For almost as long as I can remember, retailers have been killing themselves off by trying to compete on nothing else but price. The thinking is “if we can sell it for less than our competition, we will get the business”. It really doesn’t work like that, but many good retailers have closed their doors trying to cut prices instead of building relationships.
Of course, price is important. Especially today, when consumers are more savvy and there is so much media exposure for every imaginable product. But consumers want more. They want competitive prices – no one wants to feel they over-paid – but they also want service, selection, and information. Think about how many of your shoppers would have become customers if you could have talked to them and answered their questions. Most are not merchandise or fashion and your advice will go a long way to make them comfortable – and that is when they will buy.
Retailers have developed “sales” for every possible holiday or event. Any excuse for a sale is taken. This is good for the consumer, but not great for retailers. Sales have become the most prevalent way to build traffic. It’s easy, just pick a sale theme and cut your prices. The problem is you’re also cutting (or eliminating) your profits.
Even though I will advise that this habit should stop, it will not. But as a specialty retailer you must work to find other ways to compete beside just lowering prices. Be creative. Put yourself in a position to mean something more to your customers than a place where there is a lot of products at cheap prices. If you don’t, you will wind up like thousands of other retailers who couldn’t make it by cutting prices alone.
Retailers seem to feel that if they can sell an item for the same amount as they bought it for, they are “getting their money back” and can then reinvest those dollars in other better selling products. While this is partially true, the whole truth is that every item of merchandise that is put into inventory must carry its proportional share of overhead. So when an item is marked down and sold at the product cost, there is no contribution to overhead or profits. To keep your doors open, you must pay your overhead (rent, utilities, labor, advertising, etc.) This contribution to overhead must come from somewhere and it is usually your profits from other products sold at full price. As you can see, the more you markdown, the more you deplete profits earned from full price sales.
If you are a retailer working on a “keystone” markup, you must sell through at least 80 percent of your inventory at full price just to break even! That’s pretty startling, but it’s true. So it follows that you must do everything possible to sell merchandise at full price.
As with all things, that’s easier said than done, but here are a few suggestions:
- Get involved. Participate with the people who will buy or recommend your products. Let them know that you are the kind of person they want to do business with – honest, knowledgeable, service orientated. Perhaps sponsor some organizations to get recognition.
- Educate. Be a fountain of information about your products. Hire better people. Work with them. Learn all you can. There is nothing more inviting than someone who is willing to share knowledge with you. The better your staff relates to your customers, the more they will sell. Building relationships will build sales.
- Make your store more interesting. Have you done everything possible to make your store “user friendly”? Perhaps you need an area where products can be tried rather than using every inch to jam in more merchandise. Learning if the product you want is right before leaving the store is a big help. This is also a great opportunity to get your staff involved.
- Buy the right items. Know your customer. Know your town. Know what is happening and what the needs of those you serve are. Spend the necessary time researching the market before you buy. Buy the best available items.
- Buy the right quantities. Don’t overbuy! More sales are held because retailers need to raise cash to pay the bills for excess inventory. Sounds like a vicious circle and it is. Retailers buy too much, then they have too many invoices, then they run a sale to raise cash, then they pay the bills, but have no profits left at the end of the cycle.
Since your bottom line can be tied directly to your buying, you need to do your buying in a way that will help you produce the greatest profit. That way is “open-to-buy”. Open-to-buy is a process that will guide you to determining the correct quantities to purchase in each merchandise category for each month 12 months into the future. The process is based on two elements – the same two forces that drive your store – sales and turnover. Obviously sales are important, you spend most of your time figuring how to increase sales. Perhaps some of the above suggestions will help in that pursuit.
Turnover is a little more mysterious, but every bit as important to your success. Simply put, the more you turn, the more you make. Turning your inventory means you are keeping your stock fresh, interesting and productive. Putting merchandise on sale is not helping your turn because no profits are realized. Each time merchandise sells at regular price it generates funds to pay the cost of the merchandise and contribute to overhead and profits. If you do not sell enough merchandise to cover your overhead and leave a profit, your profit will be lost to overhead. So it follows that if you turn your invested dollars more frequently you will generate more money to pay overhead and create profits.
Retailers need to have a two pronged mission. The first is to create as many regular sales as possible. The second is to turn inventory dollars as frequent as possible and generate the highest possible profits. Markdowns will not fulfill this mission. Creating the right atmosphere, educating and gaining the consumer’s loyalty, and using open-to-buy planning to determine and control your buying will get you where you want to be.
Using open-to-buy to plan your buying dollars and then educating yourself as to what is available in the marketplace gives you a powerful advantage. You will be buying the best available merchandise in the right quantities to support your sales, give you the turn rates you desire and leaving you with a positive cash flow every month – whether sales are strong or weak. That is where open-to-buy planning really shines. By ordering the right quantities to bring your beginning inventory each month to just the right level, you will see your inventory rise and fall in response to anticipated sales and your profits will always be there because there will be no excess invoices.
So what is the formula for retail success? Rethink your store, your customer, and your merchandising approach. Perhaps you will opt to change your advertising, your store layout, your displays, your decor, your personnel, and your service and sales approach. No matter what you change, if you have previously seen cash flow problems, you need to change to open-to-buy planning as soon as possible. Making the necessary changes in your sales approach and buying with open-to-buy planning will insure that this is just the beginning of many profitable years ahead.