Managing your retail business for stability in a tumultuous economy

And the hits just keep on coming. Consumer Reports just released a report that finds 76 percent of consumers will be cutting back on their holiday spending (click here to read). Outdoor Industry Association reports outdoor retailer sales, long argued to be recession-proof, are now taking lumps, too (click here to read). And, the National Retail Federation issued a November report that showed cargo volume at major U.S. retail container ports fell again in October and hit their lowest levels since 2004 (click here to read).

In an email notice to his retail clients, Pruitt wrote, "Business may be down by 30 percent, but remember, 70 percent of customers are still shopping. Keep your focus on these customers." Which is very good advice, considering that Pruitt sees the economic downturn lasting well into 2009. "We actually started seeing a retail slowdown starting during the April/May period of 2007. Typically, these cycles last 18 to 20 months, which meant we were anticipating a rebound just in time for the holidays this year," Pruitt told us. "But five weeks ago, the dream of a holiday rebound was shattered with further financial unraveling that was unprecedented, meaning we are in a double dip -- back into another 18- to 20-month cycle of slowing retail trends.

"Pruitt said he hopes that this second cycle will last less than the typical 18 to 20 months, shortening to 12 months, but he admits everyone is in uncharted territory now. He did point out bright spots and opportunities, though. Retailers with strong vendor relationships have been able to work with those companies to discount in-stock merchandise, trim or cancel existing orders, and work to extend terms. Of course, vendors are also feeling the economic pinch, so their support can and will continue only for so long. The most important steps a retailer can take immediately are:

Minimize excess inventory risk now. While the holidays may generate a small sales lift, immediately following the holidays, business will likely slow as everyone tries to liquidate inventory.

Adjust your merchandising style. With the inventory you do have, work to flow it onto the floor and onto shelves in smaller amounts to keep your store looking fresh with new inventory. It will give those consumers who are still shopping a reason to keep checking back in.

Get a handle on inventory. Have a very good understanding of how much inventory you now own, and how much you will need in the future. You have to be able to maintain sufficient inventory on hand to be able to buy into margin on a consistent basis. It used to be that 10-percent open-to-buy levels were sufficient. The new rule of thumb is 25 percent.

Be realistic with your inventory management. Once you determine what your reasonable sales targets will be, and how much inventory you will need to achieve those targets, plan down, not up from there. Be conservative!

Be flexible and responsive. Where it may have been traditional to manage retail inventory in terms of monthly performance levels, in this economic climate, retailers need to shift to weekly reviews of inventory levels and manage accordingly.

Keep expenses in check. This is perhaps the most challenging aspect for smaller retailers who do not enjoy the capital backing of larger or public companies. When sales start dropping quickly, it is very difficult to push expenses down fast enough to compensate and doing so without the proper strategy can put a company at risk simply because it is eating the bottom out of its business.

Grow your gross profit dollars. One way to ensure cash flow that will keep a retail business healthy even in a depressed sales market is to ensure you are able to create more gross profit dollars by building higher initial markups and minimizing your inventory markdowns. As a guide, Pruitt has developed a formula: "For every one point of additional maintained markup (M/M), you will need to increase your in-season open-to-buy (OTB) by 5 points. So, if you want to increase your M/M by 5 percent, you need to increase your in-season OTB by 25 percent to be able to execute your plan, going after off-priced and immediate buys."

Pruitt pointed out that there are huge opportunities for stronger businesses in this economic climate, but retailers need to be sure they are positioned to take advantage of those opportunities as they come along. And, he adds, the opportunities are going to be coming fast and furious in the form of distressed merchandise, bankruptcies and more. It is also a great time to negotiate leases at low rates and build out stores at a much lower cost. He said he believes these opportunities will last for another year.