With traditional Sinhala and Hindu New Year celebrations approaching, Sri Lanka has entered a virtual recession, potentially delivering a sucker punch to the retail trade for the third year in a row. The previous two years were lost due to the Covid-19 pandemic. This year, the downturn is a cinch because of the drastic drops in practically every economic indicator.
Because of price increases in essential commodities such as fuel, LP gas, milk powder, medicine, and many other products, the public’s disposable income has dropped dramatically, and inflation has reached record levels.
Until the pandemic broke out in late 2019, the retail trade in Sri Lanka had a magnificent run with substantially high consumer spending. The online presence in Sri Lanka has created a new and different customer segment that has improved retail markets tremendously. Evidently, new retailers entered the market with innovative retail business concepts. Undoubtedly, the retail trade sector grew at a reasonably high annual rate during the past few years.
Customarily, the retailers are the ones that hit the wall at the initial stage of a financial crisis. The Covid-19 impact was enormous, with unbearable losses. Many retail stores were closed, creating an unprecedented unemployment issue, particularly for those who sell non-essential consumer durables.
With a Buddhist and Hindu population of over 83% of the country who celebrate the April festival, it is the best-selling season for most retailers in Sri Lanka. Regrettably, with the mounting prices, the public attempt to tighten the belt, particularly by cutting down on less important items such as gifts, clothing, and other personal articles. Those who usually plan to purchase durables during this period have abandoned the idea of extra expenditure.
Difficult situation
Regardless of how difficult the situation is, retailers must not give up and close their doors. They are compelled to carry on by using whatever strategies that can be used. They are forced to find possible opportunities to win more customers by strengthening their respective positions with amended goals. Hence, let us explore some of the strategies to continue in difficult times and derive the best from customers.
Experienced retailers, first and foremost, find headroom to implement new initiatives. Depending on the nature of the product, they can either cut or extend opening hours to create additional demand. Simultaneously, they can implement new rosters for staff, relocate store space, introduce special promotions, and establish loyalty programs.
Also, most often, retailers tinker with additional space available, such as parking lots.
A retailer can measure the opportunities available in the market in different ways. As the potential is diminished due to the recession, new customer buying patterns emerge and the retailer should study them by investigating local and national markets. The product sophistication and expected service levels can be different to normal situations.
In my experience, closing the gaps between needs and offers is an effective practice in times of duress. Most retail businesses have significantly more customers than other types of ventures. By lessening the gap between the actual need and the offer of the product, retail businesses can influence customers to spend more in a retail store.
The effort to influence can be made uncomplicated by giving them what they desire. Therefore, in order to bridge the gap between what customers want and what the retailer holds in stock, they must abandon the gradual “last year, plus or minus” optimisation method that may have worked well in the past. Instead they must also resort to other methods such as improved service quality and other customer needs.
Going after high-cost items is required in troubled times. When sales stagnate, retailers are faced with difficult decisions: cut costs or risk losing profit margins. Most retailers try to exclude costs to keep as much of their profit margin as possible. However, they frequently mix the two factors depending on the product.
The good costs are the ones that are needed to produce what customers’ value and are ready to pay for.
These are the costs of providing convenience, unique shopping experiences, unique services, or a larger selection of goods than competitors. Taking costs out of the equation may increase margins. Therefore, the choice between the two factors must be made extremely carefully.
However, in tough times, taking the extra costs out is a need that cannot be avoided. Nevertheless, with the right level of insight, retailers can tie their costs to the benefits that customers are willing to pay for when shopping in their stores. That gives customers an important tool for managing their expenses more precisely.
Structural changes
Studies have revealed that successful retailers who have identified the changes in the market in recessions are likely to outperform by looking at their reinvestment during the crisis period. When retailers understand the metrics of the ratio of capital expenditure to depreciation, they grasp the idea of capital allocation decisions. Hence, retailers must understand the structural change taking place in the market and develop a value proposition and investment strategy to suit the situation.
Merely cutting down on staff or other resources such as marketing is not a good strategy in a time of financial downturn simply because it can lead to customer inconvenience. Therefore, retailers must consider that the process of reducing excess staff is a tedious process. If the revenues drop to unbearable levels and the company runs out of alternatives, there is no choice other than to downsize.
The matter of retaining existing staff or outsourcing people arises in this type of situation. While temporary hiring can curtail the costs, outsourcing may bring in temporary staff without product, industry, or company knowledge with a low level of loyalty. Hence, the outsourcing process of hiring people must be done extremely carefully. However, outsourcing of functions such as accounting, HR, pay roles, creative, or even marketing can be recommended, while in-house selling must be done by permanent staff.
Revitalising the business model to be more flexible in all customer-related functions can bring amazing results. For example, the work-from-home concept that was introduced during the Covid-19 pandemic has brought an enormous amount of convenience to workers and often, cost reductions to employers. Although the model contained some negatives for both employees and employers, the concept has produced the majority of the expected outcomes.
Likewise, adjusting the customary practices according to the customer’s actual needs during a crisis is essential. The reason is that the customers are also tremendously under pressure to reduce their expenditure due to the financial recession that they are experiencing. They are more careful with their purchases during a troubled time and resort to saving more than spending. Hence, conveniences such as reducing time at the cashiers, online deliveries, and gifts, can attract customers.
Every retailer must keep in mind that their competitors are also trying various tactics to draw customers to them. Hence, countermeasures are important to keep the competition at bay. A relentless marketing campaign, perhaps more intense than in a normal period, can be extremely effective.
The coming season will be an acid test for all retailers in Sri Lanka. Surviving and thriving during a recession requires balancing the right cost-cutting measures and accurate reinvestment plans. In addition, marketing efforts and in-store customer handling play a pivotal role at this time. Research suggests that the best antidote is a balanced focus on operational efficiency, marketing, customer service, and repeat sales.