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?