Retail finance executives cut where and what they could in 2009, including marketing budgets, but the flexibility of their marketing partners and emphasis on productivity allowed them to maintain or even increase their advertising outreach.
This was among the key findings in a survey of chief financial officers from 26 specialty and department store retailers in the U.S. and Canada conducted by Karabus Management Inc., the Toronto-based retail advisory subsidiary of PricewaterhouseCoopers LLP. The 26 stores participating in the second-annual cfo survey ranged in volume from $140 million to $9 billion, with 46 percent public and the remainder private.
Forty percent of the cfo’s surveyed said they’d moved away from traditional broad-based advertising and toward more targeted promotions geared to existing customers, and half indicated that, because of savings offered by their media and marketing partners, they were able to cut back on marketing expenditures without materially affecting their customer outreach efforts.
Although a “significant percentage” cut back on overall marketing budgets in some way, none of the cfo’s interviewed indicated their firms had cut their advertising, opting instead to increase or at least maintain it to offset the effects of reduced traffic and spending. However, 40 percent of those that reduced their overall advertising and marketing expenditures compensated for doing so with initiatives involving customer-relationship management, customer-specific promotions and other marketing tools. Just 5 percent increased overall expenditures to gain market share.
“There is a trend towards introducing science into circular and catalogue distribution to effectively target customers and maximize the return on investment from their advertising,” said Antony Karabus, chief executive officer of the firm that bears his name. “And you’re seeing marketing executives as well as marketing vendors become far more accountable.”
He also noted department stores, more so than specialty stores, were jumping into social networking opportunities rapidly.
The study revealed that many retailers still have a great distance to travel to take advantage of e-commerce opportunities. Seventeen percent of respondents didn’t have fully operational and transactional e-commerce sites, but were planning on enhancing their sites’ functionality in the near future. On average, those surveyed have sold over the Internet for five-and-a-half years and e-commerce accounts for 6 percent of company sales. Online sales improved for nearly half of respondents, and 44 percent said that e-commerce revenues were growing faster than overall sales.
For holiday, the cfo’s expected sales to decline 1 percent, but were operating with 7 percent less stock when measured on a same-store basis. Seventy percent of them had reduced stock levels at a rate greater than their declines in sales. Additionally, 35 percent expected increases in comparable-store sales for holiday, while the remainder expected decreases.
“But the picture is improving,” Karabus said. “One retailer who expected a comp decline of 10 percent two months ago is now projecting a 3 percent drop.”
He emphasized retailers “acknowledge the risk of owning too much inventory and realizing lower margins and reduced profits from markdowns outweighs the risk of failing to maximize holiday sales due to leaner inventory levels and corresponding out-of-stocks.”
However, the approach to inventory has become more studied. Thirty-six percent of respondents identified flowing goods closer to need was the most important factor in year-over-year inventory reduction, while fewer — 28 percent — designated lower open-to-buy quantities. Assortment and vendor editing ranked third, with 16 percent identifying it as their top priority.
Although most retailers are not obtaining rent cuts, many indicated they were getting more favorable terms in areas such as cotenancy and “kick-out” clauses. Landlords have seen an improvement in their access to financing and are reluctant to negotiate price, particularly in top malls, unless a retail brand is considered crucial to the tenant mix.
Thirty-five percent said their efforts to renegotiate leases had resulted in modest savings, with some impact on the bottom line. More than one in five — 22 percent — said they didn’t attempt to renegotiate leases. Seventeen percent indicated renegotiation efforts in the past year had produced substantial savings in occupancy costs.
Forty percent identified cash flow management as their top priority for the holiday season, followed by tighter inventory control (24 percent) and additional cost savings (16 percent).
“The cfo’s surveyed are focused on the right priorities — you never go out of business for having too much cash,” Karabus noted, adding his firm continues to see “significant opportunities to drive productivity out of the merchandise-planning function to increase gross margin return on investment. We see this as a critical tool to improve sales and gross margin dollars in an essentially flat comparative sales environment.
“As we approach 2010, retailers today are much better positioned than they were a year ago, with streamlined operations, leaner inventory levels and more stable debt positions,” he said. “While the answer of when the consumer will return is still unclear, retailers need to remain focused on driving efficiencies across their operations to best position themselves for survival and success when the consumer returns.”
As to when that would happen, he would only say, “Stores are already comping against horrible numbers. Eventually, they’ll turn positive. It’s just a question of when.”
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