Specialty Retail Blog

Typically, if demand for a thing drops price drops with it. Sales are used to clear out old inventory. Why, then, are there still so many boarded up storefronts? Megan McArdle speculates that stores are reluctant to lock in at low rates and stores which require investment are reluctant to take advantage of short term leases.

The result is that the businesses ideally positioned to take advantage of the current glut in vacant store space are those which require little capital investment in a space and don’t necessarily need to be in the space for a long period of time.

Everywhere you look today you see retailers scrambling to turn excess
inventory into cash through heavy markdowns.  The definition of a  recession
is where there is an excess of capacity, inventory and labor in the
marketplace.  The danger for retailers, as it is with other businesses, is
slashing inventory, staff, marketing etc. without a plan. That uncontrolled
strategy will leave them struggling at best and without a business for many.

Retailers need three strategies now instead of just one. Strategy one is
the short term strategy that depends on an accurate sales forecast so you
can adjust the stock to sales ratio down to the new sales level.  Blowing
out merchandise through heavy markdows below that level will starve the
business of needed cash to buy into profitable sales later.

iA midterm strategy will guide buyers into the right levels of merchandise
to buy into as well as the right expense structure to retain in order to
maintain profitable business. There are many aspects to consider in this
crucial period. Negotiating tactics, the Margin Buying Service to provide a
greater margin, aggressive approaches to fixed expenses, aggressive
marketing and customer relationship management as well as a different
mindset for the entire staff are some of the considerations that are
important for success in this midterm approach.  Many shoppers are taking a
hiatus on shopping during this period of chaos and they will come back so
you must be ready.

The final strategy is the long term strategy that will grow your business to
new levels of profitability.  As many as 25% of the retailers will not
survive to join in this process but those that do stand to grow the business
to new levels.  Making that happen requires strategic planning, guidance
based on data and analysis and a team decision process that involves buyers,
sales, an accurate plan and an implementation process to make it work.

Your affiliate will be providing a break even analysis and plans that
reflect changes that serve as the foundation to this process.  Following
that plan is more important now than ever before.

 Now is an excellent time to renegotiate your lease.

And it usually isn’t. Special offers, dating, and incentives tied to minimums appear to be good on the front side but in reality they typically sound better than they are. Vendors make these offers, not because they are good for the retailer, but because they are good for the vendor. That in itself should be a sign of trouble!

Let’s start with invoice dating. In some industries and with some seasonal products dating can be an advantage. However you can be fooled into overbuying knowing that you do not have to pay for these goods for 6 months or more. Here, merchandise planning can make a huge difference, as you will only commit to what you can sell profitably. If you have carry over inventory that is still viable for the next season; are you deducting that inventory against your future open- to-buy? The bigger question is why do you even have carry over inventory?

Dating typically causes retailers to overbuy and then as the season unfolds they have limited or no dollars to spend on new goods. Dating can cause you to over commit to one vendor. If that vendor is not selling and another vendor is selling, you have managed to box yourself into a corner. It is always important to leave yourself open- to- buys, especially in key classifications.

Dating can create a false sense of security. You will eventually have to pay for those goods; if they do not sell it would be a shame to pay those invoices on the profits of other vendors. If you do use dating, especially on seasonal goods that arrive early, it would be prudent to set aside the cost of goods on each item as it is sold and keep it in a separate account, possibly interest bearing. Some banks have great business accounts that allow you to keep an almost zero balance in your checking account and a savings account attached. . When the invoice is due you have the money saved, with interest! Simply sweep the funds necessary to cover the invoice from savings to checking.

Incentives tied to minimums. If the minimums force you to overbuy then don’t do it! The 10 or 15% will not be enough to counter the markdowns you will take to unload an overbuy. When you go to an all you can eat buffet, you eat more than you need and then it is diet time. If you hate dieting then pass on the buffet. However in your store a diet can mean markdowns and thus loss of profit. It also creates a squeeze on cash because those markdown goods will need to be replaced by stock that you can sell at full retail. Incentives tied to minimums must fulfill your needs and not the Vendor’s.

There are other incentives where the vendor offers discounts on reorders based on an upfront commitment. This can work if the open to buy dollars for that vendor match your overall assortment plan. Otherwise take a pass.

If you decide to get involved with Vendor incentives, that does not preclude you from negotiating your own terms, conditions and discounts. Hot vendors do not need to give anything away. Merchandise that is sold with pre season incentives may mean the vendor is in a position to negotiate. Remember, as the buyer, you have great leverage. Do not be afraid to use it. Smaller retailers need to remember that they are important; as they typically are the most profitable business a vendor can write. Small retailers do not beat up vendors for price incentives and discounts like larger companies.

The best incentives you can get are the ones you negotiate on your own terms. The first rule my father taught me in negotiating was, “There are 3 prices: The line price, the incentive price, and the price you pay. Make sure the price you pay is the lowest you can get, then go back and lower it again.

Copyright Management One® 2007 Written by Marc Weiss