When economic belts tighten, the business rules of engagement change
I laughed when I read that 16 big name retail chains are asking their landlords if they can pay their rent monthly to help cash-flow during the current hard times. You might as well ask Jaws to stop eating swimmers. Apparently, those scratching around for the rent money include BHS, Boots and The Carphone Warehouse.
Even so, if we can all stop sniggering for a minute, there could be a serious point here. Which is that when economic belts tighten. the business rules of engagement change. Of course, at this stage, all we can be certain about is that the European economy is heading south. But logistics professionals should, perhaps, start to readjust their business thinking.
By my reckoning, this is the fourth major economic downturn (possibly it will be a full-blown recession) since I started writing about business all those years ago. All have had implications for logistics.
First, there was the oil shock in the 1970s – two shocks to be strictly accurate, one in 1973, the other at the end of the seventies. That rushed the question of distribution costs to the top of the logistics agenda.
Then there was the downturn of the early eighties. That crushed the lifeblood out of a lot of Europe’s manufacturing industries and led to a wave of M&A in the later eighties. One of the logistics spin-offs was the growth of highly automated mega-warehouses. Then there was the early nineties recession, which led to a savage drop in consumer spending – the last time high street giants really felt the strong winds of economic realism. By the mid-nineties, many were starting to look seriously at how they could sell more online.
But what strikes me about all of these downturns, is that the reaction has always come afterwards. Not many have thought about the changes they ought to make if times get tough before their cash-flow hits the fan. It’s almost as though they need to feel the pain before they can find the gain. Will that be true this time around? For most companies, I guess that might prove to be the case. But not all.
What strikes me is that some parts of the economy are doing better as a result of the downturn – the low cost supermarket chains, for example. It’s a truism that when money is short, prices must fall. Prices will be under pressure. But those who succeed will be those that learn how to structure their pricing to minimise the bottom-line hit.
One approach to this will be to offer customers different service levels. Cleverly done, this provides an opportunity to segment the market and seek out customers who are willing to pay for a premium service.
But offering customers premium delivery services becomes difficult if stocks have been squeezed too tight. And inventories are usually among the first things to get squeezed when cash is short. Cutting back is fine when stock has been allowed to rise to levels that are on the generous side. Where stock is already under control, cutting more can lead to worse customer service – which may eventually drive buyers away.
So that means that decisions on stock levels really ought to be the result of It’s almost as though they need to feel the pain before they can find the gain. sensible and informed debate between logistics and the sales and marketing teams. Not forgetting, of course, finance who will probably be driving the move to cut back. The key point, as I’ve indicated, is that deep or long downturns – this one may turn out not to be very deep but quite long – usually lead to some important strategic change. The winners spot that, the losers don’t.
This time, I think we’ll see online sellers carving a larger slice of the sales pie in both retail and business-to-business. Firms which provide added value for customers should do especially well – for example, supermarket deliverers that unpack your shopping. Logistics operations that learn of ways to build in extra customer value will help their firms become winners. Which is good news for them.
But bad news for those 16 high-street chains seeking easy payment rent plans. They will have to look extra hard to find their landlords’ soft spots. That could prove as tough as hunting for a shark with no teeth.
Peter Bartram is a business writer, journalist and author of 20 books.