Perhaps.  As mentioned in previous articles, retailers must adapt and change or die.  A wise man once told me there are three ways to make money in business.  Be first, be smarter or cheat.  I don’t cheat.  Who is going to be first?  Think about it. 

When Will We Finally Get It?

The second biggest line on our financials is usually cost of labor.  All these years of pouring over schedules, checking percent to sales, sales per hour, sales per transaction etc.  What has that done for the business?  We focus on our people, providing tools to make sure the finish operational tasks, are honest, clean and dependable.  We spend hours on “training” to make sure they follow operational policies and procedures.  There are varied names for these employees.  Cashier, clerk, customer service attendant and on and on.  Where we seem to miss the boat is; what business are we in and how does this asset contribute to the bottom line?  Other retailers have made the change and when will convenience stores follow?  The primary goal of any retail box is sales.  Yes, we spend hours on marketing, merchandising and store standards to insure that the box is ready for our customers but we all know the most important asset we have is the person who is there for the moment of truth.  The actual transaction of money for goods.  So why don’t we spend time screening or teaching our team how to sell?  Why is there so much focus on operational tasks and so little on sales?  It is a rare chain that talks sales every day.  And when they do talk sales it’s usually number of units per day instead of sales by employee.  When we do look at sales per employee, it is usually from a lost prevention standpoint.  When you walk into a store and ask the person behind the counter what their mission is, what is the reply?  To sell more?  Highly doubtful.  What I propose is a shift in our model to the business plan that many clothing retailers have adopted.  Instead of screening and training our employees how to make coffee, why aren’t we focused on selling the customer more stuff?  Here are some ideas from the initial interview process through the training and operational execution. 

Screening

• Instead of asking yourself when you interview a candidate if they seem honest, ask yourself “Would I buy merchandise from this person?”
• Ask the candidate what they think retailing is about?  We need to look for answers that are sales related.  They should include helping the customer find merchandise, suggesting tie ins or bundles, items on promotion and other add on sales.
• How would they increase the sales in the store?  What ideas or former experience do they have?
• If they have prior experience, where did they rank in the store for sales?  A candidate should know.  It is no different than knowing what your EBITDA is for the month and year.  Each of us has a metric to measure our performance.

Training

• Do we really have to teach someone to clean glass and wipe down counters?  Yes there are operational tasks that are critical such as safety and risk procedures, food service etc. but these are operational tasks.  Is it time to separate the duties into sales and operations? 
• What are the sales hooks and scripts that will work in your location?  New items, promotional items and revolving programs should all be covered.  A day part team member has different sales targets than evening part.  How are we addressing this?
• Value added?  What is the customer getting for their money?  What makes this location different than the box down the street?  How is the customer’s day and life improved by shopping with us?

A Day in the Life

• Is our team member focused on sales or on making sure they take out the trash? 
• Have we provided incentives?  Rankings, sales contests and daily focus help motivate those that we need to retain.  If one of our team members is not focused, then we need to consider re-assigning or possibly even upgrading.
• Have we reviewed division of labor?  Do we have our best sales people filling coolers and other repetitive tasks when they should be interacting with customers? 

This article could go on and on and will be expanded in the future.  When I started in the business one of the most common phrases I heard was that sales cover a multitude of sins.  Many companies are trying to reinvent the wheel by designing new stores with all the bells and whistles.  Retailers are still neighborhood stores.  They do not differ greatly from the day when a customer would walk down Main Street and visit all the specialty shops.  Yes, many of the mom and pop stores are gone thanks to large box retailers but our customers still want the experience of interacting with someone who knows the business, is friendly and can make suggestions to improve their life.  Product knowledge, the ability to provide solutions and a true interest in the customer’s well being are the best merchandise we have to sell.  So when do we get it?

Consumer Trends Report

Excellent report on changing consumer trends.  Download the report here.

Convenience Stores and Customer Services

Convenience store operators are always looking for that high margin product to help offset lower margins in cigarettes and beer.  The latest fad has been food service.  Consumable, low cost of goods and relatively low cost of entry.  Buy a freezer to store product, thaw or heat, put on display and rake in the money.  As we discussed in our last blog, there is an ancillary risk; the liability.  Just as with Wall Street investments, the greater the risk, the greater the chance of return.  If we create something from scratch, we have a better chance to control the cost of the product.  But we introduce multiple levels of risk in the process.  I had been thinking this over and I began to wonder what happened to services?  Low cost of capital, indefinite hold time, instantly ready for the customer.  Years ago money orders and check cashing were hot.  Lately there was a lot of discussion about postal service opportunities.  But really, convenience stores have not done a very good job on being innovative in developing services.  Video rental came and went and then came back when it could be an automated third party application.  Check cashing seems to have gone the same way.  A few operators use third party services in a piggy back format.  But then I started looking at Walmart.  When they had issues with customers not having an acceptable means of payment or could not cash their payroll checks to shop at a Walmart store, presto, Walmart develops their Money Store concept.  Need a haircut?  Need glasses?  Need just about anything?  Walmart has it.  And for a good reason.  As we all know, the name of the game is convenience.  If I can go to one location and accomplish multiple tasks without having to drive in traffic, find another parking space etc., the customer will likely spend more than planned at that location.  That is why we first starting selling gasoline.  Customer needed fuel, had to pay inside and maybe even come back in for change so we had two opportunities for impulse sales.  Then we evolved to CRIND.  Now we know that up to seventy percent of all people that purchase fuel do not come in the store.  Ouch.  So we run loops on pump displays trying to get customers into the store.  Enticing them with our monthly promotions or a TPO.  IRC.  What ever we can come up with. 

With more and more people becoming electronically mobile, I think the internet and mobile technology will present new opportunities for services.  Face it.  We love having mobile applications but how many times do you either sit and wait while it loads or when it does, you cannot see the data on the screen.  One of the biggest perks with an IPhone is the magnification feature.  What if we could offer the same services at a dispenser for a nominal fee?  You are waiting for the tank to fill anyways.  One of the rules of retail is penny profit.  Watch your pennies and the dollars will take care of themselves.  An extra few cents spent while the customer is fueling times the number of cars on and off the lot?  You already have the infrastructure in place.  Now you can track what services they use.  Just one example.

Now lets look at in the store.  Electronic kiosks are already being used for recruiting and ordering in food service.  What is to prevent us for providing other services for the customer?  I know we have done similar things in the past but did we look at what the sweet spot was for price elasticity?  What new offers could we have?  How about streaming content that is burned to a CD?  Secure access to check your bank account, buy from Amazon, purchase a preloaded debit card, etc.  We need to start thinking out of the box.  Don’t wait until somebody sells you the program at NACS.  By that time, everyone else will have it.  Look around at your life, the life of your customers and customers at other retailers and look to see what they are using that is either consumable or have a high enough penny profit on a sale to incorporate in your business.  Cost of goods is still the biggest line on a financial.  Services can help your bottom line.

Food Service: Risk vs. Profits

One thing that working with various clients does for an individual is teach them new lessons about the business.  Recently I had the privilege of working with a small retailer.  Their major concern was having someone to run their operations.  Previous management had spent hours in the stores but had no structure and no real agenda.  Yes there were operational issues.  Every retailer has challenges that need to be resolved in the short term and in the long term.  But what I was truly shocked about was the liability this company had from food service.  I had thought that every retailer had read all the articles about how one food service liability case could eliminate any profit that could possibly be created for many years to come.  You would think that everyone remembers the trials and tribulations that Jack in the Box faced after their e coli troubles and how many years it took to come back, if only partially.  I have seen companies just operating a thaw and serve program that faced large losses because procedures were not followed and a customer consumed a compromised product.  To put things in perspective, the company I was working with was preparing items from scratch that introduced an infinite number of variables and risk into the process.  So what had this company done to prevent it?  Absolutely nothing.  After speaking with management, it was determined that there were two forces working.  One is called the Superman Syndrome.  In the Superman Syndrome, the client is working under the illusion that they are invincible and that nothing can happen to them.  This is one of the most dangerous illusions in the management of risk.  The old adage, hope for the best but prepare for the worst would hold some wisdom in this scenario.  Too many times management believes they can dodge the bullet but we all know this is just a matter of probabilities.  Eventually, your number comes up.  When it does, it is not a Las Vegas jackpot but a team of lawyers that will be in your pockets.  The other syndrome that was in effect was the Ostrich Syndrome.  Look away, pull up the covers or stick your head into the sand to avoid the reality of the situation.  Denial does not eliminate what could and will happen if steps aren’t taken to control the situation.  It may not be one hundred percent effective but we still have the duty to our customers to do everything we possibly can to protect them and our stakeholders.  The motive to short cut or ignore well established procedures in the name of profit makes even Wall Street look like saints and this is the way a judge and jury will look at the complaint.  Bottom line is, if you don’t know what to do, there are numerous people who have that knowledge. Take the time and dedicate the resources needed.  Analyze your business, train your people and certify everyone in Serve Safe.  Do not accept anything below established standards.  Whether it is equipment, training, certification or procedures, we need to hold ourselves to the same standard we claim to hold our employees to.  Management cannot have the double standard to expect employees to follow procedures when management compromises any aspect of the business due to the syndromes discussed.  To ignore the issue shows an incredible lack of responsibility to your customers.  And eventually, that attitude will catch up with you.

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Resolving Conflict

Why Are Vendors Still Running The Show?

After 30 years in this business I am still amazed how retail can literally be screwed by their suppliers.  I am not saying it is a lack of knowledge, a lack of systems or perhaps just a lack of scale or all of the above.  I thought the old days were over where it was every person for themselves but a recent assignment changed all that.  I am currently working in a very fragmented retail market.  Geographic obstacles as well as a lack of merger and acquisition consolidation has prevented the outlets in this trade area from reaping the supply chain advantages that most larger chains or chains with better density already enjoy.  This particular chain is a start up and does suffer from the all of the above scenario but in examining other chains in the area for a possibility of an acquisition or a roll up, most are years behind in inventory control, cash management and supply chain tightening.  An “independent” culture seems to reign here, usually the result of an entrepreneurial founder that has passed down the business to second or third generation private owners.  While in some cases, such as wholesale and supply, those markets can withstand competition due to high cost of entry, retail is no such animal.  Where there is dirt, a competitor can come in and if there isn’t enough dirt, cash or leverage can accomplish the same effect. Porter’s Five Forces still have credence in our economy and is very relevant in fragmented markets such as this.  Once the geographic barriers provided insurance but with information going global and price inefficiencies being exposed quicker, competition is quicker to respond.  To the good, the company I am working with is making a commitment to install IT systems that will provide them with good data.  To the down side, numbers are just numbers unless you have the human infrastructure to interpret and act on the numbers.  This variable cost as opposed to the fixed cost of the IT purchase is what they still balk from and what could be their undoing in the future.  Even armed with numbers, what is the guarantee that suppliers will provide better costs and services?  None unless there is a larger threat to their survival.  National pressure from parent company?  Very unlikely.  Unified front from retailer market through co-op, buyer groups or brokers?  Have not seen it yet.  Not only are we trying to leap into the future, we are trying to break years of ingrained behavior established by what worked in the past.  Yes, there are some young Turks or nationally controlled chains that are taking advantage of this inequality.  Dollar General is making impressive gains in this market as is McDonalds.  Does anybody see the writing on the wall yet?  If they have, they have not reacted.  Maybe we need to model Nebuchadnezzar and find our Daniel to interpret.  Even so, that is no guarantee to action.  Only when we can truly show a win-win for both supplier and retailer and actually have both parties believe in it will change ever occur.  In personal life and professional life….