Out of necessity, he had drawn down his inventory in 2009. He was now looking at a store with significantly less merchandise, with racks and fixtures that were a lot lighter than they’d ever been. He recognized that he wasn’t going to be able to quickly rebuild his inventory to its previous level, and frankly, he wasn’t sure he should anyway. Still he was concerned about how his customers were reacting. Was he going out of business, they wanted to know.

 

This is not an atypical concern right now. Many independent retailers have had a similar experience over the last couple of years and are asking themselves similar questions.

 

Opportunity is the mother of invention. For many independent retailers, rebuilding inventories to previous levels would not be smart. Most of them would concede that they once carried more than they really needed, and have learned that they’d rather have the cash in the bank. This moment, then, represents an opportunity to re-merchandise the store, and create fresh presentations that wouldn’t have been possible when inventories were more significant.

 

Independent retailers need to seize the moment.

 

When I’ve work with clients on right-sizing their inventories, re-merchandising is almost always part of the process. Assortments need to be adjusted and space re-allocated. Still, while recognizing they were carrying too much, owners are understandably concerned that sales might suffer. From my experience, however, sales almost always go up.

 

Where stores once were stuffed with 12 or 15 pounds in a 10 pound bag, now they only have 8 or 9 pounds. Now, there’s elbow room. Now, the merchandise has room to breathe.

 

It’s not just about shorter arms on four-ways and shorter peghooks on slat-wall. Now there’s an opportunity to widen out aisles a bit and create better sight lines and impact. Now there’s room to turn garments face out and create more dramatic presentations. Now there’s the ability to create vignettes.  Now, there’s room to space things out and create greater impact for every line or program. Presentations become much more powerful.

 

Re-merchandising in this way dramatically increases the visual appeal of your assortments, thus increasing the impulse quotient. Customers stop and linger more, they’re drawn to things they never would have noticed before. And that leads directly to a bump in sales.

 

There are many virtues to leaner inventories. Inventory turnover increases, creating a better balance between cash and inventory. Cash flow improves. Assortments remain fresher, with a higher percentage of new merchandise on the floor. And finally, leaner, more focused inventories lead to greater sales. This moment, then, is an opportunity for independent retailers to move their stores forward in a way that’s prudent in the short term, and will set them up for sustainable success over the long term.

 

 

“A new frugality, characterized by a strong value consciousness that dictates trade-offs in price, brand, and convenience, has become the dominant mind-set among consumers in the United States.”

 

“Even as a slow recovery is under way, it is becoming clear that consumers are not going to step up to store counters with pre-recession alacrity. Marketers and retailers that wait for them to do so are taking a major risk with the futures of their companies.”

 

“As consumer demand returns, it will likely center on a different mix of price points, brands and private labels, and retail formats than prior to the recession.”

 

“Retailers… should be changing their product assortments, pricing strategies, advertising, and promotions. Companies that do this well will find the winds far more favorable, and they will prosper first and most in the new value-driven marketing environment.”

 

“Frugal behaviors, such as reducing or deferring consumption, trading down to lower price points, purchasing “private label” brands, and shopping at discount outlets, are hardening into habits.”

 

This confirms what many independent retailers have learned. Recovery doesn’t necessarily mean a snap-back in business. Assortments and price points have had to be adjusted as inventory levels have been brought down. The tried and true ways of reaching customers and driving sales are no longer effective. The customers have changed.

 

I spoke today at a gathering of independent retailers. My message was pretty straight forward: it may take 2-3 years for sales to fully bounce back to previous levels, with little margin for error businesses must be managed very skillfully, and they must return to the one-customer-at-a-time mindset which helped them build their businesses originally.

 

As the article concluded:

 

“Waiting out a return to the pre-recession, premium-driven consumer mind-set is not a viable strategy.”

 

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.

 

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.

 

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.

 

“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.

 

In the course of a conversation the other day, as we were discussing these issues, I asked her what she thought would really set her apart from any potential competition. What dis she think her competitive edge would be? She looked a bit confused, because we’d talked before about her plans for the store and how she wanted to create a store that would truly meet the needs of the teacher community. She wasn’t exactly sure what I was getting at.

 

I told her that she was her competitive edge.

 

For any independent retailer, their personal vision, passion and creativity, and their ability to communicate that to their customers and employees, represents their competitive edge. It is uniquely there’s, it’s what makes them uniquely them. It’s the one thing that can’t be readily copied or knocked off. It’s the thing that differentiates the very best independent retailers from all comers.

 

In this new-normal, post-recession, sort-of-recovery environment, there’s a lot of conversation about things like customer experience, total value and new media, and rightly so. What they all have in common is that they aim to build closer, more personal relationships with customers, and they all grow out of the vision, passion and creativity of an entrepreneurial mindset. The mass-market retailers are busily trying to re-engineer business models built around volume and economies of scale to become more “personal” and entrepreneurial.  They’re really up against it.

 

These are the things that come naturally to the very best independent retailers. There’s nothing cookie-cutter about them. No, you’re not suddenly going to be able to compete head-on with the mass-market retailers, but that’s never been your game. Independent retailers have long been about filling the niches, and delivering superior products and experiences to their customers.

 

The environment favors the passionate, the energetic, the committed and the entrepreneurial. You are your competitive edge. Use that competitive edge, and the future is yours.

 

For a number of years, until the recession hit in full force in 2008, independent retailers had the luxury of not having to manage their inventories too precisely. This was true of retail at all levels. Sales were strong, the economy was solid (even if there were cracks forming) and financing was readily available at favorable rates. The previous five years had generally been good ones.

 

On the whole, retail inventories grew fat. There was no pressing urgency to tighten them up. For the most part, every independent retailer’s primary focus was nailing down every last sale.

 

How much things have changed.

 

During 2009, inventories were brought down dramatically, for several reasons. First, many independent retailers understood that with sales declining inventories had to be brought down to avoid slower turnover and aging inventory. Second, inventories were brought down in an attempt to create a sense of scarcity and urgency within customers, and put a floor under falling retail prices. Finally, many independent retailers liquidated inventory as the only remaining available source of funds to cover monthly cash flow deficits.

 

Whatever the reason, with sales increases likely to be tough to come by for the immediate future, the capital to re-inflate inventories just isn’t there. For many independent retailers, there’s no longer any margin of error in how they manage their inventories.

 

What does this mean for independent retailers as we go forward? Here are several thoughts.

 

•          It’s no longer feasible to carry expansive assortments, like a fishing net cast to catch every last customer. Assortments have to be tight and focused on the core mission.

 

•          Supply chains have to be managed aggressively. Vendors almost always try to push inventories down the chain into retailer’s stocks. Independent retailers must push back hard on vendors and not let this happen.

 

•          Independent retailers must adopt a just-in-time attitude toward inventory. Excess depth of inventory is no longer sustainable. Reorders must be placed more frequently, vendor minimums negotiated downward. Longer peghooks must be traded out for shorter, wider shelving for narrower.

 

•          Independent retailers must establish monthly merchandise receipt budgets, derived from prudent sales and inventory plans, and those budgets must be adhered to. Every purchase represents a payable of some sort. There’s no longer the luxury of putting something in inventory without the capability of turning it quickly back into cash.

 

•          Independent retailers can no longer plan to do big clearance business. The markdowns are unsustainable. It takes full margins to be able to cover the payables and the other expenses of the business. Heavy inventories, leading to heavy markdowns, are potentially lethal in this new environment.

 

•          Owners and managers can no longer give short shrift to inventory management. It is now an essential skill which must master personally in order to succeed in an environment with so little margin for error.

 

The last point is key. Independent retailers must now be able to generate positive cash flows without the cushion of excess inventories to fall back on. Assortments and inventory levels are, in fact, directly related to pricing power and margins. Few can sustain positive cash flows with the greatly reduced margins that they experienced in 2009.

 

The new environment is full of many challenges for independent retailers. Instinctively, many feel if they can merely rebuild sales that that will be enough. For most, however, it will require exceptional inventory management skills as well.

 

Today, the independent retailers who have made it through 2009 remain worried, but the terror has receded. The holiday selling season on the whole looks to have been slightly better than expected, although too many independents are still struggling mightily. If 2009 was about survival, 2010 is about stabilizing and rebuilding.

 

2009 was about maintaining solvency. Most independent retailers had to tap into reserves to maintain liquidity. Many dramatically ran down inventories, not merely to keep them in line with sales, but also to raise cash. 2010 is about re-establishing sustainable cash flows.

 

If inventory at the beginning of 2009 was available to be used as a source of cash for many independent retailers it was only because in the years preceding it had been allowed to build up beyond what sales required. Over the past year, there have been numerous articles about how retailers are dramatically increasing their focus on inventory management, particularly leading into this past holiday season. Independent retailers have learned that they, too, have to improve their inventory management capabilities.

 

If 2010 is to be about stabilizing and rebuilding, if it’s to be about re-establishing sustainable cash flows, the task at hand for independent retailers will be to dramatically improve their inventory management capabilities. While most all will seek to rebuild their revenues through renewed marketing and outreach initiatives, and through re-investing in their in-store experiences, few believe they can count on significant sales increases to stabilize cash flow. And with so much cash dedicated to inventory, what comes next is a re-commitment to prudent, effective inventory management. That’ll be the subject of my next post.

 

Burton M. Tansky, president and chief executive of the Neiman Marcus Group, told the Times, “We’ve told our customers that the availability is less than they’re used to seeing in the stores. We’ve suggested that it would be prudent to shop early.”

 

“We’re out of stock on a number of hot items people want,” Stephen I. Sadove, chairman and chief executive of Saks said. “Our associates are telling people, ‘If you want this item in your size, we only have three of them, we only have two.’ ”

 

This morning the major department stores released their November same-store sales, and it was not good. Sales were off 26.1% at Saks, and 7.5% at Neiman Marcus. Nordstrom, able to buck the trend, was up 2.2%. Amongst other department stores, Macy’s was down 6.1% and Penny was down 5.9%. Overall, retail sales for the month were said to be down 0.3%.

 

What to make of all this? My reading is that the strategy of managed scarcity was not enough to overcome continued weak demand and consumer resistance to full retails. Limited supply did not lead to higher prices; rather, higher prices led to weak unit sales.

 

This is important for independent retailers, who tend to specialize in discretionary merchandise, and who have been struggling to command full retails and full margins. In an environment where deep discounts are being offered across every commoditized category by every mass-market retailer, those higher-end retailers were not be able to sustain their price points, regardless of stock levels. Customers called their bluff. The economy is too weak, and the retail currents are too strong.

 

These November sales results are a key leading indicator for independent retailers. They suggest that as we move into 2010, the macro-economics will still be weak and consumers will still hold the upper hand. Independent retailers will continue to struggle with price points and margin. Skillful inventory management will remain vitally important, and cash flow will remain of paramount concern.

 

Aggressive by nature, many independent retailers are reviewing their weekend business, looking for items and categories that out-performed and other opportunities that might pop their business in the next few weeks.  Even with a flat sales plans for December, they’re not willing to passively concede that a 5% or 10% increase can’t be wangled. With one last buy of the right things, they reason, that 5% or 10% might be there for the taking.

 

That last buy, in fact, is usually the least profitable buy of the year. The problem is not generally in what’s bought, the problem is in the quantities bought. Invariably, the last buy has not been planned for, it’s placed on the spur of the moment, and represents an aggressive merchant’s unwillingness to stand pat with the assortments and quantities already on hand. What starts out as a highly surgical buy of several key items almost always turns into an additional layer of merchandise across several key categories.

 

The key metric to consider is the final sell-thru’s on those quantities that were brought in with the last buy, before the first round of clearance markdowns is taken. Invariably, a large percentage of the last buy ends up on clearance racks, bringing the overall profitability of the last sale down significantly, and lowering the profitability on the balance of clearance inventory as discounts need to be ramped up across the board to push through greater-than-planned-for ending inventory.

 

In my experience, the last buy rarely impacts sales, one way or another. The one exception is when a single item is driving business, and would sell out without the last buy. Absent that, all that the last buy does is add to ending inventory. In situations where sales break out and exceed plan, the bump usually can be directly attributed to a jump in traffic, with most departments and categories participating. In that case, a simple analysis almost always shows that without the last buy that ending inventories would end lower than planned (with less to clear out!) rather than with significant out-of-stocks.

 

In the current environment, the last buy is even harder to justify. Few retailers are working off of a positive sales trend, which shifts the risk/reward equation even further in the wrong direction. Independent retailers should avoid the last buy, except in those rare cases where a single item is driving business and is in danger of selling out. Rather than focusing solely on December sales, independent retailers should also be looking at December and January together, and considering how to maximize profitability across both of these crucial months.

 

“If we were to run our inventory as tight as Saks, Nieman and Nordstrom, how would we ever make our sales? We wouldn’t have enough inventory.”

 

Perhaps, but perhaps not. The point of the strategy isn’t sales volume, however. It’s margin dollars.

 

The answer lies in the composition of sales, the balance between unit sales and average selling price. For years, the trend in retail has been for unit sales growth while average selling prices have eroded. For mass marketers, this has made sense; buy unit market share with lower prices, offsetting the reduced margins with volume and cost reductions driven by economies of scale.

 

That may have worked for mass marketers, but it’s a recipe for disaster for specialty retailers, and most independent retailers. They can never hope to do the volume to offset the loss of margin. The markdowns they took last year just to move through their inventories decimated margins and profits. A strategy of managed scarcity is designed to rebuild margin percentages, and margin dollars.

 

Most likely, these retailers have actually planned for slight sales decreases, given the economic environment. But their sales plan is composed of more significant unit sales decreases combined with a recovery in average selling prices. The impact of such a plan, however, would not be slight. Higher average selling prices lead to greater margin percentages, which on a plan calling for a slight top line decrease will generate a nice increase on the margin line.

 

In the short term, these retailers are willing to accept a flat top line, but they must improve margins. When 4^th quarter results are released, the key metric won’t be their performance on the top line, it will be how they did on the margin line. If their plan comes in, they’ll have dramatically improved profitability while reestablishing pricing integrity.

 

In an environment where significant top line increases just don’t appear to be in the cards, a strategy of managed scarcity, of planning for lower units sales offset by higher average selling prices, makes a lot of sense for many independent retailers. The payback won’t necessarily be on the top line, however. It will be on the margin line, and on the bottom line.

 

For a year now, independent retailers of all shapes and sizes have been struggling with weak sales, deep markdowns and the question of how they’ll ever be able to get customers to ever pay full price again. At the same time, they’ve drawn down inventories, to align stock levels with sales, reduce markdown exposure and maintain positive cash flow. Throughout, as inventories have been reduced, there’s also been the hope that lower stock levels would begin to put a floor beneath prices.

 

As we’ve gone through the first few months of the fall selling season, there’s been a close watch on retail prices. With unemployment at the highest levels in a generation, and consumer confidence wavering between cautious and pessimistic, there’s been the concern that consumers would demand deep discounts before they would open up their wallets, irregardless of stock levels. Would prices hold? The early indications have been mixed, at best, especially on lower and moderately priced goods.

 

This morning in the New York Times, there was an important piece on luxury retailers such as Saks, Neiman Marcus and Nordstrom, and their efforts to sustain full retails through a conscious strategy of limiting quantity. There were several quotes that stood out.

 

Burton M. Tansky, president and chief executive of the Neiman Marcus Group, told the Times, “We’ve told our customers that the availability is less than they’re used to seeing in the stores. We’ve suggested that it would be prudent to shop early.”

 

“We’re out of stock on a number of hot items people want,” Stephen I. Sadove, chairman and chief executive of Saks said. “Our associates are telling people, ‘If you want this item in your size, we only have three of them, we only have two.’ ”

 

This is significant for many independent retailers. While not Saks, Nieman or Nordstrom, these independent retailers do offer better specialty merchandise in their categories, merchandise that is highly discretionary and that has been under the same pricing pressures as other discretionary spending.

 

The success of these luxury retailers in altering the pricing and demand equation by limiting supply is worth keeping an eye on. Independent retailers need to be in these stores, observing assortments, merchandise displays and stock levels as we go through the next six weeks. They need to engage store associates to see how things are going. They need to see if they hear more comments like this one, from the Times story, regarding a woman’s boot, priced at $1995:

 

“All gone, except for this,” said Nick Passerelli, a Saks employee, dangling a size 11 boot from his fingers.

 

And then there was this final quote at the end of the story, something for all independent retailers to think about:

 

“What’s luxury retailing about?” Mr. Sadove said. “It is about a scarcity of supply.”

 

 

First, he claims, the owner/founder needs to think like an independent. Then, they must have a singular entrepreneurial vision that is hard to replicate, must be persistent and passionate about the business, must work hard and do whatever it takes to succeed, must be willing to adapt to change, and must connect to the community.

 

To this, I would add that the most successful independent retailers also aggressively manage for growth. They understand that to succeed over the long term that they must achieve a critical mass within their markets. It’s not that they necessarily aspire to open a number of stores. Instead, their objective is to claim a predominant position within their markets, their communities and in their customer’s minds, often with just a single store. They understand that size and scale matter. To become the retail destination of choice for their customers they must become almost omnipresent in their customer’s minds.

 

George Whalin addressed this indirectly in his recent book, “Retail Superstars: Inside the 25 Best Independent Stores in America”. In his book, George profiled 25 retailers who have distinguished themselves over the long haul as creative, innovative, engaging, focused and profitable. one of the common characteristics of each of the retailers he profiled, however, was that each had achieved a critical mass in their markets, typified by size and scale, that enabled them to capture a commanding position and reputation.

 

In some ways, it might seem like a chicken and egg issue. In order to achieve a critical mass, you must earn it through a dynamic excellence that both Robert Specter and George Whalin have described. But merely achieving that dynamic excellence won’t generate the growth that leads to critical mass. You must manage for that growth. 

 

As independent retailers look forward to 2010, and what looks to be another challenging year, there are two financial imperatives. The first is obvious. You must be profitable, whatever your current revenue level. Secondly, however, you must also manage for growth, for only by achieving critical mass through size and scale can you give yourself the best chance at being able to sustain your profitability for the long haul, regardless of the economic environment.

 

Nevertheless, there were concerns about the impact on retailers in the near term. The Associated Press reported that… “Craig Sherman, vice president of government affairs at the National Retail Federation, thinks the industry "dodged a bullet on the holiday season" for the most part, because most merchandise is in stores' distribution centers. However, he said CIT's woes could throw a wrench in ordering for the important 2010 spring season.”

 

The concern for independent retailers is not primarily on the impact that the CIT filing might have on them directly. As the AP story noted, CIT provides financing for “… 2,000 vendors that supply merchandise to more than 300,000 stores. About 60 percent of the apparel industry depends on CIT for financing.”

 

For independent retailers, many of whom have worked through financing challenges over the past several years, the impact of the CIT filing is likely to be felt most as disruptions in supply from their vendors. Already this season, many vendors to independent retailers have significantly narrowed their lines and tightened availability, both due to the uncertain retail environment and difficulties obtaining credit. CIT’s filing very well may make obtaining financing even more difficult for many vendors.

 

Independent retailers need to take this into account as they look to Spring 2010. Any merchandise that they seek for delivery the balance of this year are likely already in vendor’s inventory or in-transit. Looking forward, however, many vendors may find that pre-sale levels have to be significantly higher before they can justify committing to manufacture, even after further narrowing of lines.

 

This puts added burden on independent retailers to be sure that their pre-season orders are actually going to be produced and delivered. Independent retailers may further find their vendor base narrowing in unplanned ways, creating the need to re-source key items, programs or categories. Even in a sales environment where liquidity is crucial, and pre-season commit percentages need to be managed closely, strains on the vendor base may dictate that more liquidity be reserved for immediate, in-season, on-the-floor goods.

 

Independent retailers need to be in close communication with their key vendors as the plan and prepare fore 2010. They need to keep their ear to the ground for any possible impact on the availability of merchandise, and be prepared to act quickly, if necessary.

 

Inventories are down, in large part to guard against end-of-season markdowns, but also in an attempt to put a floor beneath retail prices. Nobody knows for sure, however, whether customers will respond to lower stock levels by buying now at current prices, or holding out for lower prices later.

 

This makes it challenging to set sales plans, but the real issue is the balance between unit sales and average selling prices. Most independent retailers are planning for a flat season at best, but there are many different ways to get to flat.

 

If you believe that your lower stock levels will hold the line on discounting, then you are probably planning your average selling price to be up over last year, with your units down, reflecting your lighter stock levels. If units break plan, you’ll chase.

 

If, on the other hand, you doubt that you’ll be able to hold price, your plan likely calls for average selling prices in line with last year, with units flat as well. You probably have already planned your discounts, with promotion dates.

 

This is not an insignificant distinction, because at this point in the season the issue isn’t just how much money is left in the open-to-buy, it’s also how many additional units you want/need to commit to. How you’re planning these last two months is critical. Don’t overlook the balance between your planned units and planned average selling price.