I was driving through a neighboring town recently when I encountered a seemingly endless line of going-out-of-business signs along the side of the road. You've probably seen similar signs -- small, low signs stuck into the ground, one after the other, like daisies springing up on the roadside. This one was a local patio store. I knew the store well. Independently owned, about 6,000 square feet, they'd been there for years, selling high-end patio furniture, huge gas grills on steroids, pool tables to balance out the seasons, and artificial Christmas trees and other holiday decorations.
I decided to stop by and take a look. I suspected the signs had just gone up, and when I got to the store it was clear the sale was just getting started. Everything was marked down 15-25 percent, as appropriate for the beginning of the end, but what struck me were the inventory levels. Somehow, it was like they never got the memo that there was a recession going on, and that high-end discretionary items in particular were out of favor. Instead, they were loaded to the gills.
As I left the store, I was reminded of a stop I'd made last fall at a similar store a couple of hours away. That store is a pretty good sized free-standing store, on two levels, close to 12,000 square feet in all. When I walked in, the ground floor was already fully set with Christmas merchandise, and what first caught my eye was that a good percentage of the boxed ornaments had quite a bit of shelf wear -- packaways from the prior year, not a good sign.
Then I went upstairs. From wall to wall, packed so tightly you couldn't leave the main aisle, was one top-of-the-line patio set after another, broken up only by high-end gas grills packed in just as tightly. Summer carry-over, 10 pounds stuffed into a five pound bag. When I saw the store going out of business this weekend, I immediately thought of this store, and wondered if they were still in business.
On my way home on Saturday, I decided to stop into a third, very similar store on the way. In addition to patio furniture, grills, and pool tables, they also sell swimming pool supplies, in about 10,000 square feet. I had always been impressed with this store; it had always struck me as well-managed and executed. And I wasn't disappointed on this visit, either. The store was certainly lighter than I'd seen it before, but given what had been going on lately, the inventory levels made perfect sense. They still had more than enough assortment to satisfy most every customer need. It was clear they weren't going anywhere -- they were well positioned to be a survivor.
There is a lesson in all this about inventory and cash. In these challenging times, there's been a lot of discussion of right-sizing inventories and managing for cash. But regardless of the times, no small retailer can afford to invest every last dollar in inventory. Every small retailer must constantly manage their business to accumulate cash. Too little inventory is almost always better than too much, especially if it means the difference between maintaining a cash cushion and not. There's the mistaken belief that carrying more inventory will lead to more sales. All too often, the reverse is actually true.
Cash should only be invested in those activities that will directly lead to increased revenues or decreased costs. Maintaining good liquidity at all times is essential, regardless of how strong the sales trend is. Think about the store I visited this weekend that's going out of business, or the store I saw last fall that was buried in carryover merchandise. Do you think they'd rather have the cash right now, or all of that inventory?
I've been speaking lately to more and more people who are thinking about starting up a retail business. For the most part, these are folks who have not been in retail before, but have great ideas for offering customers something new, something different, something compelling. They've got the entrepreneurial bug.
If you think about it, this interest is not very surprising. There is a growing sense that the economy is nearing a bottom, and that things might start turning up before long. These people are at a point in their lives where they want to do something different, to follow their passion. They have cash that they're ready to invest and put to work. They just want to be sure they're putting it to work prudently and to the best effect.
Of course, there is an enormous amount of planning and work that goes into opening a new store. If you've caught the bug and are thinking about going into business, here are a just a couple of core thoughts to keep in mind:
Carefully define the niche that you want to pursue, and construct a plan to own and command it. Cutting-edge retailing today isn't about selling stuff; customers can get just as easily buy stuff on the Internet. To be successful today, you must engage your customers in a personally meaningful way, around a specific shared passion. That passion might be a mindset, a lifestyle, or an active pursuit. It's important to them, and that makes you important as well. The shared passion is what will keep them coming back to your store, that will set you apart, and, last but not least, earn you the margins you'll need to be successful.
Day in and day out, execute your passion. Create a compelling retail experience around that passion, and design every last detail of your business to work in complete harmony to captivate your customers. Everything -- from store design and build-out, to décor and layout, to merchandise presentation and assortment, to lighting and music, to fitting rooms and cash wrap, to your employees and their passion -- must be pulling in the same direction, and with the same intent; to provide each customer with a memorable experience, worthy of telling their friends about.
Success requires you to make your financial investment wisely, then manage it prudently. That requires a comprehensive and detailed set of plans, not just through Grand Opening, but for at least the first year you're in business. In retail, that means not just having a financial plan, but also a merchandising plan. You'll need a detailed set of sales, margin and inventory plans, broken down by category and subcategory, in units and dollars. When these plans are completed, you will have the essentials of an Open-to-Buy, with a detailed Buy Plan, by month, to guide your initial purchases. You'll also have a dynamic plan that will provide critical benchmarks, and that can be continually adjusted once you are open to reflect actual results and emerging trends.
Develop a companion monthly cash flow plan, derived in part from the sales, margin and inventory plans, that also takes into account every other cash expenditure as well. This takes you beyond pro forma financials, and provides you with a cash budget, and benchmarks for identifying variances and potential cash shortfalls in a timely manner as you go along. More than many other businesses, retailing is a cash business, so having a plan to manage your cash, and being able to self-finance your seasonal cash needs, is essential to success.
These are but a few general thoughts to guide your thinking. Most importantly, plan. It's easy to lose sight of the big picture once you've become immersed (if not overwhelmed) by all the details. If you have a passion, then plan carefully and execute your plan smartly, there could be no better time to get into the retail business.
As too many small retailers have learned -- and are still learning -- this recession is different from those in the past.
This recession is a credit-driven recession. The lack of available credit, and the withdrawing of credit, has been the pinch point for many businesses in this downturn.
For smaller retailers, this means that as both your profit and loss statement and balance sheet come under pressure, you've got to pay close attention to your covenants and in close communication with your lender.
For many, the focus has been on the P&L, but it's a major mistake to take your eye off your balance sheet. You can be sure your lender won't. In fact, the balance sheet is likely the place your lender will begin.
One of the things lenders will track the closest is your inventory. Most of your asset base is likely invested in inventory, and if that's increasing during a time of declining revenues, that's an important tip off to your lender that you are likely to need additional financing in the face of declining free cash flow.
A key metric, which you need to watch like a hawk during these challenging times, is inventory turn. If inventory turn is slowing, that's likely to be a significant red flag to your lender. It means that inventory has not been brought down in line with your declining revenues, and portends all sort of potential trouble down the road. When sales decline, inventory must be brought down accordingly. A slowing of inventory turn, in the face of declining revenues, is not sustainable for very long.
In this credit recession, managing your credit, and your lender, take on added significance. Be sure to keep an eye on all of your covenants -- but also be sure to watch your inventory turn very closely.
Every time I've ever had a client tell me how important their inventory is to them, I respond by asking them if there were a way to do business without carrying any inventory, would they? It brings them up short every time. The fact is that there isn't a small retailer alive who wouldn't love to find a way to do business without having to carry any inventory.
It's an important point to consider in these difficult economic times. Retailers of all shapes and sizes have had to re-adjust their inventories to reflect new sales levels and build their cash balances. For many, it has been a challenge to find the right balance between reducing inventories and maintaining full assortments.
One of the ways that a small retailer can find an acceptable balance is to review those items that might be able to be supported through special orders rather than standing stock. When I review assortments with new clients, I almost always find a group of items or programs that could effectively be converted to special order.
The key consideration in these stock-versus-non-stock decisions is your customer's expectations. If a customer comes into your store and expects to find the item they're looking for in stock, then it needs to be in-stock. All too often, however, small retailers think that a customer expects every item to be in stock. Clearly, that's not the case, especially for those small retailers who are focused on servicing a very narrowly defined niche. The first step, therefore, is to identify those items that customers would be perfectly willing to special order.
The next step is to determine whether your vendor base can effectively service special orders. Most every vendor would prefer to ship in multiples or pre-packs and have their items inventoried (and paid for!), but most understand that some of their items lend themselves more to special orders than stocking.
The third step is to understand how long a customer would expect to wait for delivery, and to be sure that each vendor can turn around your special orders on a timely basis. Customers, for the most part, are going to be willing to accept whatever lead time you quote them, so long as it's reasonable, and you deliver when you said you would.
Finally, in a time when sales are not easy to come by, examine your assortments and consider whether there are any additional items or categories that you could offer on a special order basis that are complementary to your current offerings. Work with your vendors to identify opportunities for additional business that don't require you to bring additional inventories into stock, and consume valuable cash.
Increasing the percentage of business that you conduct through special orders is an excellent way to maximize your revenues without incurring the financial burden of carrying additional inventory. It's also an excellent reminder that carrying inventory has its costs -- and that carrying too much is never a good thing.
The major retail chains reported their March sales recently, and the good news is that for the third straight month, there wasn't any really bad news. Sales were down slightly from a year ago, after being up slightly in February. Still, Easter was in March last year, so we are likely to see the impact of a later Easter this year in April sales.
The key point is that after free-falling in the fourth quarter of 2008, things appear to be stabilizing. Most smaller retailers are still afraid there might be another cliff just around the corner, but there's a growing sense that the worst might be over.
This has been a long and painful period. While the economists date the beginning of the recession to the start of 2008, many specialty retailers, who typical focus on higher-end merchandise, saw their sales start to drop as early as the spring of 2007. The S&P retail index rolled over in the summer of 2007, and by the fall of the year, the decreases had spread widely. The major chains that year started breaking price in late September, broke their Black Friday sales in early November and were in full clearance mode right after Thanksgiving.
Retail sales in 2007 were a leading indicator of things to come, and they are likely to be a leading indicator as we dig our way out. The challenge for smaller specialty retailers is that while they were the first to experience the downturn, by their very nature they may be the last retail sector to recover. While low-price driven chains like Wal-Mart and Costco have actually weathered the storm pretty well, for specialty retailers, the performance of retailers like Macy's, Penney's and Kohl's may very well serve as the leading indicator for a turnaround.
Still, even if specialty retail may be the last segment to recover, every small retailer needs to be pushing forward, bucking the headwind. Customers are still spending, but they are much more judicious. I believe strongly right now in marketing to your best customers, and building your customer base through referral programs, early previews, trunk shows, and other initiates to strengthen your relationships with your customers.
In my last post, I wrote about the likelihood that the current recession will not end quickly or with any perceptible rebound. From the retailers that I've spoken to recently, there is a sense that the sales decreases may have stabilized for the moment, but there's no confidence that things will actually improve anytime soon.
Right now, many entrepreneurial retailers are financially stressed, and at best are anticipating a very challenging first half of the year. Their immediate focus is on improving their cash position. Many are struggling with difficult decisions about reducing payroll. They are liquidating seasonal inventories, while deferring second quarter commitments as long as they can. They are uncertain about how to proceed with their marketing plans, whether to aggressively pursue new customers or focus on reaching their current, proven customers.
In the end, it's about cash flow. With positive cash flow, there is the promise of tomorrow and beyond. Without positive cash flow, there's only an abyss.
In this moment, cash-flow planning is more important than ever. From my experience, even before this recession set in, only a small percentage of entrepreneurial retailers paid enough attention to cash-flow planning. For most, their attention didn't go beyond keeping a close eye on their bank balance. That wasn't enough when times were better, but it's certainly not enough now.
Like any other planning, being able to project your cash flow into the future enables you to set up benchmarks and spot potential trouble before it's on you. Projecting cash flow gives you the opportunity to develop the widest array of options to deal with cash shortfalls, whether it's reducing expenditures, seeking additional capital, or sitting down with your banker to discuss additional financing.
Right now, more than ever, you need a cash-flow plan that looks into the future on a rolling month-to-month basis. Such a plan projects all of the transactions that will impact cash each month, including cash-in from sales, and cash-out for product and expenses, as well as any financing in-flows or repayment obligations.
The projected ending cash balance for each month is the key, for that enables you to spot where the pinch points might be. This is what you're looking for. As you plan each month out, at least six to 12 months forward, also be sure that the planned cash balance at the end of each month is sufficient to give you enough of a cushion to cover any surprises.
Once you've built a cash flow plan, put it to work. As each month ends, when you post the actual results and calculate your variances, be prepared initially for a few surprises. You're likely to see some variances that make you stop and wonder. As you review the significant variances, there are any number things that you're likely to find. Maybe in hindsight the original plan didn't make a lot of sense. On the other hand, maybe too much was spent on repairs and maintenance, or payroll ran a little heavy. Perhaps something was posted into the wrong account in error.
After you've tracked down the causes of the significant variances, and closed the operational leaks and bookkeeping idiosyncrasies that you find, you also need to take what you've learned and adjust the plans for the future months. Then, take the actual ending cash balance and roll it forward into those future months, and review each future month's projected ending cash balance.
This is the critical step in spotting potential cash flow problems as early as possible. Your cash-flow plan is a living document and must be constantly revised to reflect the most current information. This month's variance between your planned and actual ending cash balance may not have an immediate impact on your cash flow, but when you roll it forward it may project your cash into the red (or dangerously close) several months from now! And the time to learn about it is now, not several months from now!
In this economic environment, there's very little margin for error. Sales are down, margins are eroding, and credit is tight. Cash, as they say, is king. I've written before that if you show me an entrepreneurial retailer that takes the time to plan, and who puts that plan to work, I'll show you a successful retailer. That's true now, more than ever.
I was speaking with the owner of a small women's specialty store the other day. We were discussing the state of her business when she said something that made me pause for a second.
"I'm concerned that red may be the new black."
I thought I understood what she was saying, but I asked her to explain, just to be sure.
"I mean, what if the new baseline of my business is going to be 20 percent below where I've been? I've been running 20 percent down. What if that's the new baseline. At 20 percent down, I'm in the red, but if that's the new baseline, I've got to figure out how to run in the black at that level."
I suspect it's a question that many small, entrepreneurial retailers are asking themselves. What if red has to be the new black?
If you read the headlines, or have found yourself, like me, eating breakfast in the morning with CNBC on in the background, rather than CNN, you know that there's been a lot of speculation about the shape of this recession. Most past recessions have been V-shaped, in that the decline led to a brief bottom before the economy bounced back. The most difficult recessions have been U shaped, with a period of bouncing along the bottom before things turned up. Now, many economic prognosticators are expressing the very real concern that this recession will be L-shaped, that we're going to experience a prolonged period of bouncing along the bottom without any real perceived recovery.
If this recession does turn out to be L-shaped, red will be the new black.
What does this mean for small, entrepreneurial retailers? My suspicion is that most have taken the approach that they can sustain the current decreases for a while, but business will bounce back in the next six to 12 months, and they'll be OK. But what if business doesn't bounce back? What if we don't return to the previous level of consumer spending, a level that we now understand was driven by unsustainable levels of personal debt. We're told that in the short-term that we need to stimulate the economy to get consumers spending again, but in the long-term we have to spend less and save more. What if the consumer decides to ignore the short-term call to shop and settles in for the long haul? What if this recession is fundamentally transforming consumer spending patterns?
Every retailer, large and small, has to plan for this possibility, and they need to plan for it now. In many cases, losing 20 percent or more of your revenue base will require you to fundamentally rethink your business strategy. Here are just a few things to consider:
- How will margins be affected? The current decreases most likely have been accompanied by seriously eroded margins, as markdowns have exploded to keep inventories in line. What margin levels will you be able to sustain going forward? It's probably not prudent to assume that you'll be able to maintain your previous margins in this new environment. How can you generate more margin dollars from this revenue base? How will your promotional posture have to change given the new realities? How can you protect your pricing integrity?
- What levels of expenses can be sustained? What does this mean for your marketing budget and advertising? Can you continue to sustain the current channels? How do you re-strategize your marketing? As I've written before, my sense is that current marketing efforts should focus on your best customers, who are less expensive to reach than potential new customers.
- How much payroll can you handle? How do you manage payroll reductions? Do you reduce payroll through cuts in headcount, or cuts in hours worked or cuts in pay, or some combination of the three? How will this impact your customer experience? How will you have to alter your customer experience, and how do you alter it so that it's merely different, not worse?
- How does this change how you merchandise? You're going to need to reduce your inventory levels. How will this change your store layout and visual presentation? How will this affect your assortments? Will you become narrower but as deep, or shallower but as broad? Will you alter the mix between destination and impulse items? Will you use different strategies for different categories? How will this impact how you source? Will you use more domestic resources to shorten lead times? Will you narrow your vendor structure to remain important to your key resources?
These are just a few of the questions that a thorough strategic review must include. Given your individual situation, there will be many more. The point is that given what we know now, and all of the uncertainties that undoubtedly lie ahead, this is the time to carefully plan for what will need to be done to remain viable if this turns out to be an L-shaped recession.
Red just might have to be the new black.
For many small, entrepreneurial retailers, the post-holiday period has gone from difficult to frightening. Coming off of an extremely weak holiday selling season, which has left them behind the cash eight-ball, and facing gloom-and-doom headlines, they now find themselves staring at a sea of clearance merchandise with few customers coming through the doors, regardless of the discounts they're offering.
So how can they clear this inventory out and generate much needed cash, before it backs all the way up into the spring?
As urgent as the moment has become, there's also a real fear of putting the whole store on sale for 80 percent off (which might not even drive more traffic through the door) and doing serious harm to the very integrity of the store itself. How would we ever get them to pay full price again?
Successful small retailers have long known that the very best marketing involves personal referrals and recommendations that their best customers give to their friends. These retailers have historically gone to great lengths to foster and nurture these customers, because they were the route to the next tier of customers. They have done this not with price promotions, but with trunk shows, private viewings, and other special events. They have attempted to extend the warm, gracious, and engaging atmosphere of these events to their sales floors in general, trying to create a comfortable and inviting shopping experience. Long before there ever were loyalty programs, this was their intuitive approach to building enduring first-name relationships with their best customers.
I've been working with several clients on leveraging these relationships to clear out the backlog of seasonal inventory while protecting the long-term equity of the store itself. Without question, it's a tough balancing act. Still, what we've come up with is worth considering if you find yourself in this situation as well.
Rather than resorting to 75 or 80 percent off, as you might need to do if you took a straight clearance approach, or adopt a BOGO (buy one, get one) structure that leaves you essentially with a similar level of discounting, here's how we've approached it.
First, we started by leaving discounts where they've historically been for second markdowns -- usually at 50 percent off. Then we built a customer referral program on top of those discounts. Working from the existing customer e-mail lists, we've sent out emails offering these customers a gift certificate if they bring the e-mail and a friend not on our e-mail list, and that friend spends at least a given amount and gives us his or her e-mail address. Then, we offer the same opportunity to the new customer.
We've been working with a two-to-one ratio between the minimum amount that has to be spent and the value of the gift certificate. For example, if the minimum amount that had to be spent was set at $100, then the gift certificate would be $50.
This works for my clients for a number of reasons. First, we're giving their best customers an incentive to come in and see what's on sale. In an environment of weak traffic counts, these are the customers who are predisposed to come back in. These are the customers who are typically the easiest to convert, and have the highest average transaction and units per transaction.
Second, the friend is probably going to spend more than the minimum amount, and the current customer will likely make a purchase as well, whether she uses the gift certificate at that time or not. So, we're going to move through those clearance units, and probably at a cumulative discount of less than 75%.
Third, we're adding new names to the e-mail list. These are the customers we want to pursue over the coming months, to welcome and embrace. Whether business remains difficult, or the spring starts to show a rebound, these new customers are needed to expand the base the business is built on.
Finally, we're avoiding any banners or signs screaming "75 PERCENT OFF!" Yes, we're using price to incentivize our best customers, but in a way that's more subtle and also sends the message that they're special and important, as they truly are. It gives us our best chance to minimize any long term damage to our price integrity.
In this time, when it's tough to get foot traffic into your store, and tougher still to get them to open their wallets, turning to your best customers gives you the best chance to convert your inventory backlogs into precious cash. It's also the least expensive way, from both a marketing and a markdown perspective. You've spent a lot of years developing your relationships with these loyal customers. Now is the time to turn to them.
- Another Going-Out-of-Business Sale
- Is Now the Time to Go Retail?
- Why This Recession Is Different
- Want to Increase Revenue? Reduce Your Inventory
- When Will Sales Turn Around?
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