Retrenchment: Short-Term Pain for Long-Term Gain?

This article features in the March 2012 edition of Business Café – tutor2u’s digital business case study magazine for all Level 2 and Level 3 business courses.

We usually expect businesses to be actively trying to grow due to the advantages that being large can bring, e.g. economies of scale, increased market power and increased profits.

However, there are situations when firms actively seek to shrink and become smaller. Retrenchment is the term which describes this process. It involves a business reducing the scale of its operations by either reducing capacity (Burberry closing a factory), withdrawing products (Kodak leaving the digital camera market), withdrawing from markets (Tesco leaving Japan), and de-merging (HMV selling off Waterstones).

What is it that causes this strategic change and does it negatively affect the businesses’ prospects and stakeholders?

Poor trading figures are one key factor in a business deciding to retrench. Thorntons, the chocolate manufacturer, has recently announced that its half-yearly profits have fallen sharply. Profit in the 28 weeks to 7th January was £618,000 compared to £8.4 million a year ago.

Considering Christmas is the most important sales period for the company, this is a worrying sign. The Chief Executive blames the decline in high street footfall and shrewd shoppers purchasing those items which are discounted as part of promotions. Thorntons has 364 UK stores and it has been announced that 180 will definitely close over the next three years as their leases expire. This means that 10,000 UK retail workers will become unemployed as a direct result of Thornton’s retrenchment plan. Obviously, fewer stores and less staff will reduce the costs of the company but it is hoped that sales levels can be maintained by offering more franchise opportunities to people wanting to run a Thorntons store, as well as the manufacturer increasingly selling their chocolates through supermarkets and other retailers.

Thorntons is not alone in its aim to retrench. The economic climate has taken its toll on other businesses, such as Thomas Cook. The lossmaking company is retrenching by closing 200 of its travel agencies, reducing its number of aircraft, reducing the hotels being offered and withdrawing from some destinations. Again, this is bad news for employees and reduces choice for customers but is a strategy that is needed if the business is to have a chance to survive.

Lloyds Banking Group is another high profile business that is undergoing retrenchment, as is Comet and the Royal Mail. Loss- making organisations like the Royal Mail have been more affected by a change in how people prefer to communicate. The rise in sending texts and e-mails means there has been a huge slump in the number of people sending post. Since 2002, 65,000 people have left the postal service, 12 mail centres have closed and there are plans to close 16 more.

Kodak, whose name became synonymous with photography, is to stop making digital cameras. The 133 year-old company said it would also end production of video cameras and digital picture frames. Kodak said it would concentrate on more profitable divisions, such as photo printing and desktop inkjet printers. It is estimated that these changes should save the company about £63 million per year. It is these parts of the business that have been loss making for the business, primarily because it could not compete as mobile phone manufacturers have introduced increasingly sophisticated cameras on their own devices.

Retrenchment is a strategy that is being pursued by many high-profile companies. In a bid to reduce costs, improve their competitiveness, reduce their reliance on declining markets, ride out the economic downturn or rid themselves of takeover mistakes, retrenchment could be the strategy that sees some well- known businesses survive to secure long term job security and once again experience increasing profits and returns for shareholders. Unfortunately, it will be the employees of these companies that have to suffer the uncertainty of potential job losses.