How retailers can negotiate out of trouble. These days retail administrations and profit warnings have become commonplace in the national media. Once-booming businesses telling us they are crippled by cashflow issues, or are teetering on the brink. When thousands of jobs are in jeopardy, people want fast answers and price cuts and short-term sales are often the go-to solutions.

While the desire for a fast turnaround is natural, it’s vital that professionals consider other opportunities that can stabilise cash flow and improve profitability. One such area is strategic negotiation. An effective negotiation strategy can very quickly improve cash flow, reduce overheads and ultimately soften expenses to protect profit, and for even the most troubled of companies. Not only that, but an effective negotiation strategy can ensure a business remains relevant, profitable and successful in the long-term.

A changing economy

The rise in a digital economy has been used as a scapegoat for many of the big retailers struggling to compete. While businesses such as Blockbuster and HMV can be forgiven for blaming digital technology for outsmarting their offering – can Toys R Us? Consider the offering and indeed the fact that demand for toys remains strong regardless of economic conditions, we find ourselves asking - why? How can a company that sells something timeless fail? Often overlooked, the answer lies in an effective negotiation strategy.

How does effective negotiation work? Let’s delve deeper into the Toys R Us model as an example

When first established in the 1950s, the retail giant embodied the child-like desire to spend, spend, spend. It was consumerism at its very element, with mass appeal to parents and children alike. Toys R Us in the main monopolised the toy market. Manufacturers wanted to be stocked there, parents and children wanted to shop there. Toys R Us had bargaining power, and as a result it could negotiate hard to secure competitive deals with manufacturers. As a business model, the toy store struck the balance between smart sales and effective negotiation with manufacturers. For example:

• It was accessible – most of Toys R Us stores were located out of town, perfect for 1950s baby boomers embracing the concept of consumerism and spending as part of leisure time. It was new, novel and provided shoppers with an easy place to please the family. Likewise, manufacturers were able to sell to a retailer safe in the knowledge they’d receive unrivalled brand exposure and sales.
• Innovative, imaginative and ahead of its game – its advertising and marketing were pioneering. It captured the hearts and minds of the nation and compelled people to buy into the idea of visiting a Toys R Us store. This only strengthened negotiation power for the retailer – positioning itself as the place to be stocked for toy manufacturers.

However, somewhere along the line, this changed, and the brand was unable to maintain competitive pricing comparative to online retail giants like Amazon. At this point the retailer’s approach to negotiating should have changed to ensure the business maintained its edge. This would have safe guarded the business longer-term. But, it seems that negotiating wasn’t even used or considered towards the end of Toys R Us, when it could have been utilised as a tool to inject much needed cash into the business.

The bargaining power of a ‘brand’

It became a ‘chicken and egg’ situation for the retailer. Fail to offer something exciting, appealing and unique and you sacrifice your bargaining power to manufacturers. Fail to create bargaining power with manufacturers and you sacrifice the ability to create an affordable, exciting and innovative offering for your consumers.

The appeal was lost with Toys R Us. It became out-dated and as such lost its bargaining power. The brand became the real victim – consumers were accustomed to depending on Toys R Us as a failsafe, go-to for affordable toys galore, but costs rose, customers became alienated and as a result brands no longer regarded the retailer’s brand as a ‘must have’ association for their toys.

Business management

Rather than being a pioneer, Toys R Us became a ‘me too’ brand playing catch up in a rapidly changing retail space. And this isn’t just a brand reputation issue, it’s a management issue. Toys R Us rested on its laurels. It became complacent in a competitive market and didn’t look to alternative business management methods – such as using an effective negotiation strategy – which could have saved considerable amounts of money for the business, as well as streamlined the company’s positioning.

This continued as the business became less and less relevant. The failure to adopt an effective negotiation strategy as part of its business model became the retailer’s ‘big mistake’. First and foremost, it failed to consider how it could innovate and maximise manufacturer relations to ensure strong profit margins. Then, as cash became tighter and tighter, the store failed to implement effective negotiation techniques to quickly ease the demand for cash from the business. It continued to operate out of huge and costly units, didn’t change its procurement process and ultimately relied on sales to inject cash, instead of considering cost saving measures. Towards its end every single pound counted, yet Toys R Us didn’t make every pound accountable.

Retailers must work hard to ensure that every pound really does count

Huthwaite recently conducted research with YouGov into the impact of an effective negation strategy which revealed that six out of ten of the most effective margin-maximising strategies require effective negotiation skills. It is not enough to focus on innovation, sales and growth. Businesses must also work hard to ensure that every pound really does count. A company based on the purchase and procurement of toys to sell to the consumer, can’t focus on just the latter, not least when its desperately searching for short-term sales to maintain a massive corporate portfolio.

The buying process needs to form the core foundation of the business. How a business such as Toys R Us negotiated its purchases was quite clearly key to its success.

The lessons to be learned from Toys R Us

We can only surmise that Toys R Us failed to embrace the benefits an effective negotiation strategy can offer a business, and as a result missed an opportunity to save a house-hold name and major UK employer.

So how can other retailers use the lessons learnt from the Toys R Us liquidation and make immediate changes that will have a positive impact on profitability, short, medium and long-term?

Huthwaite’s research

Huthwaite’s research shows that businesses with a systematic approach to sales and negotiation experience 42.7% greater growth to the bottom line than those without. This fact alone highlights the importance of applying effective negotiation techniques to drive profitability across the organisation. In times of trouble, this is essential.

By negotiating skilfully in a number of areas retailers can free up valuable cash. Huthwaite’s data shows that six out of the top ten most popular margin maximising strategies used by businesses all require strong negotiation capability to be truly effective. These being:

• Improving productivity - 53%
• Reducing overheads - 53%
• Cost-effective purchasing - 50%
• Improving customer retention - 49%
• Reducing fixed costs - 48%
• Managing general operating costs from suppliers - 41%

With effective negotiation skills, retailers can start maximising these tactics immediately. The question isn’t if, it’s when can we start and how much can we save?

Will there be more high street victims?

Despite negotiation playing a major role in profitability, and therefore growth, Huthwaite’s research has found that not all businesses are implementing a formal approach to negotiation putting them at a distinct disadvantage with those who are.

Retailers need to act now to address the training needs across all departments. Effective negotiation is not a dark art. It’s a learnable science that can yield immediate returns.

Ultimately, if Toys R Us had planned ahead by using an effective negotiation strategy across the business, it could have been saved from liquidation by improving cash flow, increasing margin and protecting profits in difficult trading times – giving the company the breathing space to innovate, reposition the brand and streamline its offering.

If you want to learn more about how Huthwaite International can help your team develop a highly effective negotiation strategy contact us.