Text by Viviane Souza (Supermercado Moderno) – Interview with Prof. Vicente Falconi, founding partner of FALCONI
The country is confused. Sales are difficult and consumers are living in insecure times. Instead of thickening the broth with complaints and frustrations, it is best to act. Be the subject of change and take responsibility for the recovery of the business. A lot of what can be done is in the hands of every business owner (not the government). Their decisions can slow down and even reverse the crisis for their own benefit, for employees, customers and suppliers. To help you, until the end of the year SM will publish a series of articles on how to act to make the wheels turn.
The first is an interview with the Brazilian pope of business management Vicente Falconi. He shows that it takes more than a favorable market and entrepreneurial impetus. Efficient management is essential. And retailers, he says, still devote little to financial control, a lean operation and to productivity. Check out the following:
In times of economic crisis, the mantra usually is: reduce costs, increase efficiency and increase revenue. Isn’t this too obvious?
The point is that food retailers need to work on these points continuously. When the economy is doing well and revenue increases, they forget about efficiency and costs. So when the market shrinks, they suffer more. But the retailer who never neglects expenditures and efficiency remains healthy and gets better results.
Is management of capital employed one of the neglected points?
Yes. There are entrepreneurs who do not even know what this is. Capital management involves assets that can be converted into working capital. For example: Installment sales. If the customer pays with a credit card, it takes longer to be compensated, and the retailer does not consider this when negotiating their payment deadline with the vendor, and ends up compromising the petty cash. That is why some chains need to seek credit from the bank. Often the capital of the company is all invested in assets that do not generate liquidity. Real estate and vehicles are also examples of fixed assets. It may not be worth it being the owner of the property intended for the store. It is preferred to rent space in order to free up resources for network expansion.
How to generate more working capital during this time of recession?
Reducing costs where possible: electricity, operations, payroll, supply, stock. This helps to generate more working capital. Without petty cash, what’s left are loans. Because the costs are high, the company ends up sinking into debt.
And when the company is already in debt?
It is important, among other decisions, to dispose of assets such as land, to get instant cash. But the main restructuring is financial, something that the food retailers have to worry more about.
Renegotiate leases is recommended to face difficult times?
With some good negotiating it is possible to reduce the cost of rent for shops and administrative offices between 5% and 10%. Remind the property owner that there are more offers than demand in the market, which will make it difficult to find new tenants and reduces the value. It is also worth mentioning the timeliness of rent payments and the reforms that have been carried out. It is also worth showing the decrease in store revenue, to show the difficulty of honoring the amount charged.
What is the formula to reduce costs?
The first step is to map all of the business expenses, by means of accounting classification. This in every store, in DCs, in administrative areas. Thereby making it possible to analyze all of the expenses month by month and thus monitoring the impact of each of these on the result. One of the worst ways to reduce costs is in a linear manner, indiscriminately affecting all sectors. This is common, but this impairs the area that was already operating on a tight budget. The best way to do this is to analyze cost by cost, department by department, not to create trouble by cutting too much where it is expendable.
And what would the gains be from the analysis of department by department?
This is an important point. When you create a reduction challenge per area, unknown expenses end up appearing. The important thing is that the cuts do not cause a negative impact on the operation. If the temperature of the air conditioning fluctuates a lot and this raises the costs of electricity, the solution is not to turn off the air conditioning, but set a standard temperature for all the shops and the administrative area.
Is cutting the payroll inevitable?
Having a full payroll is not good, but having only a few employees in the stores is bad. When reducing spending, we need to consider issues such as peak times of the store and the sections that most need people. If the retailer exaggerates in cutting cashiers or merchandising staff, for example, they will have less staff working during peak times, which is damaging to the service. Train employees so that they can multi-task is a way to have a lean but efficient work force. So you can relocate them whenever necessary.
But is it possible to sacrifice a little service in times of crisis?
The moment requires the opposite: good service to generate more people in the store and more revenue. Even though the customer is buying less, they still want to be treated well. There are those who only value price and go to wholesale shops. But there are those who want service and if they do not find it, they migrate to the competition.
All you need to do is control the overall result of the business to make quick and right decisions?
Controlling the overall result is not enough. Financial control must involve monitoring and comparison of expenses, revenues and profitability store by store, section by section. But most of the supermarket chains still do not do this. Without this control, you cannot know what is happening inside the company – the obstacles and opportunities – and therefore it is difficult to make good decisions.
Can you give an example?
You must know, for example, which units are underperforming. This is to identify problems and come up with solutions. Perhaps it is important to adjust the assortment of goods and improve service. Perhaps the result is bad because of an excess of inventory, which further increases the costs. It is possible then even when acting efficiently, the store continues in deficit. Then the only solution is to close the doors, so that the unit stops adversely affecting the business as a whole.
But closing stores is a difficult decision
A common problem among grocery retailers is clinging to the business. Therefore, they cannot close units even if they are pulling the results down. This is unacceptable, it can destroy a good business. You have to understand that sometimes the market forces the company to shrink in order to gain strength for a healthy expansion.
How do you raise the average purchase?
On average, out of every ten customers who enter the store, six or seven will make a purchase. The store has to be able to raise the average purchase of at least one of these six or seven. This is achieved and with good service, marketing actions and affordable prices, but mainly with the appropriate assortment of goods in all the groups in the categories: routine, convenience, seasonal. Exposure must also stimulate consumption
Can you raise the margin by 1% or 2% of a product that is selling well?
In some cases yes. The consumer will not notice and will keep buying. This measure works with higher added value items, which do not have a regular space in the customer’s basket and, therefore, they do not memorize the prices. You need to create additional sales points to draw attention to these items and create merchandising actions in partnership with suppliers.
What should the focus of retail be at the moment?
You must do the basics well and maintain a nonconformist attitude with your results. Monitor, measure and compare the numbers and from there, find opportunities.
Click here to learn more about the actuation of FALCONI in the retail segment.