As biologists prepare to celebrate the 200th birthday of Charles Darwin next month, doubters of his theories may want to head on down to their local shopping mall.
“It’s retail Darwinism,” says Dave Brennan, a marketing professor and co-director of the University of St. Thomas’ Institute for Retailing Excellence.
Major layoff and job cut announcements this week from Target and Best Buy only underscore the evidence that retailers are operating in a “survival of the fittest” environment.
“It’s not how well you do in the good times,” says Brennan. “It’s how you get by and survive during the bad times.”
Companies with resources and an ability to adapt are going to be the ones to make it through this recession and also be in a position to thrive once the economy turns around. Until that time, we can expect retailers to continue cutting jobs and other costs as they try to keep expenses in line with faltering sales numbers.
Target, Best Buy cuts
On Tuesday, Target announced it was laying off about 600 employees at its downtown Minneapolis headquarters and leaving another 400 positions open. The job cuts amount to a 9 percent reduction at its corporate office.
The same day, Best Buy announced that it will be laying off an undisclosed number of employees at its headquarters in Richfield, even after 500 of 4,000 employees there accepted buyout offers earlier this month.
The economy and its effect on consumer spending are largely to blame.
Best Buy CEO Brad Anderson said in October that the company has observed a “seismic” shift in spending that is the worst consumer climate the company has ever faced. Retail sales are expected to be flat or slightly down for the rest of the year, Brennan said.
But retailers’ struggles stem from another problem, too, Brennan says.
As the economy grew through most of the decade, retailers opened and built an excess of stores.
Too many stores competing for too few dollars
“We have an ‘over-storing,’ ” says Brennan. “There are too many retail stores for the number of retail dollars available.”
As more retailers announce store closings, the retail economy gets closer to that equilibrium where there are enough shoppers’ dollars to support the existing stores.
“After the system has flushed out the excesses, [sales at remaining stores] have a very good chance of improving,” says Brennan, who expects we will start to see some improvements by the end of 2009.
Both Target and Best Buy timed their layoff announcements before the end of their fiscal 2008 years in hopes that they can be “lean and mean” going into 2009, Brennan says. Target’s fiscal year ends Jan. 31, and Best Buy’s is at the end of February.
“You want to load up any bad news and take the big hit now, rather than having slow and painful announcements throughout the next year,” says Brennan. “It’s better to front-end load this, rather than have it trickle out all year.”
With fewer employees, both companies will be able to accomplish less in the months ahead. Anything that’s new or in development is likely to be shelved, Brennan says. IT projects, such as website upgrades, are likely to be shelved, he predicts. Other cuts will likely come in departments that plan new stores and acquire property for them, he says.
The remaining employees will be asked to take on more responsibilities and might be reallocated to areas of greatest need, Brennan said.
Retailers will likely prioritize the basics: jobs centered on keeping the stores operating.
Even operations, though, aren’t likely to be immune to change, Brennan says. If the company sells less, it will require fewer people to do things like order merchandise and stock shelves. He expects that stores will employ fewer associates and offer fewer hours.
Another way retailers cut expenses is by reducing their inventory.
Inventory represents about 70 percent of a retailer’s expenses, says Brennan. So shoppers shouldn’t be surprised if the Nintendo Wii isn’t the only item sold out at stores, especially for slower-selling items.
The forces affecting Target and Best Buy are affecting all retailers, Brennan says, from small independent shops to high-end clothing chains. What’s another retail company to take from the Target and Best Buy layoff announcements?
“I think it says if big, well-run companies like Target and Best Buy are feeling the pinch, and these are the things they are doing,” Brennan says, “perhaps we need to go back and take a look at our business and where we are now, where we’re going forward and whether we need to do similar things.”
“It’s almost like a war of attrition,” Brennan said. “The longer it goes on, the more it wears down the options.”
The only choices are to cut expenses, or risk going the way of the dinosaurs, or Circuit City.