Monday, August 21, 2017

The Death Spiral of small retail

I work with retail now, and I started to notice interesting stuff every time I buy something.

My daughter just came back from Russia with a dream – a hoverboard (aka gyro-scooter). I wanted to try it before buying, so Qoo10 or Lazada was not an option. After a bit of search, I found a shop nearby. We come there, and it’s closed. On Sunday! I already saw the signs of retailers “Death Spiral” as taught by prof. Jack Cohen at INSEAD. So I’m not surprised with their poor selection of models and colors when I get to the shop next day.

Poor advertising, poor selection and failure to keep the lights on – these are very recognizable turns on the Death Spiral.

It is natural for a business to run in cycles. Good times pass and hard times come. When cash is low, it is simple to cut some “frills” like advertising. But this undermines the sales – new customers don’t know about you.

The cash gets lower, and the next thing to cut is stock. Why should I buy the new stuff if sales are weak? The thing is – your A products will run out of stock first. And here you stand with B and C products in stock teaching every customer that you are a bad shop with bad products. Not worth even checking out next time. 

The cash gets lower, and you try to cut operating hours. Getting rid of employees seems reasonable because it’s pretty much the only flexible cost that you have left. You can do the math and cut the days or hours when sales don’t cover salaries. And yet you keep teaching people walking by that you are closed and not worth checking next time they need something. The end is near.

Is there a way out?

The deeper you go down the spiral – the harder is to get out. But you can try certain things (in that order):
  • Cut costs that don’t undermine your effective advertising, the assortment of A and B products and open hours.
  • Use financial reserves that you created during good times (you wish, nobody does that).
  • Try to delay payments to suppliers and your landlord. All my small business experience tells me – it is very possible and underused by SMEs.
  • Seek external funding. Yes, even if it costs you interest – still better than cutting advertising.

If nothing works – think about exiting. If you are forced to step on the Death Spiral, then you are better out of business faster with fewer losses.

PS By A, B and C products I refer to ABC-analysis.

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