Specialty Retail Blog

Retailers may have some very helpful allies in places they would least expect to find them.

This article seeks to highlight some useful, but typically ignored synergies between science, engineering, business and retail. Karl Popper elegantly described the purpose of science as a process which generates predictive theories.  Science, economics and all kinds of business applications rest critically upon a common need; the need to accurately forecast a complex and dynamic future.

While the goals of science, economics and business are worlds apart, the actual process of forecasting is common to each. Similar challenges in forcasting allow lessons learned in one discipline to be applied in another.

Here, we’ll look at what forecasting insights can be gleaned from raindrops and market drops to help make our retail profits a little more stratospheric.

The most basic, even instinctive, method of forecasting involves guessing what will happen. Humans naturally learn to link certain events together. A midwestern corn farmer might say “knee high by the fourth of July.” If the crop isn’t tall enough by the given date, the farmer knows in advance that the crop has gotten a bad start and will therefore yield a weak harvest. Other times, the process is more intuitive, what we call “gut instinct.’ A person might “have a bad feeling” about some situation, even if he’s unable to explain the rationale behind it to another person. Recognizing patterns is something people do without even trying. It’s nearly impossible to look at a word written on a page, for instance, and not “read” it.

Of course, this kind of guessing is one of all kinds of human flaws and limitations. It lacks the dispassionate rigor of an actual scientific experiment. Just knowing that the crop isn’t high enough tells a person nothing about what caused its short stature. Even worse, it offers no clues to fix the problem. Gut instinct is difficult to transfer from one person to another. It creates dependence on a person, rather than a process and it’s horribly subject to the constraints of a single person’s memory and intellect. Using only gut instinct is better than nothing, but even at it’s best it is imprecise and prone to error. Stock outs sometimes and markdowns others is the result.

Of course, some of these problems can be solved by using past trends and performance to predict future results.

This approach is a little more precise and predictive if the system varies the same way it has done in the past. We’re no longer relying on the feelings of one individual and emotions are checked somewhat by stubborn little numbers. But it’s still less than ideal.

The professionals that spoke on climate research at a talk I attended recently amazingly faced the same problems that we faced in trying to predict future sales and performance for retailers. They started, as we did, using statistics.  Statistics and trends are useful in a somewhat stable or controlled environment. In statistical terms its changes can be depicted by a bell shaped curve or some other known distribution.   When climate change was affected by increasing CO2 the statistics based on the past could no longer predict the future.  Retail , also, is a constantly changing environment. When the recession hit, trends based on past performance were completely invalid.

The solution the climatologists brought to bear to help understand our dynamically changing environment was to make mathematical models of how the system worked. Over the years the model for climate change was modified to include surface temperatures, then atmospheric makeup including CO2, methane, and other gasses. Moisture content, then ocean temperatures were added. Then solar radiation coming in and out was added and so on. As each new variable was added to the model, a more accurate prediction was possible.  The true test was to back test to see if the model predicted what happened in the past. The final test is to see how accurately it predicts what happens in our actual, uncertain future.

We went through similar trials and tribulations to develop our Winning@Retail™ software. It contains both analysis of past performance using statistics and mathematical models  that account for the effects of the economy, local buying habits, inventory levels and much more to get an accurate prediction of future sales.  With each new variable added to the model the predictions improved.  Several independent tests have measured our ability to predict sales at 94% or better.

Just as knowing the future of climate change can help us prepare for the coming challenges, knowing future sales allows us to identify the right inventory levels and predict cash flow in the business.  If we don’t like the outcome, we can use the models to chart a new course based on a solid forecast of coming trends. Rather than just seeing a bad crop coming several months ahead of the harvest, we can consider how to nourish a business so that it continues to be fruitful and productive. The use of predictive models is the best approach to inventory planning.  POS systems and many spreadsheet approaches use statistics to project the past into the future.  Their susceptibility to sudden shocks and changes causes waste, errors and inefficiency, often when they are most painful.  The better your data and analysis, the better the predictions and the better the results will be.

Thanks again to Neal Esserman for sharing this blog posting from Retail Design Diva called “A Recession is a Terrible Thing to Waste.”

It discusses how the current crisis has forced many companies and people to reinvent themselves positively, and in ways that they simply would not have had the courage to if their current groove had remained rosy and adequate.

In reading an article in MRketplace.com by Harry Sheff entitled “Apparel Industry Concerned Over CIT Group’s Financial Woes”, I found a very significant line at the end of the article.“Smaller undercapitalized independent retailers who don’t have strong balance sheets are definitely going to be in for a rude awakening, and their purchasing power may be more about their own personal finances going forward than their balance sheets.”

Right now our clients are doing very well and recovering nicely. The defensive moves taken early to cut costs are paying dividends now. The aggressive marketing, event, training and selling actions as well as the right inventory are all creating demand and shoppers are back into the stores. Hopefully this will last but without cash or credit to buy goods, it won’t matter!

This line above sums up the challenges that retailers face over the next 6 months if they are not cash rich and if CIT is not cash generous.

It is very important that we are constantly working with clients now to be reviewing their balance sheets and taking all possible actions to improve the picture they portray to the outside world. There are many actions that are needed depending on the situation, store, environment and direction the economy takes. The important thing is that we do not wait and see what direction the economy takes but are proactive about things like:

• Negotiate debt to lower levels.
• Subordinate debt where possible.
• Get clients to look ahead to where the cash will come from if it won’t come from the factors.
• Eliminate the use of credit cards to finance inventory! This leaves the retailer with no recourse for erroneous shipments and high fees to overcome as well.
• Set up lines of credit with your bank NOW if you have a solid financial position.

Retailers that may not be able to fulfill their OTB will be pressed to find high margin goods to keep cash flow and profits with lower sales. Help them find these sources.

Realizing NOW what the situation might be later is important for developing the strategies and tactics to get retailers through this potentially difficult situation. Keep in mind also, this is all projection and reality could take a different turn… hopefully for the better. We will be ready for whatever happens!

Retailers are entering the fourth quarter with many significant and important questions. The way they respond to these inquiries and respond to the circumstances will dictate their success. Three of the most fundamental questions I see are:

1. What will traffic be in the store?
2. What will sales be?
3. What will margins be?

Let’s apply some logic to see if we can find some likely answers. Many people have lost their jobs (~10%) and even more are underemployed (~17%) which means they are making less money than they did a year ago. All these people will not be taking vacations or spending a lot of money on entertainment like they did before. We are talking about one out of six people; the losses cut across all income brackets from laborers up to executives.

Even with lower credit card limits, tighter credit and less home equity as financial supports, for the most part, these people will not ignore the holidays and will be shopping for gifts. The probability is that they will be looking for less expensive items and bargains this year in addition to the special gifts they buy at regular prices. The best news is there is a form of entertainment that they can still afford and that is shopping. Look for the store traffic to increase this holiday season which is good news for retailers. Keep in mind that now, more than ever before, the more entertaining you are, the more traffic will be searching you out.

Those who have less discretionary income are joined by many others in worrying about what lies ahead. On the positive side, the stock market has run up nicely to about where it was at the beginning of the year. That has released some pent up demand among the 73% of the population who are fully employed. That means there will be a demand for full price goods but also a pull for discount, off price and lower price point goods as well. Balancing the inventory mix will be tricky. No one knows when discounting will begin and how brutal it will be. That means this season your inventory planning, balance and flow is as critical as enhanced selling skills will be to determine your success. With traffic up, conversion rates could be the main dashboard components on which to focus!
Margins are the big unknown this year. It is a question mark whether the chains will pull the trigger on markdowns early again or whether they took a big enough beating themselves last year to buy more prudently and be able to hold the line on discounts. We have been working hard to find ways for clients to boost margins in the face of uncertainty and the moves are working. Certainly the Margin Buying Service is a great key for women’s boutiques to boost IMU to 70% and increase turns at the same time. The holiday suit promotion was a similar opportunity for men’s. More prudent markdown strategies are needed this year to keep up the MMU. There are opportunities out there but retailers must be aggressive to grab them.

There are a lot of other situations and circumstances that will affect retailers – from the scarcity of certain goods to a scarcity of credit available to buy them – but these three stand out as critical. The unknown factor is again extremely significant this year so be adaptable, flexible and keep listening to your market and to your affiliate. These will be the keys to your success.

Happy holidays and good luck!

We started on this ride we are on after the Great Depression and WWII. After we built up a huge debt that time we emerged to a great standard of living.  We earned enough so a man could feed and provide for his family while his  wife could tend to the home and raise the kids.  That lasted about 20 years but in the 70s, women found they needed to go to work outside the home and bring in some cash to provide for a “standard of living”. By the 80s even that was not enough so we needed to inflate the price of homes and use the equity to supplement that family income to achieve a “standard of living. “  That worked for a while but soon we needed more so the banks came to the rescue with credit card debt that was available easily to all.  Credit cards were used to build up huge deficits so the middle class could all have a standard of living. Then the crash of 2008 caused the standards to all change. The home equity vanished, the credit card issuers were retrenching and one of the two income earners in the family was likely to be unemployed.  Back to 1950.

Since 1950 we have allowed our standards to increase at a steady pace. If each of us went back to the standards of 1950 we would do fine.  That means a black and white 13 inch TV for the family instead of three 42-inch color plasma TV’s.  One car instead of two would be the norm and we would move back to the city where we would be close to the job.  The food you would eat would be fresh, not processed and liver once a week would stretch the budget too!  You could throw out the cell phone and the $50 a month bill and replace it with one land line connected to one phone ON A PARTY LINE.    We would go back to seeing clothes flapping in the breeze and you would be happy if you had a washing machine in the house.   I think you get the idea.

There are so many improvements in our standard of living today that we do not appreciate. We may be making some changes back toward 1950 and all be happier and better off for it.  In 1950 there were many retailers and many fewer chains and department stores.  There were no malls but downtowns were flourishing.  We look at malls struggling that might be signaling a reversion  toward 1950 retailing. Certainly we will not revert back 50 years but it may be worthwhile to consider this scenario as you look at your own situation and try to adapt to a changing customer base. For example, rentals of expensive items might get more popular. Although we may not be moving back to 13 inch black and white TV’s; we may be going back to one family TV instead of several scattered throughout the house.  Might not be all bad!

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.

Just like the rest of America, I was shocked to see the major US banks post huge profits. These are the same banks that were about to fail a few months ago if swift inputs of huge cash infusions were not made immediately.  My concern is what the effects of this huge shift would be on the retail community.  Here are a few of my thoughts:

1.       This does nothing for credit availability for retailers to work from. At the same time these behemoths were posting huge gains, CIT was entering bankruptcy. These profits were from trading which is the exact source of the meltdown in the first place. These banks are not making profits by loaning money to buyers or store owners!  These profits don’t mean our economy is any stronger than it was.

2.       There is a rapidly growing class warfare brewing in the country. A few years ago people were hopeful of becoming rich themselves so they were hesitant to be critical of a class they aspired to. Now with huge unemployment, foreclosures and the appearance that the bonus class will prevail on the backs of the majority, resentment and animosity is at high levels.  When hope dissipates it is replaced with despair.

3.       This despair may be more widespread than people realize and it is not based on net worth or income. It is based on a sense of control and priviledge.  There are many wealthy business owners that are frustrated by trying to get capital, depressed by falling profits and scared by the huge amounts being spent by government with the promise that their taxes are going up.  They feel out of control and very nervous about what the future holds.  They resent the seeming control that the banks have in the government and financial institutions.  There are more and more taxes and restriction on businesses while the banks flit unfettered in their actions.

4.       The more depressed, frustrated and confused people are, the less likely they are to spend their money.  The less likely they are to go out and shop. That means that retailers must make a greater effort to reach these people with a positive message. Retailers may need to abandon their old myths and drag these people kicking and screaming out of their comfort zones and into stores to have a good time.  Shopping may be incidental.

Some retailers are getting on the side of the “downtrodden” whether they truly are or just feel that way. The market is changing and buyers thinking is vastly different.  Make sure you are adapting to those changes in your marketing, message, merchandising and strategy!

With the many changes in the economy, everyone seems to have a different prediction about about what kind of retail landscape will remain after the tremors of the recession dissipate. One view is that the future is in single branded stores run by vendors. In this scenario, small independent specialty stores cannot survive because of the following three reasons:

1. Credit will be unavailable

2. They will have little or no leverage with the big vendors

3. They will not be able to out-bid the major vendors for prime retail space

Although there has been a boom in single branded stores over the past decade, there are definite reasons to believe that the independent specialty retailer sill flourish. My belief is that the credit shortage is a short term adjustment in the credit market and soon there will be lenders waiting to cash in on the demand for credit from viable borrowers.

The second assumes that the big branded vendors are the only future of retail. My view of reality is that the major brands may be the past of retail. Branding is expensive and requires a significant marketing effort. That expense must be added to the cost of the products. One lasting remnant of the recession, once it is finally over, will be a switch to value on the part of the marketplace. That value orientation combined with the speed of knock offs and the high value offerings of many smaller vendors will challenge the dominance of the big branded vendors. That is not to say there won’t be some vendors that will survive in retail but there will be just as many that don’t. Manufacturing apparel is less expensive than retail. Retail requires a major investment into a very different world of real estate, sales forecasts,strategy, leadership, management, training and cash flow planning.

Third, if the big vendors bid up the cost of prime retail rents, they will have to add those costs to their merchandise. Again, value would dictate that higher prices and lower value will not be a winning combination. If it were, you would be seeing a flood of vendor leases flooding the retail market rather than a flood of empty boarded up stores in many malls and location. The following are merely two scenarios that specialty retail may follow to not only survive, but thrive. No one knows exactly which paths the world will follow but these scenarios make sense with the changes we are witnessing. The biggest challenge that specialty retailers have to wrestle with is a lack of any unified leadership. The biggest threat to their survival is their reluctance to view themselves as one group with common challenges, goals and obstacles that will best be overcome together rather than fighting one another. Independent specialty retailers will survive and prosper by working together to challenge the vendor stores, department stores, internet and other retail competition. The new scenario for the future will emerge over time but the following two are not only possible, but waiting to happen.

Scenario One

Unemployment in the U.S. has reached 9.5% and is climbing. Among US born blacks and Hispanics unemployment is 24.7% and 16.2% respectively. Unemployment among immigrants is about 11%. This high unemployment begs for an answer and specialty retailers may be one solution. Cottage industries have grown up in many spots around the world. People with skills in knitting, sewing and even clothing design work at home to produce goods that are then sold on the market. These people tended to be stay at home moms, older workers etc. With all this pent up potential to work, retailers can revive the “specialty” label that was lost. When the mom and pop store began to carry the labels that the department stores carried and the brands that could be purchased everywhere, they no longer were specialty stores but rather, competitors in luxury commodities. If the mom and pop store can no longer compete with the major branded vendor then he needs to find another strategy that cuts into the market share the branded vendors have. The future of retail is not with the major branded vendors! The future of retail may be in creating a new, unique and effective private label offering based on putting this pent up labor pool to work producing luxury items that are below the radar. Customers will be attracted to value, specialty goods and a private label that is more than slapping your label on over priced commodity items. The challenge is to supply a reliable market for value rather than just provide a high priced commodity This scenario gives the specialty retailer the ability to go vertical just as the big branded vendors are going vertical!

Scenario Two

The retailer’s expertise is in buying and selling. A vendor’s expertise is in design and manufacturing. If vendors are looking to get into retail, they are entering a strange new world that they truly do not understand. The investments in infrastructure and the management of a retail staff are very different. The tight balance of costs, management of a market, and selling effectively are all different skills that are not intuitive. When you look at the expertise of both the vendor and the retailer respectively, there is a marriage waiting to happen. Split the supply chain in a different place so the mom and pop retailer may benefit by utilizing his unique skills and expertise while the vendor can accomplish his mission much more effectively.

Long ago the grocery industry figured out that the store is the best place to sell the goods and the manufacturer is the best one to provide the goods. Each vendor “owns” a certain amount of shelf space and has representatives that come in periodically and restock shelves, arrange displays and monitor their space. The grocer waits on the customers and handles the daily stocking and sales. It is time for the retail community to look at this same scenario.

Vendors, rather than opening their own store, must evaluate the opportunity to “purchase” shelf space in the existing retail store. The inventory would be owned by the vendor until it is sold and the vendor would be responsible for keeping the right amount of goods in the store in order to be profitable. No longer would there be an open to buy in many classifications on the part of the retailer but the vendor would now be responsible for his open-to-supply! The beauty of this is there is less investment and risk on the part of the vendor AND there is no credit required for the retailer to stock the shelves. Marketing could be a joint effort that provides synergy. The vendor can market his goods and drive business to the store. The store can market to drive traffic to the store too.. The vendor would have reps that, instead of selling at trade shows, travel to the stores in each town or area to teach the local staff, monitor the inventory and give input back to the vendor or planners to hone the Open to Supply budgets as well as develop the assortment plans with the local retailer input.

Both of these scenarios are feasible. There are many other scenarios that are feasible as well. None of them is without bumps in the road and and challenges that will require coordinated leadership to develop and effective management to implement. There are many other potential ways for specialty retailers to emerge from this recession stronger and more viable for the new market and I welcome others to add their scenarios to this blog. As long as the big branded vendors assume the future will be like the past and they just need to continue their direction, we will be heading into the age of specialty retail! Our goal and mission is to stay abreast of the various options and opportunities and work with clients, industry groups and retailers to assure the future of specialty retail.

NYT article about weaker trends in luxury items, but profit on items well adapted to sell in a downturn.

<a href=”http://www.nytimes.com/2009/05/20/business/20shop.html”>link</a>

With the onset of The Great Depression of 2009, we are constantly hearing a lot about change but not nearly enough about balance. Whenever there is change, it brings an imbalance since the change affects different people, different departments and different customers in ways that are not equal. The scramble to balance the system again, or at least to find a new balance, is extremely important.

One example comes in our workforce where millions have now lost their jobs while others are still working. The imbalance in pay that ranges from unemployment compensation to the same old salary is huge. Many companies are trying to stabilize the system through furloughs and pay cuts to rebalance the pay structure and help people keep their jobs. Other companies are eliminating bonuses which has the effect of eliminating a source of incentives too. Some companies are doing surgical layoffs to raise the quality of the staff. With this approach, each worker is evaluated for performance and the lowest performers lose their jobs.

Another balancing act that is critical is that between revenue and expenses. As revenue has fallen in most businesses, there must be a rebalance on the expense side too. Every expense line is part of the rebalancing and some must be renegotiated while others must be eliminated. Expenses you could not live without a year ago now have a good chance of not surviving the new balancing process.

The new balance needed will extend beyond your business and extend into your personal life as well. Personal finances will need a new balance point. Even your other habits will find a new balance as we redefine ourselves for the “new normal” being established. As you go through this process, be aware that, as a store owner, your customers are also doing the same thing in their personal lives.

Your business will be affected in many ways that you may predict and others that will only become clear in the rearview mirror. For example, many vacations are being cancelled or curtailed. Will people buy less resort wear? Will they shop more with you because they are not shopping while on vacation? Will they shop less because they are not preparing to go on vacation? The responses will vary but the questions must be asked.

The new balance will make our old rules of thumb into myths. The faster you can find a new balance, establish new rules and move forward, the more successful you will be.