The impact of a near-simultaneous shutdown of the global economy has been wrenching for business. Most businesses are closed, and tough choices are being made to preserve cash and survive through this period of uncertainty. While many industries are suffering, retail is among the worst hit.
Retailers have rightly taken an all-hands-on-deck approach to employee, vendor, creditor, and constituency management. With most of that work completed or well underway, it can be tempting to move on to focusing on the future. But while planning must go on, there is a critical and time-sensitive focus missing throughout the industry—tracking. This includes tracking of all the levers pulled over the last few weeks, their impacts, and contractual and noncontractual repercussions. This information must feed into a central repository that will be invaluable in managing stakeholder impacts caused by the rapid-fire activity of the past several weeks.
This task seems mundane in these times of operational urgency. But retailers that focus on stringent recordkeeping will be better positioned to deliver the data needed for insurance claims and to protect themselves from the mountain of lawsuits—frivolous or not—that may be coming from landlords, vendors, lenders, insurance companies, and other stakeholders. Many of the tactical changes made to deal with this global crisis are unprecedented, with no prior system of recording or tracking in place. This is because the current scenario was unimaginable even weeks ago. It’s not surprising that the urgency with which retailers have needed to make a whirlwind of decisions has almost certainly put rigorous recordkeeping on the backburner. Producing complete and accurate records, however, will be the difference between the risk of significant loss or mitigation or remediation, even if the latter is a difficult and protracted process.
What data must be tracked?
The key data to track is any loss of value due to share price and market capitalization declines, in addition to costs to restructure loans or increased borrowing costs, lost sales, employee obligations, and other expenses likely to lead to lawsuits and negotiations. Businesses also need to be on top of their insurance policy fundamentals and all information the carrier requires to support claims.
There are three granular areas specific to retail that will demand extensive recordkeeping to improve retailers’ chances of substantiating losses in future disputes and create reliable business forecasts that will help them emerge out of the current crisis:
Sales and merchandising
Sales-related data: Retailers must build out a detailed financial analysis that compares monthly sales forecast prior to the crisis to actual sales and detail each reason for the difference, such as shipping delays, inventory shortages, closed stores, order cancelations etc. If the business lost profits from having to withdraw product because stores were closed, this should be distinctly tracked alongside dates and exact reasons by location—a complex but necessary task. Upon unwinding, it will also be important to track any compressed margins due to unanticipated promotions or discounts set up with the goal of generating cash from stranded, seasonal, or other inventory.
Additional costs: Track any fees or penalties incurred from failing to meet the minimums for order contracts, vendor allowances and the like with suppliers, canceling or refusing to accept merchandise shipments, and any other logistical expenses. There may have been additional expenses if retailers offered consumers free shipping and returns to promote online shopping. Retailers should also record any costs associated with disposing of stale inventory or inventory spoilage in cases of consumable goods. There may also have been new expenses associated with shipping product from store or moving inventory out of stores back to warehouses or distribution centers.
"Retailers must build out a detailed financial analysis that compares monthly sales forecast prior to the crisis to actual sales and detail each reason for the difference, such as shipping delays, inventory shortages, closed stores, order cancelations etc."
It’s imperative to carefully record employee-related costs incurred while stores are closed and not generating sales. There may also be expenses associated with converting administrative personnel to remote working arrangements and protecting employees working at open locations from exposure. Once stores are ready to reopen, there will be costs incurred in hiring and training new sales associates, which will require maintaining detailed records of new associates and those returning from furlough.
Rent and other operational costs
It’s also important for retailers to track both when and why they closed stores. Was the catalyst a state or city order? Did a landlord make the decision to close a shopping center? This information may be vital for future claims. If rent payments have been reduced due to lower sales, this could result in a reduction in losses. Penalties or fines that stores incur due to not paying rent would also become potential losses. In addition, retailers should record any rent abatement that landlords or government programs provide, as these amounts will offset any loss claims.
New operational costs, such as extra security to protect closed stores, deep cleaning, or making changes to the store layout to encourage social distancing, must have their own recording system. There will also be new expenses associated with preparing insurance claims and government funding applications, especially if external consultants are helping address these issues.
Why is this important?
While curtailing expenses is understandably consuming the bulk of decision making, gathering and organizing information now is critical to preserve and protect retailers in the medium and long term as the economy reopens. This information will be critical when businesses apply to federal and state relief programs, file insurance claims that demand strict adherence to evidence requirements, or if there are legal disputes with partners. While retailers are trained to think about customers, brand, product, and profit, taking these essential steps now will make a huge difference in the amount and timing of much-needed benefits received and claims mitigated.