Placing Your Bets
With the Fourth of July now gone by, and the dog days of summer settling in, the attention of many small retailers turns to clearing out their remaining spring and summer merchandise, and finalizing initial shipments of back-to school and early fall merchandise. While business may be slowing down at the cash register, it's a busy time behind the scenes transitioning from one selling season into the next.
It's also a very appropriate time to review your fall sales plans and your pre-season commit percentages. Developing your pre-season commit percentages goes hand in hand with developing an accurate sales plan. One without the other is a job only half done.
Pre-season commit percentages?
A pre-season commit percentage is the percentage of the season's sales plan that you have already committed to before the season begins. It's the bets you've already placed before the season has even opened up.
Every seasonal retailer has to place these bets. Based on the prior year results, and any new items or trends in the market since then, a seasonal retailer has to commit to enough fresh merchandise to set displays and cover early sales, sales which are a critical early indicator of the season to come. Similarly, a retailer frequently has to commit up front to merchandise scheduled for delivery later in the season to assure they'll have core stocks of key items and categories at that critical time.
On the other hand, the greater the pre-season commit percentage the greater the risk associated with those commitments. The best way to think of this is in terms of the calendar. The higher the pre-season commit percentage, the further out into the selling season those commitments will cover, before any sales have been made to indicate which way the season will go. Will I run an increase or a decrease? Will the styles or colors I've bought be the hot sellers? The further out the commitments go the greater the risk that overall sales volume may not be as high as planned, or that the fashion trend may develop in a different direction than anticipated.
The risk is not just markdown risk, although unwise pre-season commitments can easily lead to markdowns that will quickly torpedo the profitability of any season. It's also obsolescence risk, damage risk and packaway risk. And its cash flow risk. As you go through a season, your cash flow plans assume your sales will generate enough cash to pay the bills as they come due. Too much inventory brought in too soon runs the risk of payables coming due without the cash to pay for it, as well as tying up cash needed for critical purchases later in the season.
There's no hard and fast rule for evaluating pre-season commit percentages, except to say that 0% is almost always too low and 100% is to be avoided unless absolutely necessary. Appropriate pre-season commit percentages are unique to each retailer, their product lines, merchandising strategy and vendor structure. That said, here are a few thoughts to help you evaluate your pre-season commit percentages:
- When calculating your pre-season commit percentage, be sure to include your packaways from the prior year. Packaways represent the very first of your purchases for the upcoming season (not to mention the very last, unnecessary as it turned out, purchases from the prior year, but that's a column for another day…). Be sure to carefully review your packaways. If they are at all dated, or they're the least bit shopworn, plan on taking the necessary markdowns early in the season to free up those inventory dollars for additional purchases of your better sellers and hotter items as you get deeper into the season.
- Different categories of merchandise by their nature are going to require higher pre-season commit percentages than other categories. Take a category like artificial Christmas trees. The selling season is relatively short with little opportunity to reorder hot sellers. In fact, this market, made up entirely of imports, requires close to a 100% pre-season commit percentage, with those commitments frequently due by February, a full nine months before the selling season really kicks in. Contrast that with a category like sweaters, which has a much longer season and much greater opportunity for in-season re-ordering. A pre-season commit percentage between 50% and 75% would be more appropriate for a category like this.
- The key to minimizing risk is to place commitments and schedule deliveries as close as possible to the anticipated time of sale at retail. If you can defer some commitments until you get into the season, rather than placing those bets before the season begins, the more knowledge you'll have on how the season is developing, both in terms of sales volume and fashion trends. You'll have a better understanding of the marketplace as well, which vendor has the merchandise you need, and if there are any deals available.
- If you allow it, your vendors will impose purchase terms and minimum quantities, which will require you to commit to all of your seasonal needs upfront, and with it the inventory risk. Don't allow it! If you're a buyer with dollars to spend you have the leverage to negotiate purchase terms that work for you. You probably won't get everything you ask for, but that's more than if you don't ask. Otherwise, you'll quickly find that you're looking at 100% pre-season commit percentages across the board, and all of the inventory risk on your shoulders.
- Don't let a deal tempt you into making a commitment sooner than you really need to. A 5.0% early-commit off-invoice discount may look great, for example, but you may give those savings right back in markdowns and inventory financing costs if the quantity you have to commit to is much greater than what you would have otherwise. An off-invoice discount in exchange for an earlier commitment and a larger order is the most common way a vendor will attempt to shift inventory risk onto you. If the deal seems too good to be true, it probably is.
- At their most detailed, pre-season commit percentages need to be evaluated not just for the season as a whole but by delivery periods as well. To illustrate, let's break the fall selling season down into three delivery periods, Back-to-School, September/October and Holiday. A pre-season commit percentage of 66% might break out into 90% for Back-to-School, 75% for September/October and 40% for Holiday. Again, the key is to place commitments and schedule deliveries as close as possible to the actual point of retail sale.
The bottom line is that the greater the pre-season commit percentage the greater the inventory risk associated with those commitments. Understanding the nature of this risk, and managing your pre-season commit percentages accordingly is one of the keys to having a successful season, in terms of sales, gross profits and cash flow.