Economic downturns are tough for retailers. Historical data show that almost all retail companies suffer declining sales during a recession and that the rate of recovery is slow once the economy begins to pick up.

"These downturn dynamics mean retailers should move quickly to minimise performance deterioration," three consultants from McKinsey & Company write in the The McKinsey Quarterly.

Retailers are not short of options: they can close shops, restructure support functions, revamp stores, recruit new staff and introduce enticing new promotions.

But knowing which strategy to employ, and when, is an art — an art that Ashish Kotecha, associate principal in McKinsey's San Francisco office, John Leibowitz, principal in the Miami office, and Ian MacKenzie, consultant in the Chicago office, claim to have mastered. The trio have written a snappy two-by-two grid to help retailers to survive a downturn with four sets of strategy based on company health and the maturity of the market in which they operate.

Retailers who are in good health — as measured by balance sheets, management teams and overall performance — operating in a market with significant growth potential are advised to invest, to gain an advantage over competitors. That could mean acquiring new stores, revamping existing ones, recruiting talented staff from weaker competitors and investing in better local market strategies, including predicting local consumer demand and restructuring stores to reflect this.

For retailers in good health working in mature industries, a slightly different customer strategy is proposed by the consultants, including attracting shoppers with compelling offers and making sure there are plenty of staff on the shop floor to assist customers.

Somewhat obviously, they point out that retailers with good cash reserves and access to ready credit lines have more options than their weaker competitiors. “Companies with weaker financial health will need to focus more aggressively on reducing costs,” they write in their paper How retailers can make the best of a slowdown.

They suggest that stores do this by rationalising stock and renegotiating terms on direct sourcing of products. They also suggest that weak retailers look at their efficiency on the shop floor — reducing the time that staff spend on non-customer-facing activities and increasing the time spent helping customers. “The focus should be on getting more from existing sales resources, not just cutting labour hours,” they write.

They conclude that “retailers should bear in mind that the least effective thing to do during a downturn is to simply hunker down and weather the storm. Though there's no escaping some pain, moving quickly to improve performance can reduce the odds of a deep dip in sales and position retailers to participate fully in the inevitable upturn.”

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