On the train to London last month, I overheard two keen young men discussing how they could counter the credit crunch. “A wage freeze plus a round of selected redundancies would keep costs under budget,” said one. “Yes,” said the other, “and to be below the bank’s new borrowing limit, all expenditure over £100 should be signed off by a director.” As we continued through Stafford, Lichfield, Rugby and Watford, they produced countless cost-saving ideas and I became deeply depressed by deja vu. In 48 years, I’ve experienced several dark days and downturns. I thought of interrupting, but they didn’t look the type to take advice from a man with a senior railcard. I met my first crisis in 1975. Our finance director offered to chair a cost-cutting committee and, stupidly, I agreed. For a month his committee took control and played business politics: “In my hard-working department, costs are already cut to the bone,” each department head pleaded. The operations director was not there (he was busy running the shops), so the committee proposed cuts out in the field. “Shop wages are our biggest cost. To make an impact, we must cut the staff who serve our customers,” they argued. Thankfully, I rejected their plans and left the committee to concentrate on some hair shirt economies – Spartan measures for difficult times. They cut out Christmas parties, free fruit and The Financial Times in reception that no-one read. They even counted the loo paper – we used a roll per person per fortnight. This attention to detail pleased our FD. “It’s creating the right atmosphere,” he said, as he launched his SAVE IT campaign by putting red stickers by every light switch. These irritating small economies don’t do lasting damage. But I saw another finance director (thankfully not mine) champion a cost-cutting campaign that ruined his business. During difficult times, FDs often make decisions which they claim are “essential”. Sales had dropped 12 per cent and were getting worse but the FD, who knew nothing about retailing, still tried to meet budgeted profit. “Wages must be brought in line with turnover,” he said. “And margins must be increased to make up the shortfall.” He got his way. Prices went up. Staffing went down. Sales plummeted a further ten per cent. The finance director, still keen to make up the profit shortfall, ordered more price increases and redundancies, which put the company into administration. Head office rules, targets and money-saving KPIs can destroy a company’s culture and do damage for years ahead. Take note of the measures introduced by Mr Minit UK, a business we acquired in 2003. Its cost-cutting dictatorship declared that shop managers could not buy postage stamps – they had to ring head office, who sent them the stamps in the post. My most successful cost-cutting campaign was in the nineties, when I delegated the job to our area managers. Being near to the action, they understood which costs could be cut without destroying the business – and they were willing to trim their own empires because every penny saved increased their bonus. Another wheeze that worked was when my son, James, and Paresh, our finance director, went through a year’s invoices. They discovered we were paying for things that were absolutely useless – costs we could cut without ruining the business. Cost cutting would not have saved Woolworths and, during a severe recession, it probably won’t do enough to achieve an optimistic profit budget. If sales drop ten per cent, we are bound to make less money. But as long as I have enough cash to keep the bank manager at bay, I won’t be bothering about budget and I certainly won’t be forming a cost-cutting committee. Common sense tells me to keep looking after our good people by paying out lots of perks and spending as much as usual on training so we can take advantage of the opportunities that are sure to appear when things get better. Picture: source
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