Renaissance Partners, L.C.

Reprint from SGB January 4, 2000

As retailers approach and hopefully recover from the last Holiday Season of the millennium, it is once again time to objectively evaluate the business. Many companies are at a crossroads in their business lifetime. Management, Directors, Shareholders and other “Stakeholders” annually, if not more often, ask:

• Do we continue to do nothing;
• Do we close the doors, liquidate, payoff creditors and move on;
• Do we identify and address our needs internally and take action;
• Do we seek help from outside our business?

To answer these questions objectively requires a critical assessment of the position we’re in financially, competitively and a determination of what core competencies we have. Simply put, why are we in this position and do we have what it takes to fix it.

Why Are We Distressed?

For many players we must first look introspectively at ourselves. In most cases management is, and has been, in self-denial believing that if we return to our key success factors of the past, and re-double our efforts, things will work out. In other cases the Directors, Owners and Managers are relatively inactive or not motivated to take intense action to evaluate and reinvent the business. Many are only willing to collect a paycheck and play out the string until someone else takes responsibility and action. Others are risk averse and seek to avoid being blamed when the business “flames out”.

Due to not thinking outside the box and self-denial behavior, many businesses did not aggressively test during the successful periods throughout their heritage. As a result, the concept, format, real estate venue, assortment, service level and use of technology may not have changed. Further, rarely did these companies develop reliable networks for information and reliable input from customers, employees, suppliers and professional outsiders.

What Do We Do Now?

Do what should have been done previously. Get factual, diagnostic information about our business and believe it! Get it fast!

• Access and assess the customer, their likes, dislikes, shopping habits, who they think of first as the authority for each merchandise classification we’re in;
• Access and assess our people and their input regarding the customer and our business;
• Determine if our company has “brand significance”, or are we merely a distribution point for a collection of goods (branded or otherwise) supplied by various manufacturers;
• Understand the culture of our company and its relevance versus what needs to be done;
• Tap information about factors external to the Company – i.e., markets, competitors, products, services and service level;
• Understand and objectively evaluate internal factors that drive execution of the existing strategy and will be required to carry out future strategy – i.e., people, people/job/culture match, systems, merchandise content and management thereof, asset utilization, customer satisfaction.

Armed with hard facts commit the management team and stakeholders to action.

Profit Improvement and Turnaround Action Plan

Most profit and cash flow improvement programs require time and resources to enact. Most also have limited access to new capital, requiring that the cash be internally generated. Time and lack of focus is often the enemy. The successful turnaround requires decisiveness, focus and a simultaneously executed two-pronged approach:

1. Create Liquidity – collect receivables, liquidate slow or non-turning inventory, sell hard assets that are not essential to the core business, trim all non-customer essential expenses (payroll and non-payroll). Everything that is nice to have but not core to the business must be turned into cash. The income statement is not meaningful – cash is.
2. Strategically Assess the Business – perform external and internal research on the customer, employees, markets, assortment, competitors and core competencies of the company and its competitors. Commit to knowing more about the competitor than it knows about itself.

Based on the above, critically assess your Company as you would in a due diligence evaluation pursuant to an acquisition or merger:

• Does the business have a reason to exist?
• Can it be #1 or #2 in its markets and in its category?
• What must be done to position the Company to be #1 or #2?
• Are we thought of as a “brand” – do we stand for something and can it be made to have value?
• What financial commitments must be made?
• How long will it take?
• Develop a new financial model of the business;
• Develop a detailed financial (cash) model of the restructured business by month for 24-36 months to determine cash availability;
• Develop a full strategic plan that supports the financial (cash) model;
• Communicate with existing creditors, lenders, stakeholders – do they believe in management, its plan, and will they support the plan (under what circumstances, for how long, what benchmarks must be achieved for their continued support);
• Develop a detailed implementation plan – who does what and when;
• Establish a time-line driven set of measurements of success.

Turn It Loose

If the outline and questions above have been diligently and exhaustively performed and the evaluation is positive, believe in it, commit to it – do it. If management doesn’t have the stomach for it, find someone who does and support him or her without second-guessing and undermining of their leadership. Then, stay the course and focus on execution excellence – there may not be another chance.