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Industry analysts say cutting costs and managing conservatively are more imperative than ever.
This story first appeared in the November 24, 2008 issue of WWD. Subscribe Today.
“Right now this is survival mode for everyone,” said Allan Ellinger, senior managing partner of Marketing Management Group. “While you can’t always control your sales, you should always be able to control your expenses. Every business leader needs to manage his expense structure, and every line item within it, on a daily basis. You should be going into next year with a sales plan that is extraordinarily conservative, and an expense structure that brings your overhead down so you can maintain your margins and guarantee you can get through the year unscathed and ready to rebuild when the economy improves.”
Andrew Jassin, partner in the Jassin O’Rourke Group LLC, said, “Although companies cannot economize their way to prosperity, they can protect their businesses by economizing, especially in down-markets.” He said cost-saving measures need to stem from the top. In other words, taking a private plane to a bailout meeting would not be highly recommended.
“Every company needs to keep morale as high as possible, but cut back at the same time, which means on parties, lunches, travel and bonuses. It comes from the top down: Top executives need to lead by example and tighten their belts on their cars, lunches and bonuses,” said Jassin.
“The issue is not really the Christmas party,” added consultant Emanuel Weintraub of Emanuel Weintraub Associates Inc. “You need to do that, but it won’t save the company. The most important thing right now is having merchandisable product. The way you have enough money to create great product is cutting elsewhere. The product cost is in the supply chain and freight costs — not in the Christmas party.”
From the retail perspective, Sharon Zackfia, retail analyst at William Blair & Co., said, “There’s a reality here: Most of these companies’ comps are down 10 or more, and there has to be a move to right size the cost structure to match the sales. Hiring freezes plus streamlining departments that aren’t as necessary in this economy are good places to make some tweaks.”
For example, Bergdorf Goodman laid off 30 employees, while Lord & Taylor eliminated between 100 and 150 of its staff as part of a long-planned restructuring.
Zackfia said it gets a little more complicated with sales commissions and pay cuts. “Executives tend to be bonus driven and they certainly will get hit on the chin this year with bonuses cut, but firms need to be careful to not cut away at their best people in the field by cutting sales commissions. You don’t want to replace skilled labor with less skilled labor — that was one of the things that went wrong with Home Depot and Circuit City,” she said.
She also noted that delaying or canceling new stores could put a retailer at a competitive disadvantage. “In terms of delaying or canceling new stores, the question is, where are these new developments, will the other stores still show up and will people move into those new surrounding residential developments?”
As far as marketing expenditures, she recommends staying the course. “With marketing, most people shouldn’t quit their marketing spend to drive more traffic — that’s counterintuitive. But raising the marketing spend probably doesn’t make a lot of sense, either.”