Because of his expertise, our retailer loved to surround himself with great quantities of every imaginable product related to every merchandise category represented in his store. He went to every trade show and bought from his favorite suppliers and looked for new resources as well. He made sure that he had the newest and the best items. He also bought enough so he would always have product in stock no matter what the season. One thing our retailer never wanted to do was to miss a sale.
Business was good. It seemed our retailer could do no wrong, except that as sales and inventory continued to grow, cash flow seemed to dry up. Something was wrong. Our retailer thought about the problem and decided to cut back on some overhead. That would save money and improve cash flow. He laid off a few of his employees and cut back on the hours of others. Definite savings.
But, as you can imagine, this hurt sales. Regular and potential customers were coming in, but couldn’t get the advice and help they had come to expect and some decided to go elsewhere.
Well, our retailer didn’t want to start paying those big labor bills again so he figured the answer was to bring in more merchandise. Then no one would be able to leave the store without finding something. And besides, what is more satisfying than to go into the marketplace and place large orders with your suppliers. They are really appreciative and most of them want to buy you lunch (or dinner). So, the orders were placed and the goods kept rolling in. The store was now bursting with every imaginable item. Who could resist buying everything in sight?
To our retailer’s delight, sales crept steadily upward, but cash flow continued downward. It got so bad that he was having problems paying the bills for all of the merchandise he had bought, and there was more on the way! So some bills were paid late.
He didn’t want to jeopardize his credit or relationship with his vendors, but what choice did he have? Delaying payments would give him time to figure out a way to raise cash. “A sale will raise cash so I can pay the bills”, figured the retailer, so prices were slashed. Ads were placed and in came the customers – buying, buying, buying. And why not, prices were too good to be true. Now there was available cash to pay the bills, and paid they were. Our retailer was pleased that he was keeping his good credit in tact, but after paying the bills the bank account was once again empty. After all the hours our retailer had put into the store, there was nothing left for him – and more merchandise was on order. “Guess I’ll run another sale” thought our retailer. And he did – and the cycle was set. Buy, markdown, pay bills, buy, markdown, pay bills – and still nothing left for our retailer.
What am I doing wrong? How can I get off this treadmill and make some real money from my store?
Our retailer had some wrong ideas about merchandising and had to make some mental changes before he could get things on the right track.
He was wrong about reducing his staff. Any retailer’s biggest asset is his help. They set the tone for everything that happens in your store. Better people with a better attitude and a better work ethic will mean better sales, happy customers and positive “word-of-mouth” advertising. Everyone talks about the good and the bad they have encountered. The ordinary they forget, but tend to think of ordinary more in the bad column. Interested, attentive, informed sales personnel can do wonders for any store – much more than “more inventory”.
He was wrong about loading the store with inventory. The specialty retailer must have the right amount of merchandise – not an over abundance. Having too much merchandise creates more problems than it solves. It is confusing to the customers as well as overwhelming. There is only a limited amount of input that any customer can deal with and going beyond that just creates confusion. Too much inventory takes too much space. Customers need to see displays to whet their appetite for buying. Displays are your silent sales persons and give your real sales staff a place to begin to add to customer sales.
Too much inventory eliminates any sense of urgency to buy. When your customer sees that you have so much stock of the item he wants, there is no need for him to make a buying decision. He can check the competition and come back almost anytime and will find the same merchandise available. You want and need to create urgency in your customer. You want them to make a buying decision. When they see a limited quantity of the right merchandise, they are forced to make that buying decision. That is good for you.
Too much merchandise also eliminates the need for your customer to come in to see what’s new. When the store is filled to the maximum, not much change can be expected in the near future. You want your customers to come in frequently and make regular buying decisions.
Too much merchandise means too many invoices. Our retailer’s problem all along was that he was buying too much. Then the problem was compounded when he laid off his help and bought more merchandise. Merchandise must be ordered to meet anticipated sales at desire turn rates. Only the newest and the best should be a part of your merchandising mix. With all the information available to your customer, that’s what they want to see and that’s what you must have – in the right quantities.
Our retailer did not want to ever miss a sale. That is not good retail thinking. As much as it hurts, to do the optimum job as a merchandiser you must miss some sales. If you make every sale, you have too much merchandise. You never want to miss a sale on merchandise that you own, but you must come to grips with the notion that you cannot service the needs of everyone that walks into your store. If you sell 100 items and miss a sale on one, what do you remember? The one, of course. But that is not a reason to call your suppliers and order in a stock of that product.
Our retailer’s attempt to maintain cash flow through markdowns was misdirected. Consider this. A retailer working on a “keystone” markup must sell through 80% of his inventory at full price – just to break even. The reason for this is that every item of merchandise that you put into inventory must carry its proportionate share of overhead – every item. So that means that if you double the cost of an item to create a selling price, chances are that your overhead (rent, labor, advertising, utilities, etc.) are probably about 40% leaving a 10% profit. If you mark down the selling prices, you first eliminate the profit and then the overhead contribution. Even though you think you can recoup your “cost” by markdowns, you are only receiving the cost of the merchandise which is not the true inventory cost. Markdowns don’t work. They rob you of your profits and create financial hardship. Markdowns also create customers that are looking for sales. You want customers who are looking for newness, service, knowledge and an atmosphere they can relate to.
Once our retailer realized that open-to-buy (and not staff cuts) was the answer, he started properly planning his buying based on anticipated sales and desired turn rates, and brought his sales force back to the right level. Business once again was growing, inventories were lean and balanced, turn was up and cash flow was terrific. There was no need to take markdowns. Our retailer had learned how to keep his profits in his pockets and not on the shelves.