Although the U.S. economic picture currently looks bright, we believe there are storm clouds gathering on the horizon. And a big soaker is threatening to hit the U.S. shores as soon as 2018.

Why do we find ourselves in increasingly rough waters? Historically, economic booms and busts have rolled through our economy in fairly steady patterns. And now, even though many consumers are just beginning to feel as if our economy is back on track—while millions more feel trapped under the burden of growing income inequality—economic data actually shows that we are well into our current economic cycle.

So even though it may not feel like it, factors like strong consumption, tame inflation, solid household finances, falling oil prices and more all point to the fact that we’ve seen more of this current economic cycle than of that which remains ahead. (See Exhibit 1.)

zoom iconExhibit 1: Consumer sentiment is near pre–Great Recession highs.And what comes after the boom end of an economic cycle? Inevitably, some kind of bust.

This looming recession will arrive, just factoring in the intricate drivers of the U.S. economy. And if there is any doubt that a U.S. recession is coming, remember that global forces are also contributing to the looming storm. Many of our trading partners continue to struggle in Europe, Latin America and Asia. There’s just no way we can continue at our current pace while the world’s economies flounder around us, given today’s global economy.

Other economy watchers agree. As one Merrill Lynch report pointed out, our current economic expansion looks very similar to its 1990s cousin. That expansion was 120 months long and was ultimately felled by oil prices collapsing and a series of currency crises in emerging markets. We’re at around the 80-month mark in our current expansion.

Meanwhile, a Societe Generale report said that while the chance of a recession this year is under 2%, our current highs are not permanently sustainable and recession will come knocking in 2018 or 2019.

Now what? Execs can continue to operate like sunny days will last through the planning period, or they can start working now to build a revenue engine to power their organization through choppy waters and invest in long-term cost structure changes to drive and sustain profits.

Let’s go through some of the biggest cost-saving moves a retailer can make, using real-world examples to see how the savings stack up. Leading retailers are pursuing many of these cost-cutting initiatives simultaneously—when it comes to cost cutting, there’s no such thing as a silver bullet.

1. RETHINK THE STORE.

There’s plenty of room to lower a store’s fixed costs without damaging the customer experience and, in some cases, actually improve it.

While retailers are understandably wary of cutting labor out of fear of hurting the customer experience, not all labor is created equal. Start by reducing the number and frequency of non-selling activities, such as inventory checking, receiving, moving products from backroom to the selling floor and price changes, and then converting some of those employees to customer-facing work while reducing overall staffing levels—and costs. Basically, retailers should strive to spend as little as possible on any non-selling activities.

One multibillion-dollar specialty retailer piloted several efforts in this area, including redesigning the sales floor to accommodate more of each item, reducing nonproductive sales areas—thereby decreasing replenishment time—and revamping its backroom operations through the use of standardized processes and cross-training teams to share labor across functions.

In pilot testing, the retailer was able to reduce labor hours by 10% and overall baseline labor costs by 3% to 5%. The retailer is investing 25% to 40% of the savings back into the business to improve the customer experience by having more trained staff available at the point of sale and other customerfacing areas, helping to drive additional sales to power through a recession.

Meanwhile, a national footwear retailer reviewed all of its store operations to bring them into line with best practices while developing better store labor standards for payroll planning, budgeting and labor scheduling. As a result of this work, the retailer is expecting a 15% to 40% improvement in labor efficiency for key store tasks, leading to the opportunity to recover roughly $7 million in annual labor expenses.

Plus, future stores fully implementing 1:1 Retailing technology like digital shelf edges and magic dressing room mirrors will be able to provide even better service with fewer staff. This may also include using temporary or flexible staffing models, as startups like Forrge bring this Uber-like model to retail.1

Especially as the recession hits, retailers will cut prices in a bid to remain competitive, so it’s important to devote a significant chunk of instore selling space to revenue generators that are less vulnerable to encroachment by Amazon and other low-price warriors, such as providing services related to the products you sell. Not only are services inherently harder to offer online and in value-driven retail formats, they also help bring customers back into the store, driving up traffic and creating new paths to purchase.

Retailers can also save money—and improve the customer experience—by heavily curating and minimizing in-store inventories and then pushing larger assortments to their digital channels. Having smaller, more locally tailored store assortments helps reduce inventory carrying costs and store footprint and improves margins by reducing markdowns. Several studies show that consumers actually prefer this pared-down in-store experience as well.

For this strategy to truly succeed, it is imperative that real-time inventory availability be trackable across channels and that store associates are empowered to use this data to save the sale.

Using stores strategically can also help reduce shipping costs—consider increasing ship-from-store to help close the delivery speed gap and reduce lastmile charges. And, of course, buy online, pick up in store programs help drive additional store traffic.

Finally, make sure to revisit your store opening plans to see if they still make sense given slower industry growth, lower spending and increasing cannibalization from online channels.

And when you do open new stores, consider how to do it more cheaply. For example, one retailer saved 7% to 10% on planned new store openings by cutting overall site size via reductions to the parking lot, landscaping and lighting—all without compromising the customer experience.

2. WHO’S DOING WHAT?

Instead of building massive internal teams to deliver non-core competencies, consider aligning with and leveraging innovative solution providers, which not only gives you access to the latest thinking, it also helps avoid major fixed-cost burdens.

Take First Insight. Retailers can essentially outsource some of their new product development processes to First Insight, which uses technology to assess the likelihood that a given design or style will be successful.

On a related note, make sure that the services you’re already contracting out are still valuable. Retailers can unlock surprising value by revisiting their vendor base every few years for things like travel, office supplies, building maintenance, contract labor, rentals, marketing and technology service providers—all without impacting customers or internal stakeholders. These types of goods and services represent 10% to 20% of a retailer’s total operating costs, and one specialty chain found that it would be able to save 5% to 20% on indirect spending in each category it revamped.

Even capabilities that remain internal deserve a second look in this cost-cutting environment.

For example, one $8 billion global specialty apparel brand saved more than $100 million by adding more brand-based structure to its organization. The new brand-based P&L and leadership team, consisting of key owners from merchandising, planning, finance and creative services, were able to remove some of the inefficiencies inherent in region- and channel-based organizational silos. This new group was able to reduce the brand’s SKU count from over 5,000 to around 3,000, which also helped reduce development, labor and marketing content creation costs.

This strategy also works for single-country, singlebrand retailers. One national U.S. chain built a center of excellence for its learning and development function, which also had the benefit of standardizing all training across the organization—especially critical for customer-facing roles—and its human resources and accounts payable functions. These efforts resulted in a 10% to 12% reduction in baseline costs.

3. INVEST SMARTER.

With a recession on the horizon, segment growth-oriented investments into two categories: keep and toss.

Solidly in the “keep” category: key growth-fueling investments in a wide variety of cost structure changes, from product distribution and supply chain to technology and labor productivity. You’ll need these to power you through the recession, and they could take up to 24 months to pay off, so start making them now.

Another investment that may make sense in a recession, especially one that impacts different regions at different times, is improving inventory visibility into product flow so that you can react quickly to changing demand. Having this technology in place can also help you route extra product directly to liquidation, as Saks Fifth Avenue and other retailers did successfully during the last recession.

While we’re discussing inventory, when you’re facing a recession, it makes sense to proactively trim back inventory levels, simplify assortments and up the mix of value-oriented products. One big-box retailer is anticipating turns improving from 2 to 3, while also increasing top-line sales by $100+ million, all from this type of work, enabling it to invest in its best-selling, core products.

But other business practices may not be very fruitful, and now is the time to revisit them. One common example for many retailers: massive investments in same-day or next-day delivery that are essential for some businesses but are just nice-to-haves for others and not worth continued investment heading into leaner times.

4. EXPLORE NEW PRODUCT FLOWS.

Changing some key sourcing and product flow steps will help cut costs and, if done correctly, also improve the customer experience.

For example, consider near-shoring. Not only does it help retailers bring products to market faster, helping them to be more responsive to consumer demand and to stay on top of new trends, it’s also not as expensive as it once was and can deliver even higher profits. Plus, as sourcing activities shift away from China, sourcing offices can play a smaller role, saving money.

There’s also significant opportunity to reduce complexity across the product development and sourcing process. Many retailers can also reevaluate their sourcing capabilities, going from working with many vendors with narrow capabilities to developing deep relationships with a few world-class, full-service vendors.

Don’t forget to look at reducing complexity when it comes to materials. One specialty retailer had over 50 active mills and more than 300 active fabrics weighing down its balance sheet. The retailer simplified this picture and eliminated unneeded complexity in its processes by improving internal skill sets and organizational structure. Living with the motto “sourcing can do more with less, so let it” will help the retailer reduce their cost of goods by 3% to 5%.

Once the product is developed and sourced, retailers have even more cost-cutting opportunities when delivering it to consumers. Leading retailers are exploring end-to-end product flow optimization, which can drive cost savings in both distribution centers (DC) and stores and improve inventory productivity by better aligning supply and demand—reducing inventory holding costs in the process.

Several tactics can get you there, including revamping inbound ordering to reduce minimum order quantities, reducing lead times, better aligning order quantities with expected demand, developing differentiated product flows and increasing drop shipping. All can reduce both logistics and DC operational costs.

5. IMPROVE THE CASH CYCLE.

Revisit your days payable outstanding and days sales outstanding agreements with your vendors and customers to help you hold onto cash longer. Speeding up inventory turns by integrating merchandising, inventory and operations execution will also help improve your cash cycle and free up money.

For example, one retailer analyzed payment terms across more than 2,000 vendors and found that more than 90% of those vendors required payment in under 60 days. There were limited processes in place to parametrically determine payment terms depending on vendor relationship, market stats and volume leverage. Buyers negotiated terms ad hoc and compliance to standardized terms was negligible.

By renegotiating payment terms and closely monitoring them going forward using formal guidelines, the retailer could improve its working capital by $20 million. The business can choose to prioritize margin improvement over working capital by diligent use of discount terms.

All of these efforts combined will not prevent struggling retailers from drowning in the coming recession, but they will help strong retailers weather the storm and put them into a solid cost-structure position that will serve them well even when the clouds part and the sun comes back out, as it always does.

  1. Forrge is one of the startups participating in the XRC Labs retail accelerator, of which Kurt Salmon is a founding sponsor.

20 June 2016