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When to re-order and when to run

In the conclusion of a two-part look at profitable retailing, DAVID BROWN discusses the integral components of re-ordering fast-moving stock and cutting slow sellers.

I explained last month that I recently had an epiphany about retailing, which is based on what I call the five stages of profitable retailing:

  • What to do before you buy;
  • How to buy better;
  • How to sell what you buy;
  • What to do if it sells quickly;
  • What to do if it doesn’t sell.

Part one of this column outlined the first three stages and how planning and purchasing new product is inexorably linked to boosting a retailer’s chances of successfully selling that product. Without planning ahead, retailers can’t be sure they’re buying the right stock and without following certain purchasing principles, retailers can’t be sure they’re aligning themselves with the right vendors and getting the right deals.

Furthermore, once the product is in store, retailers need to equip their staff and use a merchandising plan to give themselves the best possible chance of selling that stock. Therefore, this month we follow on with analysing what to do when an item sells quickly and what to do if it doesn’t sell at all.

Stage four: what to do if it sells quickly

Congratulations! You bought something within budget that was planned, researched, successfully launched and it has sold out. Now what?

It’s a funny thing that no matter how easy retailers find it to buy new, unproven product, they can really struggle with the concept of re-ordering it. “Phew, that piece I bought actually sold. That was lucky. Now I’ll take the money and buy something that doesn’t sell.”

Now I know this isn’t a conscious decision but this sure happens a lot. It’s just a bad habit. Plus it’s natural for retailers and their staff to enjoy the pull of newer, shinier product. Have you ever re-ordered a fast-seller, for example, only to have staff react with, “We’ve sold three of those already. Can’t we try something different?”

The importance of re-ordering to profitability cannot be understated. I had a client who would regularly sell items 30, 40 and 50 times over. When asked how, he would say, “If a fast-seller sold that day, I couldn’t sleep at night until I knew a replacement was on its way back before I left the store.”

This behaviour is simple, effective and highly profitable yet uncommon. Everyone in retail knows that re-ordering fast-sellers is fundamental to success but there remains a disconnect between knowing what to do (best practice) and current behaviour (common practice). Naturally, this is reflected in average gross margin returns on investment (GMROIs) of less than 100.                          

One argument against re-ordering is that staff will get sick of the item, however, staff almost always get sick of selling items long before customers get sick of buying them.

Another is that customers might get upset if they know the ring they bought for $2,500 is in store once more. There’s a price to pay for exclusivity and it’s not $2,500. For example, visit a BMW dealer and order a brand new, top-of-the-range BMW in red with tan leather interior but only if they promise not to sell another one in the same colour and see what they say!

If you do decide against re-ordering a fast-seller because you don’t want to upset a customer, please make sure to contact local competitors and tell them not to stock it either. After all, that’s the best way to guarantee your customer won’t see another in town, right?

For those few customers who do ask you if it’s a one-off, tell them it is a mass-produced product that you and other jewellers buy from a manufacturer so you can’t guarantee they won’t see other people wearing it. Then sell them an exclusive, bespoke piece that you will create just for them at a custom price!

While I was at a client’s store a few years ago, she sold a $4,500 diamond ring and a $3,500 watch. Both items had literally been in the store for an hour and when I told her to re-order them she looked at me like I was a crazy man.

“This is Retail 101,” I told her. “You bought them believing they would sell, you proved yourself spectacularly right and then you hesitate because you think it was just a lucky sale?” She re-ordered both items and went on to sell four more of the rings and 12 of the watches within four months.

I use the term ‘quick-seller’ often but how quick is quick? Really, it depends on what the item is, what the price-point is and how quickly the vendor can replenish it. As a rule-of-thumb, re-order everything that sells within three months. If something sells in three months, it has the potential of a four times (4x) stock-turn, significantly higher than the Australian industry average of one stock-turn, which means it takes 12 months to sell.

Next, re-order almost everything that sells within six months regardless of price, but use some discretion around stock-turn – if you need a three times (3x) stock-turn for this product and it takes six months to sell, the best you will achieve is a two times (2x) turn.

There are items that take 12 months to sell but I would still re-order them because they are at higher price points, have great margins and help sell other items just by being in the store. The key is to use your judgement on an item-by-item basis, remembering that items have an 80 per cent chance of re-selling if they sold quickly once before.

Re-ordering is crucial but it’s also easy:

  • If it sold quickly, re-order it immediately regardless of price;
  • Pay quickly to enhance your relationship with vendors;
  • Keep re-ordering until customers stop buying;
  • Keep staff motivated to repeatedly sell proven, popular items.
Stage five: what to do if it doesn’t sell

Things don’t always go as well as you like, and despite all the planning and preparation, retailers will occasionally have items that just don’t sell. That’s not a disaster but failing to have an exit strategy might be.

Retailers should always determine the time it will take to sell each item before buying it. This helps to determine whether they are buying a product because they like it or because it will turn a profit.

The big question when it comes to stock that isn’t selling is, “When is old really old?”

At our Academy, we analyse the data from hundreds of stores and we believe a new or re-ordered item has the best chance of selling within the first 39 days.

After 39 days, the likelihood of it selling quickly goes down dramatically. It’s a fast and slippery slope from 39 days until the item is celebrating its first birthday in your store!

Am I saying items are old after 39 days? No, but I am saying items are on their way to becoming old and if retailers ignore those items, the problem will worsen.

One of the reasons for this phenomenon is that staff stop showing items after this time. When things are new, staff show them enthusiastically but after 39 days of rejection and negative feedback, staff lose confidence and start showing newer items instead.

This gives retailers two choices: replace staff every 39 days or encourage the team to keep ageing inventory fresh, training them on how to show it.

To help you get aggressive with inventory that doesn’t sell quickly, let’s examine the cost of ignoring it. Most industry experts agree that retailers who still own an item after 12 months have incurred an additional 20 per cent in costs, so that $1,000 item now owes the store $1,200. This works in the following ways:

  • You have to insure it;
  • You have to promote it;
  • You have to pay staff to clean it and take it in and out of your displays every day;
  • You have to put a roof over its head (rent);
  • You have to pay tax on it even if it doesn’t sell;
  • You have to finance it and even if you don’t have debt, you could be earning interest on that money if it were used another way.

Not good, huh? Hold on, it gets worse.

If that $1,000 was invested in other stock that sold quickly at a margin, it would earn at least $1,000 of profit (a 100 per cent return/GMROI). So now a 12-month-old $1,000 item owes the business $2,200, a figure that compounds with each passing year! Can you still afford to ignore it now?

Worse still. The item is now worth 80 per cent of what you paid at best – that’s $800. How is your ‘investment’ looking now?

One of my clients has the right attitude to aged inventory. She hates it! “If my customers don’t want it, nor do I. Get rid of it!” she says, and it works. Out of more than $700,000 in inventory, she has just $12,000 in aged inventory. Admittedly, that is the best I have seen but it proves it can be done with the right attitude.

Okay, now that we know why to get rid of items and when to get rid of them, let’s finish with how. Retailers have several options available for removing inventory:

  1. Get into the habit of identifying new items of aged inventory and revisiting existing ones at least every week;
  2. Decide on a course of action. Options are:
  • Remake it using the stones and metal into a known fast-seller or special order;
  • Return or stock balance it but only if those are agreed terms with the vendor and only if you have honoured your part of the deal – trained staff; re-ordered items that did sell; paid quickly. The benefit of doing this as soon as it shows signs of growing old is that it is still a current model for the vendor so they can on-sell it;
  • Sell it:
    • Clean it, re-ticket and re-price it at a realistic selling price;
    • Make sure it looks new and then treat it as new – show it off to customers;
    • Provide a ‘Spiff’ (sales performance) incentive to staff before discounting it for customers;
    • Agree on discount terms with your team and incentivise them for selling it at a lesser discount than the agreed discount;
    • Run a sale only after exhausting all previous options. Guard your reputation by not becoming a discount store but also guard your image – no one wants to go into a store full of old merchandise. Your website can be a good option for clearing aged inventory and putting some distance between it and the physical store.
    • Scrap it;
    • Donate it and write it off as ‘advertising’.

Of all of the above options, the most important decision is to make a decision. Keeping and ignoring aged inventory is not an option. Retailers who constantly reinforce their sales staff on the reasons and benefits of moving inventory will be winners, just as retailers who make pragmatic financial decisions and not financial ones are. Yes, it turned out to be a poor seller. You made a mistake, get over it. Don’t make another one by ignoring it any longer.

The wrap

Over the past two columns, we’ve addressed the importance of planning purchases, making purchases, selling purchases and re-ordering purchases. We’ve also looked at what to do when these purchases don’t sell. Together, all these elements form the five stages of profitability and retailers who work to implement these stages in the order they are presented should experience better than expected bottom-line growth.

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