Turnarounds rarely are

The word turnaround is used increasingly in retail. Its increasing use is in inverse proportion to its actual incidence. In reality, turnarounds are very rarely achieved. The aspiration needs more than simply trotting the word out. In order to qualify for the description, surely an improvement in trading performance needs to be sustained over time?

A key issue is that often the people doing the turning around are too focused on costs and not enough focused on revenue. Cutting costs alone cannot turn a business around. In fact when looking at an ailing business you shouldn't look at costs until you have finished looking at revenue. What costs does the business require to deliver target sales? It may be that in order to transform the revenue line you need to spend more, not less.

The overly corporate approach tends to understand costs far better than sales, so that's where it is focused. Today in Board Rooms across retail, cost reduction is the order of the day aka investing less. In general, this will lead to lower sales. All businesses need investment before they can generate revenues.

A turnaround worthy of the name needs to make a detailed review of the business model. Who are its core customers, how are they served and how do you sit in the market. How well codified is the model: in other words, how well does the operating model support the delivery of the stated goals? These days all the focus in costs is on labour and rents and rates. But a retailer's biggest cost by far is inventory.

How much inventory should the retailer order, carry and for how long? Rates of stock turn and sell through are critical. Aside for having relevant product, how is it priced? How is it marked down? How are these offers articulated to the marketplace? Understanding that marketplace is critical in order to make meaningful judgements here. And having the toolkit to drive the operating model to optimally support the business is essential.

Effecting a turnaround that justifies that word will certainly require investment to resuscitate that model and perform some surgery. Simply lowering costs should be called something else and the majority of so called turnarounds are just that.

We are driving a number of turnarounds by supporting operating model optimisation aka working inventories harder to generate more cash margin. Get in touch if this is of any interest - richard.hyman@tpc-group.com