Posted by Ted Hurlbut on Wed, Feb 01, 2012 @ 08:14 AM
If you’re like most independent retailers, inventory represents your single largest investment. Your customers know you in large part by your inventory, your merchandise, by those categories and items you choose to carry. And, if you’re like many independent retailers, you feel naked if your store doesn’t feel fully stocked with broad assortments and deep, impactful displays of core merchandise.
When I work with my clients, I make sure they understand the full implications of their merchandising choices and inventory policies. The full cost of inventory extends far beyond the costs on vendor invoices or the cost of goods sold on a Profit and Loss Statement.
Carrying inventory has its own costs, beyond invoice costs or cost of goods sold. To demonstrate this for my clients, I often ask a question – If you could make your sales without carrying any inventory, would you? The answer is always – Of course! They understand intuitively that carrying inventory not only ties up cash that could be held for other purposes, but also creates costs of its own.
These retail inventory carrying costs are not always easy to quantify, but they are real nonetheless. In fact, these costs are often buried within a number of different expense lines. Here’s a few places you’ll find them:
- Interest Expense: Are you financing your seasonal inventory needs from your cash flow, or are you having to rely on a line of credit. If you’re relying on a line of credit, the interest on that line are part of your inventory carrying costs.
- Insurance and taxes: Business insurance and inventory taxes on inventory are highly dependent on inventory value. The more inventory you carry, the more you’re likely to spend on business insurance and inventory taxes.
- Payroll: Think of all the times somebody has to touch the inventory. When it’s received in, ticketed, when it’s put out on the floor, when it’s re-merchandised, when it’s dusted, when it’s marked down, when it’s counted. All of those touches represents payroll. If you added it all up, how many man-hours would that represent?
- Rent and Utilities: If you had twice the inventory, you might need twice the space - right? Well, what if you had half the inventory or three-quarters of the inventory? You probably wouldn’t need as much space. Rent and utilities are often thought of as fixed expenses, but recognize how much of those expenses are a function of inventory levels - and how inventory levels are often a function of how much space there is to fill!
- Cost of Goods Sold: COGS includes more than just the invoice cost of the merchandise you sold. It also includes all of your write-offs – for damages, obsolescence, shrink. The more inventory you carry, the more exposed you are to damages and shrink. The more inventory you carry, the more aged it will be, which makes you more exposed to markdown risks.
The important point to recognize is that carrying excess inventory – inventory in excess of what is needed to support the near-term sales forecast – not only ties up cash but also impacts profitability. Reducing inventory levels to eliminate excesses doesn’t directly recapture those profits, but opens up the possibilities for specific expense reductions that will directly add to profitability and cash flow.
Posted by Ted Hurlbut on Mon, Jan 23, 2012 @ 11:28 PM
As I work with clients trying to increase sales volume - and they ask “How do I get more customers” - I’m reminded of something that a vice president at my first retail job would say:
“Don’t send out the invitations until you’ve got the house ready for the party.”
As I’ve worked with clients, and we’ve analyzed their sales, we’ve found that, in general, traffic counts and transaction counts have been soft, but that the average dollars per transaction have held up. The customers coming in have money to spend and they are spending it. Their initial instinct is to find a way to get more customers to come in to their store - as it is.
But ask yourself this - if your store “as it is” was good enough, wouldn’t the customers already be there? Look around – it’s not hard to find stores filled with customers, nor is it hard to find stores devoid of customers. What’s the difference between the two? It’s what’s the customers are experiencing in each store.
“Don’t send out the invitations until you’ve got the house ready for the party.” My vice-president from years ago was making an important point - in retail, what really counts is what happens in your stores, and how your customers experience it.
Let me come at it from a different angle. If you conclude that it’s a marketing issue, then what do you do? What is the marketing message that’s going to drive traffic? In the short term, there’s really only one answer – run a sale. But that’s the last thing any independent retailer should do.
Independent retailing is about building relationships with customers around a shared passion, one customer at a time, one transaction at a time. The very best independent retailers understand that real value is the synergy of distinctive stores, unique and compelling high-quality assortments and presentations, passionate, informed and engaged store associates, state of the art product knowledge, outstanding customer service and exceptional execution. All of these things add up to a memorable customer experience.
Traffic is built by giving your proven customers a reason to visit more frequently. It’s about doing everything you can to assure that every visit is compelling and memorable. It’s about engaging their passion, making sure that every time they visit there’s something new for them to consider, and assuring that the experience always exceeds their expectations. That’s how you get them to come back for more, and that’s how you get them to tell a friend about it. That’s how buzz is built, and that’s the thing that independent retailers with lots of customers have lots of.
So as you’re considering how to increase your sales, ask yourself this - Do I really need to send out more invitations? Or do I need to work on throwing the most compelling and memorable party in town?
Posted by Ted Hurlbut on Fri, Jan 20, 2012 @ 10:42 PM
If you’re an independent retailer, it’s pretty easy these days to be confused about the path you should follow. You’re no different than any other consumer, you’re bombarded by the major retail chains with special offers, promotional incentives, this week’s special, next weeks sale. You hear all the chatter about social media, Facebook, smart phones, mobile apps.
When I start working with a new independent retail client, I often find them confused to some degree about strategic direction and day-to-day tactics. They hear all the noise around them and wonder if they should be following along with all the things the major chains are doing.
If that describes you, if you sometimes wonder if the way you’ve always thought about your business is suddenly out of date, if you wonder if you should be doing more of what the big boys are doing, let me assure you – you shouldn’t.
More and more, the business models of the major retail chains and the very best independent retailers are diverging. We’ve reached a point where they have about as much in common as cows and steering wheels.
Let’s consider the major elements of the business model that the major retail chains operate under:
- They’re product driven – mass produced goods for the mass-market, low margin, high volume consumer commodities or near commodities.
- They’re driven to maximize volume and market share, to capture economies of scale.
- Technology is employed to lower unit delivered costs - the total cost from acquiring product all the way through making the sale and getting the customer out the door with merchandise in hand.
- Value is denominated just about entirely by price – on everything from flat screen TV’s to laundry detergent to jeans.
- Marketing is targeted to the masses, with a never-ending stream of promotions and sales.
- The competitive environment means it’s a never-ending race to the bottom – the lowest prices, the slimmest margins.
Compare that to the business model of the very best independent retailers:
- They’re customer driven – one customer at a time, one transaction at a time, building long-term personal relationships day after day.
- The relationships are built around a shared passion between ownership, the staff and the customers. These aren’t the basics of life, these are the things and activities that makes life special for each of us.
- They feature distinctive, high-quality discretionary specialty products produced specifically for niche markets. They are characterized by craftsmanship and an attention to detail.
- Value is denominated by the totality of the customer experience – selection, taste level, product quality, state-of-the-art product knowledge, flawless customer service, a distinctive store, and warm and engaging staff - and not just price.
- Given the totality of the customer experience and the relationships that have been built, price is an important but not a determinative factor. This enables these retailers to maintain price integrity and sustainable margins.
- Technology is viewed primarily as a means of enhancing the relationship with customers.
- They’ve captured a unique position in their market, as the dominant player in their niche, with little significant competition.
- The model is sustainable so long as the store maintains its passion, commitment, freshness and relationships with customers.
These are very different business models, with many mutually exclusive characteristics. And, unless they are recognized as two very different business models, those conflicting characteristics are the reason that so many independent retailers feel confused from time to time.
As an independent retailer, immunize yourself from all of the noise from the major retail chains that’s constantly assaulting you. Recognize that you’re in a very different business, one that requires you to focus on your relationships with your customers, in your own unique ways, and not the way you see the major retail chains doing it.
Posted by Ted Hurlbut on Fri, Jan 13, 2012 @ 03:32 PM
Often, we remember special Christmas’s for the gifts we give and receive. I think this past Christmas will be remembered for the ‘gift’ Amazon gave the world.
Amazon’s new price check app was the most discussed development this Christmas season. It makes the days of that must-have toy or killer electronic game seem absolutely quaint.
Amazon’s app, which allows consumers to scan prices in retail stores and then order the item on the spot directly from Amazon, feels like the kind of technological innovation that’s a true game-changer. From the moment it was released it put pressure on retailers large and small. Amazon has a completely different cost structure than brick ‘n’ mortar retailers that gives them an immediate pricing advantage. Add to that that customers don’t have to pay sales tax when they buy from Amazon.
Amazon rightly sparked a lot of controversy when it coupled the release of its new app with a $5 off promotion whenever a customer made a purchase using the app. The publicity wasn’t all positive, but it was a small price to pay for the competitive advantage that it yielded, particularly at Christmas time.
Amazon’s target was clearly the major national retailers, but the long-term implications for independent retailers are just as significant. This new technology has the capacity to reduce all model numbered merchandise, across just about every category, to commodities where fierce price competition, across all channels, between large players and small, is the rule. Those independent retailers who rely on model numbered merchandise for a significant portion of their revenue are just as much in the cross-hairs as the largest national retailer. (As an aside, I'm eager to see how the large national retailers respond over the coming year.)
The good news for many independent retailers is that they rely on assortments that are unique and distinctive. Their assortments are not weighted heavily toward model numbered merchandise. Further, the world of independent retailing is the world of discretionary products, marketed to customers who share a particular passion, customers who are not strictly price-driven when it comes to their passion.
Still, every independent retailer should take the introduction of Amazon’s new app this Christmas very seriously. Every independent retailer needs to soberly assess their reliance on model numbered merchandise and the potential risks that the new technology poses. The business models of the major national retailers, who are commodity driven, and independent retailers, who trade in the passions of their customers, are diverging more and more with every passing day. It’s imperative that every independent retailer recognize this, and be sure they’re on the right side of the divide.
Posted by Ted Hurlbut on Wed, Dec 28, 2011 @ 07:03 PM
Christmas has come and gone for another year, and exhausted independent retailers are tallying up the results. From those that I’ve talked to, the weeks between Thanksgiving and Christmas were marked by alternating stretches where business surged ahead of last years pace and stretches where it fell behind. The only pattern to it all was that there seemed to be no pattern at all.
But I think there's a pattern that’s emerged, that’s been in the making for the past several years. I haven’t read any analysis or seen any data compiled on this, but in talking to people, including my clients, and observing in my own travels, I think there’s a pattern emerging in the balance between business done on-line and in stores.
I’ve had a number of people suggest to me that, apart from the Black Friday mayhem, the malls and major chain retail stores just didn’t seem as busy as they once were, even in the past several years since the recession. The malls weren’t as crowded. Lines at checkout aren’t as long. Parking spaces were easier to find. I felt the same way when I was out in the stores.
There’s been a lot written about the growth of on-line shopping, especially on the year over year increases of Cyber Monday. What’s been clear for several years is that e-commerce is taking more market share with each Christmas season, and that’s impacting brick ‘n’ mortar retailers more and more every year.
What I believe, however, is that e-commerce business not only peaks during the Christmas season, but so does e-commerce market share. The Christmas selling season is when the hassle of heading out to the stores is the greatest. It’s so much easier to get what you need from your laptop or smart phone.
Call it the e-commerce convenience advantage. During the rest of the year, e-commerce doesn’t begin to have the convenience advantage that it has during the Christmas selling season. But at Christmas time, e-commerce clearly has a convenience advantage over brick ‘n’ mortar retailers.
The major national chains have attempted to offset the convenience advantage through their own e-commerce sites. The very best independent retailers have sought to do the same within their niches, but the impact on them is still pretty significant. December is still the biggest month for most independent retailers, but it’s no longer quite the behemoth month it once was. You used to be able to count on December to make up for the vagaries and mistakes of the prior 11 months. December no longer packs quite the same punch it once did.
This is further reason why retailers have to be at the top of their game from the first day of the year right through to the last. The days of getting by without getting the very most out of your business day in and day out are over. Taking your business to the next level means taking your own retail business management skill set to the next level, now more than ever.
Posted by Ted Hurlbut on Wed, Oct 05, 2011 @ 09:01 PM
The word ‘genius’ is pretty freely bandied about these days, but Steve Jobs was a genius. He was to his era what Thomas Edison was to his, perhaps more. He is being described, upon his death, as a visionary. He was all of that.
When I think of his impact on retailing, two things come to mind. First, retailing at its foundations is all about compelling products that people want and need. Steve Job’s vision, his genius, was in conceiving of and creating those products. The power of Apple as a retailer is the power of the products that Steve Jobs created. There’s a lot of noise, a lot of smoke and mirrors that surrounds retailing. Steve Jobs stripped retailing back to its essence, the products themselves, and in the process created perhaps the very best retailer in existence today.
Second, and perhaps more profoundly, for a techie, for a product development guy, Steve Jobs had an uncanny ability to think beyond technology, beyond products, to consumers themselves, and anticipate how his technology could be applied in ways that transcended categories and industries. The progression from Mac to iPod to iTunes to to iPhone to iPad is nothing if not a timeless case study in consumer-centric product development, marketing and retailing. He knew who his customer was, defined that customer precisely yet in the broadest possible terms, then asked, and answered the question, “What can I create that will captivate them?”
As retailers, we can only seek to take from his life the lessons he taught us. That is his legacy. He cannot be replaced. He was truly one of a kind.
Posted by Ted Hurlbut on Sun, Jul 31, 2011 @ 02:37 PM
You are an independent retail owner. You’ve spent a lot of time trying to establish your store as distinctive and unique. You’ve put a lot of effort into trying to differentiate your business from the competition.
You’re always looking for that edge, the one thing that will make the difference.
Look in the mirror.
You are the difference. Your business is a direct reflection (for better or worse) of you, your passion, your personality, your attitude, your engagement, your vision, your taste level, your fashion sense. I could go on and on, but the point is that if it’s part of you, it’s a part of your business.
The thing that differentiates your business from any other is you. Regardless of anything else you do, you’re the Chief Passion Officer, and nothing else you do might be more important, or more impactful.
Your employees take their cue from you every time they observe you, every time they talk with you. You establish the norm, from how things get done, to how your customer’s are approached and serviced, to what the culture is going to be.
Your customer’s take their cue from you as well, both directly and indirectly. Everything that they experience in your store is a reflection of you, from the ambiance, layout, merchandising, to the interactions they have with your staff, to the way they feel as they are leaving your store.
It all starts and ends with you, the Chief Passion Officer.
The most successful independent retailers are possessed of an animating passion. It infuses everything the business does and thinks. And that passion comes directly from the owner, the Chief Passion Officer.
Posted by Ted Hurlbut on Fri, Jul 29, 2011 @ 03:10 PM
It’s been almost three years since Lehman Brothers collapsed and all hell broke loose. Are you running increases, or running decreases and still chalking it up to the economy?
Last week, Borders started to liquidate. The news stories said it was because 
ecommerce has changed the landscape for booksellers, that eReaders are significantly altering the marketplace. They noted that Borders had taken on significant levels of debt in the middle of the last decade. What the stories didn’t point out, however, was the real reason that I believe Borders didn’t make it. Their stores weren’t nearly as compelling as Barnes & Noble’s stores.
Barnes & Noble continues on (with their own issues to work through, to be sure), while Borders liquidates. Borders was able to muddle along for almost three years after Lehman. If Borders’ stores were generating sales increases, were generating positive cash flow, the debt service problem they struggled with could have been worked through, and they’d be going forward. They had almost three years to figure it out, and couldn’t.
Independent retailers, regardless of market segment, have an important advantage over major national retailers. The major national chains can only set their stores, train their troops, send out their promotional emails and sale flyers, and wait for the customers to come.
Independent retailers have a much greater ability to reach out to their customer base, proactively, because they’ve had the opportunity to build much more personal relationships with their customers, often on a first-name basis, one customer at a time, one transaction at a time. They can target their customers much more discreetly, and engage them much more directly.
That alone clearly isn’t enough to assure sales increases. But it does offer independent retailers a way to rebuild sales volume with concerted focus and effort. It gives independent retailers the path to rebuilding their sales volume the same way they built their businesses initially, by providing each and every customer with a compelling and memorable experience, every time they visit.
It’s easy to point to the economy and say there’s little that you can do. But that’s the path of least resistance. It’s been three years since Lehman. The economy was just as bad a year ago, if not worse. If you’re not running increases, it’s time to raise the level of your game, and get it done.
Posted by Ted Hurlbut on Thu, Jul 14, 2011 @ 10:44 PM
When you really dig in to the numbers, there’s always a story to be told, sometimes a story that you just hadn’t been aware of before.
I was working with a client last week, analyzing June sales results. The month had been mildly disappointing, but there was one store in particular that was off more than the others. What do you do when one store takes a tumble?
In the past, my client had only looked at overall sales dollars to assess how sales in each of their stores were doing. In the past few months we’d started to break down sales results into transaction count and average dollars per sale, by company, store and department, to understand better the composition of sales.
What we noticed in the June numbers was that the average dollars per sale for this one store had risen over the prior year more that month than in any of the other stores, in both dollars and percentage. Correspondingly, their units had also declined more than the other stores.
We then went back two years and discovered that the average dollars per sale for this one store had consistently trailed the other stores, month after month, by 5% to 10%, until the last few months, when that store’s average had pulled even with the other stores (but at the cost of the significant drop in transactions).
As we dug further, we learned that lower priced goods had historically been a more significant portion of the sales mix in that store than the others. In the past few months, however, the inventory mix in that store had shifted away from lower price points significantly enough to seriously impact transactions, and overall dollar sales. The shift in inventory mix hadn’t had the same impact in the other stores, but in that one store it had been dramatic.
Within the hour, my client was on the phone making several special purchases for that one store, to re-balance the inventory mix to meet the distinctive needs of that store.
Quantitative analysis does not come naturally to many independent retailers. Most went in to business because they had a passion for the things they sell and the customers they serve, not because they were data hounds. But customers speak in many different ways. They speak to us one-on-one, face-to-face in the store, as we work with each one. They speak to us as we observe their baskets going through checkout. They speak to us when we observe our displays and see what’s been sold down.
But customers speak to us collectively and most comprehensively, with great nuance and subtlety, when we start digging into the numbers. The numbers represent the facts of what’s really happening, as opposed to what we think is happening. The numbers tell the whole story, not just that part of the story we’ve been able to observe.
The most successful independent retailers are able to break down, crunch, and take from the numbers the stories that their customers are telling them. They use these facts to understand their businesses more fully. The convert raw data into information, and transform that into knowledge. Then they act on that knowledge. The information and knowledge that comes from the numbers makes them better managers, better merchants and better retailers.
Posted by Ted Hurlbut on Fri, Jul 08, 2011 @ 02:20 PM
Today, there was an interesting discussion on RetailWire regarding discounting. The question was whether discounting was a disease that has infected brands, retailers and consumers.
I have written on this blog numerous times how damaging discounting is for retailers, especially independent retailers. So I thought I'd post my response to today's question:
Discounting is not going away.
Discounting is not a sustainable retail business model.
These two statements may seem like a fundamental contradiction, but they are not. I don't think of discounting as a disease, although I have no trouble with framing it that way. Discounting is a terminal disease.
I like to think of discounting as a slippery slope. Once you step out onto that slope there's just about no way to step back. It's all downhill from there.
And yet, in an economic sense, discounting is nothing more than the vehicle for good old fashioned price competition. The competition drives down the market price of goods, forcing the uncompetitive out of business or into the hands of the more competitive. Just when we think that all this competition will lead to a single uber retailer, other concepts spring up with lower cost structures (ecommerce, for example), and prices are pushed lower still. This is why some have suggested that the effective life span of all but the most hardy of retail banners is only several decades at best.
This pattern is particularly true of high demand, highly identifiable commodities or near commodities, which is the business of just about every major national retailer. From toothpaste to TV's to tank tops, race you to the bottom!
Those that can escape this seeming black hole are those who offer highly differentiated products, products that are discretionary, and whose value to the customer goes far beyond the price paid. Even then, prices need to be sharp, but retailers are better able to sustain pricing integrity without having to resort to rampant discounting, and thus are better able to sustain margins.
There's not a lot of volume in these categories, so this is the business of smaller, independent retailers. That doesn't make it easier, because they are trading in more discretionary goods, but at least it's possible to construct a sustainable business model. Unless they succumb to discounting.