Harvard Business Review

Which merchandise lines should be expanded because both their headroom and current productivity (sales and profit per square foot) are high? Which should be shrunk because both their headroom and productivity are low? Which should be fixed (rather than shrunk) because their productivity is low but their headroom is high? And which should remain as they are because their productivity is high but their headroom is low? A retailer’s merchants should be able to produce a merchandise-planning map that lays out the answers to those four questions for each of their categories. The map should also specify the needs-offer gaps that have to be closed to grow, shrink, or fix each category’s merchandise lines. (Having such a map for each store cluster would be even better.) This gives merchandisers a practical way to avoid the incremental decisions that traditional merchandise planning entails.

Performance management typically means monitoring progress against budget, as well as benchmarking stores and categories using such measures as comps, gross margins, and sales and profits per square foot. But in a recession, retailers’ scorecards should also indicate where they stand in capturing headroom, closing needs-offer gaps, and taking out bad costs. And they should track their performance by store cluster to avoid the apples-to-oranges comparisons that inevitably occur when monitoring stores by region, district, or other geographically defined territories. One retailer we know does exactly that and has actually improved its performance since the retailing downturn began to intensify last summer, in part because it has the right information at the right level to manage its performance.

Finally, there is strategic planning. Blue-sky planning doesn’t make a lot of sense when the sky seems to be falling. But that isn’t the only role for strategic planning. Strategic decisions still need to be made regarding space allocation, chain investment, store format, cost structure, and staffing. When facing a downturn, the imperative in every one of these areas must be to go where the headroom is, close the needs-offer gaps, go after bad costs, and exploit the differences among store clusters. Let us be clear: The strategic-planning process must be entirely focused on meeting those imperatives. Otherwise, it is just a distraction from what needs to be done in the short-term to protect and strengthen the business for the long haul.

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In all likelihood, the current generation of retail executives will not soon see anything like the prolonged tailwind that steadily propelled their sector over the past 15 years. An era of consumer frugality has begun, shifting that tailwind into a nasty headwind. Some retailers will turn this into an opportunity to strengthen their business and gain market share at the expense of the weaker competition. Follow the rules in this article, and you could be one of them.

Ken Favaro ( kfavaro@marakon.com) and Tim Romberger

( tromberger@marakon.com) are partners at Marakon, a New York–based global consulting firm. David Meer (david.meer@ enfatico.com) is chief analytics officer at Enfatico in New York.