Surviving the Next Recession

Reasonable heads assure us an economic slowdown is coming. Is your store ready?

These are heady times for Artis Furniture, a family run furniture store in Urbandale, Iowa. Pick a metric – any metric – and it will only reinforce that thought. Store traffic and close ratios are up. That means sales are up, too – and not just at the family’s namesake store. Studio 28, the Home Furnishings Association member’s new venture in nearby Des Moines, has enjoyed an increase in month-over-month sales since opening last summer.

“We’re doing great,” says Beth Artis, who runs her family’s 91-year-old store these days. “We’re having some of our best (sales) in years. It’s always been fun coming to the store, but lately with business the way it’s been it’s even more fun.”

Beth Artis
Beth Artis, Artis Furniture, Urbandale, Iowa

Of course, in the same breath, without even the slightest pause, Artis tacks on the three words every furniture retailer is probably thinking right now given the times we are living in: “Knock on wood.”

Artis doesn’t have to look back too far to appreciate what she has today. During the 2008 Great Recession, thousands of businesses – overwhelmingly small, independent businesses – were forced to close their doors for good. Artis Furniture was thisclose to being one of them.

As the economy slowed down, so did store traffic, which translated into fewer sales. Fixed costs like the store’s monthly mortgage, utilities and insurance suddenly loomed large every month. “Our overhead was killing us,” says Artis. “We couldn’t make ends meet. We were going down.”

The family was forced to sell its longtime 16,000-square-foot storefront in Des Moines and lease a smaller space in the suburbs. A liquidation sale infused the company with much-needed cash, and they operated with a bare-bones staff for more than a year. These days, Artis is grateful, not gleeful. “In some ways we were a little lucky back then,” she says. “This time around we’re going to be smart. When a recession comes, we’re going to be ready.”

Their business cards and LinkedIn profiles describe Artis and other HFA members as furniture retailers, but that doesn’t do them justice. They’re also survivors — store owners who withstood the Great Recession while many of their competitors were dragged under.

Along the way, those survivors may have been forced to lay off longtime workers, forgo salaries or find new ways to earn money. These days, Artis may be showing up to work with a smile on her face, but there remains a cautious mindset. She’s careful about hiring. She’s thinking twice – three times, even – about borrowing much money or taking other risks. Just as important, Artis and other furniture retailers are sharing their secrets to surviving with other HFA members.

“There’s something down the road, and I don’t want other retailers to go through what we did,” says Artis. “Business has been good for too long not to have some sort of – call it what you want – correction or recession. I’m much more confident this time around because we’ve learned a lot about ourselves and our market. I think we’re going to be ready. Everyone else needs to be ready, too.”

Make no mistake: A downturn is coming. More than a decade after the Great Recession, all that’s debatable is the size of the next slowdown and when. Recessions don’t ring doorbells and announce their arrival, but in a recent survey of American CFOs, Duke University found that nearly half believe the nation’s economy will be mired in one by the end of this year.

In a way, David McMahon is looking forward to the next recession. McMahon is vice president of consulting and performance groups for ProfitSystems, a provider of solutions for home furnishings retailers. “A recession cleans things up, gets rid of people who maybe shouldn’t be in this business,” he says.

That may sound a bit cavalier, maybe even cruel, but McMahon says there’s a silver lining to a recession. “Stores that survive are stronger and smarter,” he says. “Retailers who come out the other end still in business are usually better off for having endured what they did.”

And, says McMahon, most furniture retailers don’t have to fear a recession if they prepare now. McMahon offers a simple litmus test for retailers to determine if they’re fiscally fit for a downturn in business. “Take 10 percent off your top line,” he says. “If you’re happy with your bottom line after doing that then you’ll be fine.”

But given their current staffing, inventory and overhead, most retailers can’t afford a 10 percent loss in sales, says McMahon, so read on.

Measure your traffic

The first thing to know about a recession is whether your market is in one. The Great Recession of 2008 stretched its tentacles across most of the country, but not all of it. “It really hammered both coasts, but a lot of markets in the Midwest weren’t hit as bad,” says McMahon. “Retailers need to measure their own community and not be swayed by what others are saying at furniture market or what they’re hearing on the news.”

McMahon says the best indicator of a slowdown in consumer spending is a drop in your store’s traffic count. Three months of data are ideal, he says, but in the same breath he offers a warning. “Don’t rely on your sales staff for data,” McMahon says. “Invest in technology that measures traffic. Sales staff are human. They could have a ton of traffic one weekend, but if they don’t sell anything, they’ll blame it on a slow day.”

If business begins to slow, McMahon says that’s the time to rethink your current operations. Don’t be so quick to replenish inventory. Instead, restock based on your store’s written rate of sales. Also, think about reducing the number of manufacturers you work with.

“Working with fewer vendors means your inventory might go down overall, but it will go up with the smaller circle of vendors you’re now working with,” says McMahon. “That might earn you better rates with those suppliers.”

About your inventory: If you’re successful selling your product today, McMahon does not recommend changing what you sell when the economy slows. If you sell Stickley, stick with it. If you’re known for promotional sofas, don’t upgrade hoping to chase consumers who might not be affected by the downturn. “Whatever your niche is, stick to it,” says McMahon.

But sticking with your niche does not mean buying at the same levels, says McMahon. Too much inventory in your warehouse can be an indicator of a slowdown on the horizon. It can also be a result of the slowdown.

“You can’t keep buying at the same rate,” McMahon says. “Slow down on new purchases, dial back on containers and best-sellers. Nobody wants to be caught short on cash.”

Sam Zavary
Sam Zavary, Exclusive Furniture, Houston, Texas

That was a problem a decade ago for HFA member Sam Zavary of Exclusive Furniture in Houston. Zavary says to watch your inventory when store traffic starts to slow. Cash is king in a downturn, and excessive inventory depletes your cash. “We had a lot of inventory and it hurt us just sitting there,” says Zavary. “That won’t happen again.”

One way to determine if you have inventory in line with sales is to calculate the value of your inventory and divide that number by written sales volume each month for the past year. Increases month by month without changes in your usual purchasing habits should be a red flag, says McMahon. “Your sales will not be able to support your inventory levels,” he says. “The logical fix is to scale back your inventory.”

McMahon and others suggest looking at ways to reduce your overhead. Two quick expenses to consider are rent and labor. When traffic and sales volume per customer drop, your showroom space is simply not as valuable as it once was. In a slowing economy, McMahon says retailers should approach landlords about renegotiating a lease. “They’re invested in your business as much as you are – at least they should be,” he says. Landlords, says McMahon, might work with a retailer since the alternative – finding a new tenant – can be difficult in a recession.

Labor can be a little trickier given the emotional connection. “The owners of family businesses often inherit employees from their parents who maybe should be doing something else,” says Wayne Rivers, owner of the Family Business Institute. “When that slowdown comes, you need to think of all your employees and your business and how to protect everything,” Rivers says. “That means you’re going to have to make those decisions that, really, probably should have been made a while ago.”

McMahon says employee costs account for roughly 20 percent of sales. When a recession hits, your labor budget must remain constant with sales to maintain profitability. “This is when you surround yourself with your best salespeople, your best warehouse employees. The others are probably going to have to go,” he says.

As good as business has been, Artis says she’s comfortable with her staffing level now. “Maybe we could use an extra person on the floor or in the warehouse right now, but I feel good down the road when something happens,” she says. “Nobody likes letting someone go, so maybe think twice before hiring someone now.”

Letting employees go is never easy – especially if the employee has been around for years. HFA member Jill King-Hilke long ago took that dilemma out of the equation. King-Hilke, of Annie’s Furniture & Gifts in Excelsior Springs, Mo., tells new hires that theirs is a part-time job that is “for fun” and that hours are determined by the needs at the store on a week-to-week basis.

“When things slow down, they know not to expect a lot of hours,” says King-Hilke. “But when business is good, they know they’re going to be busy.”

Act now, not later

Rivers and Zavary say retailers who wait for a slowdown to hit before adjusting their strategy could be too late. During the Great Recession, Zavary says he reexamined all his company’s expenses and cut where needed. “What percentage of labor costs are you paying? What pieces of inventory can you do without? Who’s cleaning your store?” asks Zavary. “We took a deep look at all of these questions. We sliced and diced the numbers, and a lot of those cuts are still around today. We’re a lot more mindful of our spending.”

That’s key to surviving a recession, says Rivers. “How you’re running your business today will have a big impact on whether or not you’ll survive a recession.”

One area Zavary didn’t cut back on was advertising and marketing. “Even if it’s a smaller number of people shopping for furniture, you still need those customers coming through your front door,” he says.

McMahon reminds retailers that cutting costs is only half the battle during a recession. “If your traffic is down, then your resources should have more time to work with the ones who are in your store,” he says. “Now is the time to roll up your sleeves and get to work with those customers or follow up on your base.”

McMahon says history has proven the economy ebbs and flows, so retailers need to be ready. Warren Buffett, no stranger to the furniture industry or recessions, agrees. “It’s only when the tide goes out,” Buffett famously once said, “that you learn who has been swimming naked.”

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