It Takes More Than Exclusive Lines
Posted on Mar 04, 2010 by Ted HurlbutIn a Reuter’s piece that appeared earlier this week, J.C. Penney CEO Myron Ullman said, “Department stores must keep ramping up exclusive lines of clothing and accessories if they are to win market share from rivals and thrive in the still sluggish U.S. consumer spending environment.”
He then went on to say, “There are too many department stores that are the same. If everything is the same, then it's where you get the better parking spot.”
It’s a great way of putting it. If every store is the same, it all comes down to convenience, and, by the way, price. Which is why retailers from Penney’s to Macy’s are chasing exclusive lines.
Ullman went on to tell Reuters that, “more exclusives will help Penney brush back the competition and boost the bottom line given their higher profit margins compared with widely available brands.”
Not necessarily. It takes more than exclusive lines.
Department stores and every other apparel retailer have been offering customers a “sea of sameness” for several years now. The problem hasn’t been the labels in the garments, it’s been the garments themselves. To customers, whose eyes have glazed over, it’s all become just stuff. When’s it going on sale? When’s the next markdown? (It’s more likely that the best way for department stores to protect their margins in the current environment is to manage their inventories very tightly, and avoid markdowns as much as possible, as recent reports suggest.)
The challenge for department stores, and their exclusive designer lines, is how to create distinctiveness without taking the kind of fashion risks that might alienate their broad-based, middle-America target customer. More likely than not, at the end of the day, the fashions will be safe, and all that’s going to be distinctive is the hang-tags.
This is important for independent retailers to understand, especially fashion boutiques. Many have built not just their assortments but their positioning around lines that they carry exclusively in their markets. Over the past year and a half, however, that has been scant protection from the forces rippling through the retail world. Even to these customers it’s come to look like just more stuff.
Differentiation requires real difference. Real difference in the world of independent retailing begins with an entrepreneur’s vision, and the compelling execution of that vision. For fashion boutiques, it might be the unique feel of the store, from funky to chic, or it might be the incredibly personalized service, or the discerning, captivating taste level of the owner or buyer. In this moment in time, however, it’s got to be more than just the labels on the merchandise.
Add Comment (0)Independent Retailers in Trouble
Posted on Feb 23, 2010 by Ted HurlbutI'm worried that many independent retailers may be in serious financial trouble.
Today, The Conference Board reported that its index of consumer confidence dropped “sharply” this month to 46.0 from 56.5 in January, surprising economists, who had expected a reading of 55.0. Lynn Franco, Director of The Conference Board Consumer Research Center commented, "Consumers' short-term outlook… took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months."
Ten days ago, the Commerce Department reported that retail sales in January were 4.7% ahead of sales in January 2009. This represented the third straight month with year-over-year increases, and the January increase was characterized as “better than expected.” Inside the numbers told a different story. Much of the increase was due to sales at gasoline stations (+29%) and non-store sales (+12%).
Further, several major retailers reported sales and earnings this morning for the most recent quarter, with Barnes & Nobles, Home Depot, Macy’s and Target all reporting increased earnings, but only Home Depot reporting a revenue increase.
These three reports aren’t so much contradictory as they are helpful in painting a picture of what’s happening to many independent retailers. The upshot, supported by anecdotal evidence, is that many independent retailers are likely under extreme financial stress.
When the recession unfolded, independent retailers were among the first to feel its effects. In fact, some have experienced significant revenue declines, of as much as 40% or 50% since the beginning of the recession. Independents are much more reliant on discretionary purchases than the major national chains, and as discretionary income tightened, they were impacted before the majors. Just as they were the first to feel the pinch, it’s been expected that independent retailing would lag their chain counterparts in recovering as the economy improved. That improvement is clearly proceeding very slowly, with any sales increases focused on non-discretionary goods. Revenues for many independent retailers have not yet begun to recover, and for some, are continuing to slip.
Further, throughout 2009 retail inventories across all retail sectors were drawn down significantly. This was done to more closely align inventory with sales, reduce markdown and margin exposure, and put a floor under retail prices. But for independent retailers, there was another, more urgent reason inventories had to be drawn down.
Even the very best independent retailers have experienced 15% to 25% sales decreases over the past couple of years. Few have the flexibility to cut expenses as dramatically, resulting in chronic cash shortfalls. For many, inventory represented the only available source of funding to cover these shortfalls. As they experienced these monthly cash deficits they were unable to fully replenish their stocks. As they sit today, many have very lean inventories, and that last source of cash has been exhausted, even as the monthly deficits persist.
Independent retailers are an indispensable part of our economy. While there aren’t as many as there once were, they still collectively employ hundreds of thousands of workers. Thousands of owners and their families are fully invested in these businesses. Many are likely in serious financial trouble, yet this trouble is not necessarily evident to the eye. There were a lot of storefronts shuttered throughout the first half of 2009, when the weakest failed. The stronger have survived so far, but there is the risk that we could begin to see another wave of failures as sales continue to lag.
The entire economy needs a boost, something to jump start businesses across all sectors. But I’m particularly worried about the state of independent retailers right now.
Are You Thinking About Opening A Store?
Posted on Feb 23, 2010 by Ted HurlbutSince the beginning of the year, I’ve spoken with a number of people thinking about opening a retail business. In every case they have made the decision to take their professional lives in a different direction, from working for somebody else to working for themselves, from working in larger organizations to building their own business.
They have cash and a dream, and their experience has taught them they need to be absolutely sure they do it right. Each has been at a different point in their due diligence. Some were at the very early stages in their thinking, others were well down the road to taking concrete steps forward.
We’ve talked about a lot of things, but the conversations tend to coalesce on some basics. Here are a few:
If you have a burning desire to open a store, read on. If not, you should think twice right now. If you’ve got passion, you’ve got a shot, very possibly a very good shot. If you don’t have the passion, you’d probably do better to move on.
There’s no sure thing. If there were, somebody else would have already opened your store in your market. Just because nobody else is already open in your market doesn’t necessarily make your idea viable. Your store is going to have to be unique and innovative in order to attract customers, and your execution is going to have to be exquisite.
Customers can get stuff anywhere. You’re not going to be able to compete on price, so you’re going to have to offer compelling assortments and a captivating customer experience. Customers won’t pay more for stuff, but they will for memorable experiences. Your thinking needs to go beyond what you’ll sell, but how you’ll create that compelling, captivating, memorable experience.
Location is important, but not as important as the experience you offer. Think about it; some of the best independent retailers you’ve shopped with in the past were in the most unlikely places. A customer who will tell their family and friends about your store is more valuable than 1,000 cars driving by.
Take your idea and find another retailer who’s already doing it in another area. Visit them several times. What do they do well, what could you improve upon, what ideas can you apply to your own business? Will they talk to you? While you’re at it, start shopping the best independent retailers you can find, regardless of what they sell. What makes them so good? What idea’s can you ‘borrow’ from them?
Take several of the key categories you would carry, find out who the key vendors are, and go talk to them (a trade show is great for this). Share your idea with them, including where you’re thinking of opening, and how much you’re prepared to invest. Once you’ve got their ear, learn about their lines, pricing and terms, and pick their brain about what makes a retailer successful with their merchandise. Ask if they will introduce you to some of their more successful accounts (who wouldn’t be direct competitors) so you could talk to them directly.
You’ll need to meet as many potential customers as you can, personally, before you open. You will need to leverage your personal network to begin building a network of potential customers. In the current environment, you cannot afford to build your business slowly. You’ve got to hit the ground running.
You will need a detailed financial plan. You’re not going to sell as much in the first year as you think you will, and you’re going to need more cash than you think. Your margins will be less than you think, and your expenses more. Prudent planning is essential.
These are only a few of the initial considerations that go into opening a successful retail store. The further you get into it, the more considerations that come into play. As with most things, the devil’s in the details. But if you’ve got the passion in your gut, come join us.
Whither The Winter Merchandise?
Posted on Feb 18, 2010 by Ted HurlbutHow do you deal with a quote like this, from an analyst at Redbook Research, a publisher of tracking statistics and independent analysis on the U.S. retail market, which appeared just this week:
“At department stores, shoppers were searching for limited selection of cold weather merchandise since retailers already cleared out winter goods due to lean inventories. Some retailers who are fully stocked in spring merchandise will continue to miss out on the opportunity to sell cold weather merchandise.”
To some independent retailers, this statement may sound reasonable. Most independent retailers are loathe to have a customer come in their store and not find what they’re looking for. Their natural instinct is to never willfully lose a sale. But the recession has changed many things, not the least of which is how independent retailers manage their inventory.
So it would only be natural for an independent retailer to pause over that statement and wonder if they do have significant inventories of winter merchandise left whether they’ve done the right thing, and if they don’t whether they’ve done the wrong thing.
Despite the statement above, in almost every case if you have little winter merchandise left, you’ve done the right thing. Let me explain.
The answer lies in the profitability of clearance merchandise. Start with the idea that significant inventories of clearance merchandise represent a portion of the last purchase made before the end of the season, whenever that might have been. (It might represent more than just that last purchase!) Simply stated, that inventory represents the decision whether to buy that last layer of goods or not buy it and bank the cash that would have gone to cover the invoice for it.
Stick with me here, at this point we need to do some retail math.
To illustrate, let’s assume at the time of the first clearance markdown that there was $1,000 of the last purchase still in stock, at full retail price, with a 50% markup. That means the invoice cost of that $1,000 was $500. To that $500, however, we need to add at least 8% ($40) for freight and processing, bringing the total cost basis to $540. But we need to reduce the retail value of the merchandise available for sale by at least 5% ($50) for damages and a minimum of 15% ($150) for final disposal of any unsold leftover merchandise, leaving a full retail value available for sale of only $800.
In order for that merchandise to be sold profitably, you need to clear $540 dollars from that $800 of fully valued inventory. That means that the average markdown of that merchandise when it’s sold cannot exceed 32.5% ($540/$800). Perhaps before this recession that might have been possible (perhaps), but in the last year and a half, nothing much moves at clearance time for less than 35% off, and that doesn’t factor in second markdowns that can take merchandise to 60% off, or more.
If your standard markup is more than 50%, it gives you a bit more room, but it won’t likely change the conclusion. That’s because there are still other, more difficult to quantify costs. There are the additional markdowns that are needed to move through the remaining inventory of any planned ending inventory at the time of first markdown. That merchandise is part of the now larger body of clearance merchandise and it’s going to need an extra 5% to 15% in markdowns to move it through than it otherwise would have taken. Finally, there’s the cost of not selling customers fully priced seasonally forward merchandise, and gaining the full margin of those sales, instead of forcing customers toward the markdown racks.
When it comes to that last purchase of the season, in most every case you’d be better off keeping your cash in your pocket.
Once upon a time you could clear out merchandise and perhaps break even (or at least come close). It might have made some sense to carry more merchandise later into the clearance season, if only to accommodate customers. But with margins a struggle to begin with, markdown percentages the likes of which we’ve never seen before, and cash flow under such intense pressure, carrying excessive clearance inventories is a luxury very few independent retailers can afford.
Ted Hurlbut Principal of Hurlbut & Associates Welcome to my Retail Blog. Here is where I empty out my brain of all things retail, and offer my perspective, insights and opinions. Please share your comments so we can keep the discussion lively, interesting and beneficial.
