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The three forms of retail success

With uncertainty on the horizon, the time has come for retailers to plan for ways to promote internal growth. DAVID BROWN shares three important approaches to promote improvement from within a business.

In the world of business, it’s not enough to simply succeed once. Businesses must constantly reinvent, recreate and rejuvinate in order to maintain relationships with existing customers and forge new partnerships with the customers of tomorrow.

US actress Lauren Bacall once said that “standing still is the fastest way of moving backwards in a rapidly changing world.” That’s an important concept small business must keep in mind heading into the second half of 2022 and beyond.

If you’re familiar with my work, you’ll know that I’m a fan of the 80/20 principle. It’s the art of concentrating resources in the 20 per cent of your business that can lead to 80 per cent of the improvement in results.

There are many facets to business including marketing, staff management, and sales development just to name a few. What each of these areas have in common is that they can be reliant on the actions of other people, such as advertisers, sales staff and customers.

While each have their own 80/20 areas that represent a worthwhile concentration of time and energy, business should at first concentrate resources in areas where you can have complete control of the outcome.

In digging through the monthly store performance data, there are three key areas that I feel every business should review and seek to improve. The beauty of each of these areas is it’s easy, through comparative data, to see how your store is performing against others.

The areas that you can control while having some of the biggest impacts on your results are mark up, old product, and controlled buying.

Markup

Pressure to generate sales and achieve sales targets often results in a decrease in markup.

After all, if it costs the customer less they will buy more or say purchase quicker, right Wrong!

Take a look at other retail stores that have advertised themselves as being the cheapest and count how many of those are still trading.

The price-conscious customer has no loyalty. Remember that the more sales you discount, the more you teach your customers they shouldn't pay the ticketed price.

If being the cheapest was the answer then our shopping centres would be crowded with identical stores selling on price and high-end product would not have a marketplace anymore, and yet we see a constant growth in new high-end fashion brands all the time.

That doesn’t mean you don’t discount to get sales, just pick the battles that you can win.

Items that have good markups, such as those with a greater than 200 per cent markup, have some inbuilt ‘head room’ to negotiate with and still produce the sales your business needs to generate enough profit.

Review your past three months of sales and look at the markup achieved on F-Fast sellers, fast sellers and old product.

Now may be the right time to review what markup that you need to achieve to run your business. That is a key metric that you should review at least every six months as the market and trading conditions are continually changing around you.

For any collector of luxury goods, few things matter more than a guarantee that you’re getting what you pay for.

It is critical that you know, at all times, when you are above or below that markup figure. Reviewing that information at the end of the financial year is too late to do anything about it.

Knowing this, you can project sales targets that give you the money required to run your business. You can also formulate and monitor the pricing of stock as it goes into your system.

The breadth and importance of this topic cannot be covered in these few words but it is a starting point to driving this area of your business forward.

Above all don’t let your own attitude be the handbrake on developing your mark up. On average, customers will pay more for products and services than business owners believes.

Give your customers the chance to prove it!

Old product

I mentioned above that it was best to focus on parts of the business with which we could have complete control.

Most retailers understand this when it comes to markup. You can choose what price you put on an item, and what price you want to sell it for.

For many, however, old product is viewed in a different light. Sadly, many retailers don’t see old product as something they can control. After all, they argue, they can’t force customers to make purchases at the end of the day.

What these retailers neglect to understand is the extent to which a passive approach causes old product to age. You have a choice in how long an item stays within your inventory.

Let’s test this theory. Find a sample of old items from one department, mark them down to $1 each and put them in the front window. Let me know what’s left at the end of the week.

Reading this it’s easy to think I’m being a little flippant and I don’t recommend you take every item that hasn’t sold in the last twelve months and give it away.

The point I’m making is that you choose to accept whether an old product stays within the store or not. If you really needed to you, always have the option of reducing the price to $1 and moving it quickly.

That’s the real lesson here – you have control.

For retailers, feeling in control of what happens within a business is directly related to the success and profit a business generates.

 
Stock that is still technically ‘new’,
less than 180 days old, can rapidly
become old. To get a clearer picture of this concept, produce a stock-by-age report and organise by department to see the number of units involved.

It’s the reason why many people start their own business; the pursuit of feeling in control of the decision-making process. A business owner can choose whether they go to work or not. Feelings of freedom in business come from control.

Old stock creates a number of issues. These include capital becoming tied up, displays looking tired and cluttered, and customers possibly perieving a business as out of touch with current market trends and fashions.

Old stock can also cause issues for sales staff, who feel demotivated by a stagnant environment.

It’s important to compare your sales-to-stock ratio. In the past 12 months, there are fewer than two, then potentially there is an old stock issue. If you look at this figure for each department, you’ll gain a better understanding of how widespread the issue is.

I suggest using the 12-month column to dilute any possible one-off impacts, such as an unusually slow month in any specific department.

The age of stock is also important. Stock that is still technically ‘new’, less than 180 days old, can rapidly become old. To get a clearer picture of this concept, produce a stock-by-age report and organise by department to see the number of units involved.

With so many retail sectors flooding the market with ‘sales’ the traditional once-a-year attack on old product may not produce the same results it once did.

Certainly, retailers should still do this at the time of year when they have achieved the best results, it’s important to continuously chip away at old stock to get the best traction.

There are many strategies business owners can employ to slowly, but surely, clear this inventory. One approach may be a manager’s special cabinet, and another is paying incentives to sales staff for clearing a specific product.

Additionally, retailers may talk with the suppliers of certain stock at the next buying group meeting concerning stale inventory.

The starting point, however, is understanding that you have control over the fate of old product at all times.

Controlled buying

For many, one of the most enjoyable aspects of owning and operating a store is the chance to buy new product.

Thankfully, you aren’t dealing with plastic bags or masking tape. Rings, watches and jewellery in general are fun things to buy and sell.

This enjoyment can be an Achilles heel for some businesses, however. Many customers experience a rush of adrenaline when making a purchase, and it can be a similar experience for retailers, with the added justification of the purchase being for a business.

Controlling the urge to purchase, and ensuring that you are buying for the right reasons, can be one of the most difficult areas of self-control for any store owner. The better control exerted by an owner the more effective a business will become.

A well-reasoned buying plan must be tailored with a number of factors in mind. During the developing of a buying plan, the following questions should be kept in mind:

“Many customers experience a rush of adrenaline when making a purchase, and it can be a similar experience for retailers, with the added justification of the purchase being for a business.”

• Debt reduction: Are you managing your cash flow in order to reduce outstanding loans or accounts?
• Inventory turnover: Are the current product levels appropriate for needs of the business right now?
• Diversity: Is the mixture of product conducive to reaching sales targets? Are there any balance issues that need addressing?
• Increasing average retail: Does the level of product reflect overall sales targets?
• Restocking: Have you replaced inventory of proven sellers?

There’s a simple formula retailers can stick with - purchases (stock in) must be less than cost of sales (the original cost of the goods you have sold) for any measured period of time.

Businesses must spend less on replacement product than the value of what is sold. If this continues indefinitely you will be reducing your level of stock.

There is always the chance issues can surface which challenge the parity of this formula, such as deferred payments offered by suppliers, branded products introducing new ranges, and buying larger quantities of fast selling products.

If one hypothetical product is guaranteed to sell, there is no cause for concern, because the income may well be generated before the invoice needs to be paid.

If another hypothetical product doesn’t sell before the invoice is due, then the problem remains regardless of the payment terms. Every product that a store possesses, that has not been sold before payment is due, will lead to reduced cash flow.

If ‘fast sellers’ represent 80 per cent of your sales, then 80 per cent of your ‘cost of sales’ is already pre-committed to replacing these items.

For any collector of luxury goods, few things matter more than a guarantee that you’re getting what you pay for.

Thus 20 per cent of your cost of sales is available for debt reduction, stock reduction, or entrepreneurial buying of new stock that you have never had offered before.

If debt reduction, or stock reduction, is a part of your overall plan, then this 20 per cent needs to be further reduced to provide a new stock ‘open to buy’ figure.

In other words, once you have allowed for the 80 per cent of items that need to be repurchased, as well as the amount you want to reduce your debt or product levels by, the balance remaining is what is left to spend on new, unproven items.

If you spend anymore than this you are spending more than you have coming in.

The key to getting this process right is to ensure that any new items, regardless of how they are paid for, are deducted from the new open to buy fund at the time of ordering.

If that’s done, then a jeweller avoids the trap of being lured into a false sense of how much capital is available to be spent.

Unless you have a specific plan to increase or decrease your product levels, you should end each period with the same amount of product as you started and ideally with the same percentage of fast sellers.

The only change should be new product replacing old product that is no longer required. Using this benchmark is the most effective way to measure your buying and keep it under control.

Good luck

Putting any forecasts for the future aside, all businesses have the chance to provoke internal sales improvement by securing control over the elements which can always be managed, regardless of external volatility or stability.

“For retailers, feeling in control of what happens within a business is directly related to the success and profit a business generates.”

It is critical that businesses are operating with accurate markup figures. Reviewing that information at the end of the financial year is too late to repair issues. Do it now!

Old and stagnant inventory is an issue that can always be addressed. Resolving those kinds of product management issues is a great way of reinforcing feelings of control and building confidence for business owners.

Purchasing new products for a business is exciting, but restraint is a must! Before any new inventory is acquired it’s essential that a business is spending less than is coming in and that all this information is measured and accounted for.

In the words of Tony Robbins – “it’s our decisions, and not the conditions of our lives, which determines our destiny.”

 

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ABOUT THE AUTHOR
David Brown

Contributor • Retail Edge Consultants


David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more: retailedgeconsultants.com








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