Anticipating A Very Difficult Holiday Selling Season
The signs are all there that this could be one of the most difficult retail environments in recent memory for small and independent retailers.
Published by Baby Shop magazine
As we head into the all-important holiday selling season, the signs are all there that this could be one of the most difficult retail environments in recent memory for small and independent retailers. There is little question that $4.00-a-gallon gasoline has had a significant impact on consumer spending, and has worked it's way through the economy to raise the cost of many consumer essentials. The housing crisis seems unrelenting, with home prices continuing to fall, and mortgage credit continuing to tighten. Each day brings fresh headlines of economic distress, including several prominent retail bankruptcies. Retail stocks in particular have been taking a pounding on Wall Street. It has been quite a while since the retail environment has seemed so daunting.
We're also coming off a holiday selling season last year that appeared to signal a fundamental shift in retail promotional patterns. Last year, the traditional post-Thanksgiving sales broke just after Halloween, and entire stores were on clearance by early December. It all had a very pre-planned feel about it, as leading national retailers slashed prices (and margins) early in an effort to drive market share, and forced their competitors to follow suit. This unprecedented level of promotional activity is very likely to be repeated this year, with an even greater level of discounting.
For a small and independent retailer, the key to navigating these turbulent times is to remain true to your core mission and strategy, and to make sure you remain focused on basic retail fundamentals. Here are a few thoughts on those fundamentals.
In an environment of declining sales, your first impulse might be to try to generate additional sales, to recover the lost business and get back to running increases. This likely means running a series of sales or special promotions. It's important to understand the very serious implications of such a strategy.
The decision to run a sale or promotion involves serious trade-offs between long-term and short-term considerations. In the short-term, a well executed sale might be necessary to generate additional cash to address immediate needs. Those needs frequently include being able to pay down past-due vendor bills in order to maintain the flow of fresh merchandise into your store.
This approach however, can only work for a short period of time, most likely one time only. If you develop a pattern of discounting over a longer period of time, in an attempt to maintain the top line, you will run into the financial wall of trying to pay fully valued vendor invoices with discounted retail sales receipts. This will result in a very real narrowing of margins that will leave you with little cash to pay all of your other bills.
Further, over the longer term, a pattern of discounting will inevitably alter your customer's perception of your store and the real value of your merchandise. Most likely, your retail strategy does not include competing on the basis of price; rather you emphasize your unique assortments, product quality, product knowledge and customer service. For your customers, this appeals directly to their lifestyle, values and aspirations. They are not motivated primarily by price. For these customers, sales and promotions actually violates their expectation of what you stand for, and have very serious long term ramifications.
Rather than trying to maintain the top line in the face of lagging customer demand, your objective in an environment such as this must be to maintain good liquidity and cash flow, while maintaining the long-term integrity of your business. It's cash flow that assures that the bills are getting paid, and that the business will be in a position to thrive once the economy turns back around.
Maintaining your gross margins is critical, both measured as a percentage as well as in actual dollars. Maintaining your gross margin percentages assures that there will be enough cash coming from each sale to pay for the merchandise sold and keep vendor payables from backing up. And gross margin dollars are essential to covering all of your other expenses.
The key to maintaining margins, liquidity and cash flow is to make sure that your inventory levels remain consistent with realistic sales forecasts. Excessive inventories in a weak sales environment tend to back up very quickly, creating enormous markdown pressure, while tying up precious cash. Invariably, excess inventories force your hand, leading to sales and promotions that erode margins, not to mention your store's brand equity.
Developing a realistic sales forecast begins with an honest assessment of your current sales trend. It is simply not prudent to plan an increase if your current trend is down. It doesn't matter what kind of an increase you might think you need, or how compelling your assortments might be, what does matter is that your customers have not yet demonstrated that they're prepared to spend more again. Avoid planning increases until you've already seen several months of increases. To plan otherwise is to increase markdown risk, and imperil margins.
You might wonder how you can generate an increase if you don't plan for one, but there are very few categories right now that look like there are breakout increases on the horizon. More likely, any increases will be fairly modest, and in most every case additional inventory simply isn't necessary in the short term to capitalize on that potential. You can almost always sustain a modest increase over plan for the several months necessary to buy in additional inventory, and keep the momentum going.
Finally, once plans have been developed, don't spend it all upfront. You may feel you have to commit all of your dollars upfront in order to get the merchandise you want, and even ship it right away so it doesn't get sold out from under you. In a soft market, it's more prudent to stay liquid by holding dollars back, and flowing merchandise in through the season as close as possible to the time of expected sale. That way, inventories remain lean, customers are always seeing fresh arrivals, and there's cash to spend on long-margin, opportunity purchases later in the season.
As we head into the holiday selling season, the retail environment poses many risks for small and independent retailers. Managing that risk prudently, with a focus on lean inventories, maintaining gross margins and protecting cash flow will leave you well positioned to transition into the New Year and reap the rewards once things improve.