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?

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 dcor 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.

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.

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 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.

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'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.

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.

For the uninitiated, the NRF is the industry trade group for the world of corporate retailing, and to be fair, this past holiday selling season has been called the worst since 1969, and retail bankruptcies are expected to continue unabated through the first quarter. Still, has the sky really fallen?

Perhaps it has for the world of corporate retailing. Peter Solomon, founder and chairman of Peter J. Solomon Company, an investment bank in New York, recommended during the NRF session that retailers focus on nothing but cash. "I wouldn't worry about anything else for the next year," he said. "You are selling on a survival basis and you have to survive... Don't worry about investing and if you survive, you'll somehow figure it out a year from now."

I wouldn't for a minute disagree with Mr. Solomon that cash is king in this environment. If you have cash, you can look to tomorrow. If you don't, you're looking into the abyss. Nor would I necessarily disagree with his advice to his corporate retail audience, many of whom are staring at business models that have led them onto the slippery slope of competing strictly on price over a basket of commoditized products.

Consider, however, the December sales results of Buckle, Aeropostale and Hot Topic. Amidst the doom and gloom, these specialty retailers generated comp-store increases of 13.5 percent, 12.0 percent, and 4.3 percent, respectively. Each are narrowly focused on a carefully defined fashion apparel niche, competing not on price, but by appealing to the distinct lifestyle and aspirations of their customers.

Yes, cash is king. But for small, entrepreneurial retailers, this is a rich moment, full of opportunities, for fresh thinking and innovation. Customers haven't stopped spending; they're just spending less, and are more discriminating about what they are spending their money on. Clearly, across much of their basket value is critical, but for creative entrepreneurs there is a real opportunity to captivate customers with stores, products, and experiences far removed from the me-too world of corporate retail.

The sky hasn't fallen. At the moment, there may not be a lot of capital available for rapid expansion of new retail ventures, but the time is ripe for many small, entrepreneurial retailers to incubate new ideas, develop and refine new strategies, and engage and captivate new customers. The innovators of today will be the ones addressing very different retail roundtables in the future.

For many small retailers, they've grown their business by listening to their customers, carefully assessing their opportunities and following their instincts. Their growth has been organic and has led them to a settled understanding of their business and the marketplace around them. In this daunting environment, however, the earth feels like it is moving beneath their feet. The margin for error is slim to non-existent. There are many more sleepless nights.

As we embark on a new year, it's essential that small retailers stick to sound, proven fundamentals, while developing sound strategies for re-invigorating their business, if not redefining the core business strategy and market positioning.

This is not the time to go it alone.

Amidst all of the uncertainty, small retailers have a number of resources that they can call on for perspective and guidance. The relationships they've established with their accountants, lawyers, investment advisors, and insurance agents can provide a valuable take on both local conditions, as well as a heads up to potential issues within each provider's specific area of expertise.

This is also the time for small retailers to partner with another experienced retail professional. Two heads are better than one. In many ways, the challenges a small retailer faces are unique from other small businesses, and that's even more true now. Having an informed, experienced outside perspective inevitably helps any small retailer complement their skills, spot potential problems before they become significant, and help anticipate and plan beyond the urgencies of the immediate moment.

An excellent direction to turn for this type of help is SCORE. Many SCORE chapters have retired retailers willing to provide their insight and perspective. While they may not be able to address every issue a small retailer might have, or be prepared to become too involved, they are a good place to turn first.

In this environment, however, many small retailers would benefit greatly with working with an experienced retail consultant, coach, or adviser. In down times like these, many small retailers think that engaging this type of assistance is an extravagance that they can't afford. In almost every instance, however, the investment will be well worth it in helping to protect cash flow in the near term and position the business to best capitalize on the opportunities that will be there when the rebound occurs.

Navigating these challenging economic times will not be easy for anybody. This will test the mettle of even the most seasoned merchant. Nobody can be sure when the turnaround is coming. Now is the time to be sure that you've got the perspective and guidance that you'll need to make the very best decisions.

That said, business in November was pretty tough. The sales declines were despite unprecedented levels of promotional activity. Seemingly, nobody is focused on margins or profitability right now. They're focused on liquidating inventory and generating cash. They'll do what they have to do today in order to get to tomorrow.

And then there's Abercrombie & Fitch. They really took it on the chin in November, reporting comp sales down almost 28 percent. In a sea of markdowns across all retail sectors, A&F has decided to hold firm on its pricing. They're going to sail right into the storm.

A&F Chairman and Chief Executive Michael Jeffries was quoted as saying that "promotions are a short-term solution with dreadful long-term effects." And that tradeoff, in a nutshell, is the position many smaller retailers find themselves in.

Most smaller retailers stand firm on price integrity, running few if any promotions or events, and only breaking price during clearance periods. They don't compete on price, rather they differentiate themselves by carving out a distinctive niche characterized by carefully selected assortments of high quality products, exceptional customer service and a warm, engaging shopping experience. Price integrity is critical to their competitive positioning.

But in an environment like were in now, cash flow is the key. Obviously, the stronger you are, the more pain you can tolerate. But for many of you cash flow is a major concern right now. Given the inventory you currently own, you have to balance between the short term goal of raising cash now (that inventory will generate a lot more cash in December than it will in January and February), and the long-term goal of maintaining price integrity. I'm advising my clients now to do what they have to do now to bring end-of-December inventories into line.

Abercrombie & Fitch will break price. They may wait until January and clearance season to do it, and take their lumps then, but they're going to break price. They're going to be stuck with a lot of fall and winter goods if they don't.

The collapse of overall consumer spending in October was stunning, and the worst part of it is that nobody yet knows whether it was an aberration or a harbinger. Some of the comp store decreases that the majors reported were jaw-dropping. And the retail headlines don't look like they're going to get better soon. As I write this, Best Buy said today they expect to be down between 5 percent and 15 percent for the rest of the year. The amount of the drop is concerning, but even more concerning is the huge spread between 5 percent and 15 percent. Even they don't know where things are going.

Having said that, I think the most important thing a small retailer can do in this environment is be as clear-headed and realistic as possible in assessing their situation It's every retailers instinct to do something -- anything! -- to drive traffic, but over the next couple of months it could be that running 10 percent down will be a success. We just don't know.

What I would suggest is focusing on gross margin dollars and percentages. If you can run carefully structured promotions, like I outlined in my last column, Fresh Thinking for Uncertain Times, and see a bit of a pop in your business without eroding margins, I would go that route. I would not, however, succumb to running promotions that begin to badly erode either margin dollars or percentages. You may not be able to move the top line a whole lot in this environment, so focus on getting as much as you can out of the gross margin line. The one caveat would be that if you see yourself coming in heavy at the end of the year due to the sales drops, do what has to be done to get inventories back in line.

Most smaller retailers are very growth oriented, but now is the time to temper that with prudence, and patience. It's hard to know where things are going to go, so until they become clearer, you've got to be very focused on your cash. Buy very cautiously, plan for decreases until you start to see increases again, keep your inventories lean. Turn weak sellers into cash sooner rather than later. Keep a close eye on expenses.

It's also very important right now to take the time to project your cash flow. I would recommend modeling cash flow under at least three scenarios -- best case, worst case, and something in between -- extending each model out at least six months, and updating them every couple of weeks. As you go along, you're going to want to be looking as far into the future as reasonably possible, and identify any pinch points as early as possible so you can take corrective actions as soon as possible.

Unfortunately, there's no magic bullet for turning this around. The customer right now is very frightened. It's going to take time for them to get their balance sheets in order, feel secure in their jobs, and regain their confidence. It's a mighty storm that's brewing, and for many small retailers the best they can do may be to ride it out with as little damage as possible.

Most retailers are struggling on the top line right now. The only major national retailers who seem to be reporting increases are Wal-Mart, TJX and the warehouse clubs. For everybody else, the internal metrics are just about the same; weak traffic counts, conversion rates, average sale and units-per-transaction.

In an environment where everybody else is running sale after sale after sale, it can be hard for a small or independent retailer to know how to respond. I have long advised small and independent retailers to avoid competing on price. I believe that sustained success for any small or independent retailer flows directly from compelling product offerings, exceptional product knowledge and customer service, and an in-store experience that appeals directly to each customer's passions and aspirations.

In keeping with that, I have consistently advised against running sales or price promotions. Driving sales by dropping prices has been a slippery slope that few retailers are ever able to get back off of. But, as we have seen in the daily headlines, unprecedented times require fresh thinking and pragmatic approaches, even ones that you've been fundamentally opposed to.

In working with small and independent retail clients who share my aversion to sales and price promotions, we've sought an approach that strikes a balance between the need to offer customers exceptional values while maintaining the store's fundamental pricing integrity and brand equity.

Here's what I would recommend many small and independent retailers to consider. First, identify narrowly defined categories of merchandise that you can develop promotions around. Each offering must be meaningful and compelling. It might be a specific sub-category of merchandise, such as dresses, or silk flowers, or lamps (depending on the store's particular retail niche), or it might be a specific vendor's branded or designer line. The offering may also be driven by inventory levels, focusing in on categories or subcategories that are somewhat heavier than others.

Then, establish a promotional calendar, through the rest of this year and into the early part of next year, at least. Plan a promotion every two to three weeks, each lasting no more than two to three days, and running on the best sales days of the week. Do not run the promotion longer than several days; if you do it tends to blur the distinction in your customers mind between promotional and non-promotional periods. Determine which grouping of goods would be most attractive for each promotion, and be sure that each promotion in turn is featuring distinctly different merchandise from the prior promotion.

For each promotion, offer a single grouping of goods at a significant discount, at least 25 percent off, perhaps as high as 40 percent off, depending on the discount level necessary to grab the customer's attention. You're not putting large swaths of the store on sale, so you don't need to be as concerned about the impact of deeper discounts. The key consideration is offering a discount great enough to drive traffic into your store.

Focus your advertising of the promotion around your customer email list. Target your offering to your best customers, those customers that value your store enough to give you their email addresses. These are the customers that you want to get into the store. These are the customers who have demonstrated that they will buy from you. If you feel you need to communicate more broadly, simple ad in the local paper would probably be just fine.

Be sure to run an unadvertised, in-store special in addition to the promoted merchandise. This will drive up your units-per-transaction and your average sale, while delighting your customers and giving them an extra reason to come to the next promotion. Also, ask your vendor whose merchandise is being featured if they have any promotional items that can be used as giveaways.

Dress the store up. Make it an extra special place to visit. Change out the displays and vignettes. Make sure everything is properly accessorized. Be sure to feature the promoted merchandise prominently to the best effect. Set up a coffee urn, bring in some coffee cake, do whatever it takes to fully create the warmest possible atmosphere.

Most important of all, every customer entering your store must be greeted warmly as a returning guest, invited in and immersed in the atmosphere you have created. Each member of your selling staff needs to fully engage their customers. Each customer must come away with an experience worth telling their friends about.

The business objective of each promotion is to drive traffic, conversion rate, units-per-transaction and average sale. The point is not just to sell the items being promoted, but to generate add-on sales of un-promoted, full margin merchandise. By focusing each promotion on a narrow slice of the store's merchandise, and not putting the whole store on sale or running an early clearance, the store's brand equity and pricing integrity (not to mention profit margins) are maintained as much as possible, while still driving the top line.

Difficult times require difficult choices. Most small and independent retailers take a very principled, strategic stand against competing on price or running promotional events. And many of them know they simply must offer their customers special values in this uncertain environment to get them into the store and spending their money. Finding the right balance is the key to achieving the necessary short-term results without sacrificing long-term integrity.

Building customer loyalty, as a strategic retail objective, is founded on the theory that loyal customers represent the best opportunity to increase sales. It's long been accepted knowledge that it's easier and less expensive to sell more to existing customers than it is to attract new customers. The concept is to focus on retaining those customers that shop in the store on a regular basis, those customers that form the underpinnings of the business, and then expand on that base by converting occasional shoppers into additional loyal customers. The idea is to build market share by creating greater customer loyalty in an over-stored and on-line retail environment, where consumers seemingly have an infinite number of choices.

So what exactly is customer loyalty? Is it whoever chooses to opt in to a customer loyalty program? Is customer loyalty akin to customer satisfaction and should it be measured subjectively through customer feedback and questionnaires? Or is it something more tangible that can be measured empirically, such as the percentage of customers who shop and make a purchase at least once a month?

I'd suggest that it's the preference that a customer has for one store over another for a given item or basket of items. For example, I prefer Home Depot for building materials, hardware, and tools, but Lowe's for appliances, carpeting and home decor. If I need a dress shirt, my store of preference is the local Geoffrey Beene outlet. And in the springtime, I buy my plants from a local family-owned nursery. My preferences are obviously highly subjective, and not always driven by price considerations. These are the stores that just feel right to me.

But here's the rub. The fact that I will first go to Home Depot for lumber doesn't mean that I'll buy more lumber, it merely means that when I need lumber and nails I'll be in Home Depot, and that gives them the opportunity to sell me something I perhaps hadn't planned on buying. When I go to Geoffrey Beene for a new shirt I may pick up a tie, or a pair of pants, or a knit shirt, though I may not. But at least I'm in their store.

Loyal customers are important because they form the core of your business and the base of your traffic count, but the mere fact that they are loyal doesn't automatically mean they will buy more and drive your sales increases. Customer loyalty will bring your regular customers into your store, but it's what happens when they are in your store that determines whether they'll buy more. It's their experience once they are in the store that truly counts.

Having said this, it's necessary to make the distinction between customer loyalty, as a strategic objective, and customer loyalty programs. There is nothing new about focusing attention on loyal customers, but customer loyalty programs are relatively new on the scene.

Customer loyalty initiatives have generally taken the form of opt-in programs, where customers are offered incentives to join, and retailers are able to collect names, addresses, phone numbers and email addresses (and, occasionally, additional demographic information). These incentives-for-data programs allow retailers to target specific promotional messages, usually built around pricing incentives designed to drive traffic, as well as track the purchasing patterns of those customers in the program.

These programs use the banner of customer loyalty to inexpensively market to self-identified customers, and at their core, are marketing programs rather than customer loyalty programs. What's unclear from these programs is whether those opting in, and choosing to share their personal information, are truly loyal customers, or become more loyal once they've opted in. From a marketing perspective, these programs serve the same purpose that department store credit cards once served, to build a database of known customers, and track their purchases.

Being able to target specific promotional messages is not the same as building customer loyalty in your store, one exceptional experience after another. Customer loyalty programs may help you drive more business into your store, but do not necessarily create new or more loyal customers. It's only what happens in your store that can do that.

Customer loyalty is built one customer at a time, through the quality of their experience once they are in your store. When that experience exceeds their expectations, they'll be back, and they'll tell their friends. It's what happens in your store that counts. That's true not just for loyal customers, but for all customers. It's how customers become loyal in the first place.

It's a bit startling the first time you encounter them.

In this new concept of a storefront, there is something forbidding, exclusionary. The message is clear; if you're merely curious, window shopping perhaps, then this store isn't for you. If you feel put off by what you see, uncertain perhaps, then keep walking.

But if you get it, if you want to be a part of this, if this is who you are, then this place is for you, come on in!

In very dramatic fashion, these retailers have demonstrated the underlying concept behind niche retailing. They are not trying to be meaningful, much less important, to everybody. But to their target customer they seek to be extremely meaningful, incredibly important. So important, in fact, that they seek not just to shape the identity of their customer, but to become no less than an integral part of their customer's identity. An identity built around being on the inside, belonging to an exclusive club of others just like them, who are just as fashionable, trendy, just as NOW!

These retailers are selling cachet in the form of a shared identity, a lifestyle, an aspiration, an attitude, on the cutting edge of fashion. And in the effort to appeal and be meaningful to these customers, these retailers understand that they must consciously exclude other potential customers, who might not get it, who neither look nor play the part. They are selling fashion out on the edge, so they adopt a retail strategy that's out on the edge.

It's not enough for an independent retailer to sell stuff anymore. Big box, mass merchants sell stuff. Independent retailers must sell cachet. Your store must connect directly with your customers in a unique, compelling way.

For an independent retailer, cachet can come in many different forms, but in the end it's all about emotion. It's about how your customer feels when she walk through your door, when she first encounters an item which captures her imagination, when she makes the purchase and leaves your store, when she gets it home and looks at it again, recalling how she felt when she first saw it, when she shows it to her family and friends, when she uses it for the first time.

To a younger customer at A&F or Hollister, it might be a new top, a top that she'll put on for the first time the next morning, anticipating the compliments she'll get. Maybe it's a new bag, funky and full of spirit, which exudes attitude and energy, and announces her arrival, as clearly as her hair or her clothes.

To a slightly older customer in a different retail setting, perhaps it's a centerpiece for the table for when she has special friends for dinner in a couple of nights. Or maybe it's a set of curtains and several throw pillows that will change the feel of her favorite room, change the way she feels every time she walks through the door.

And it all begins when she walks through your door.

Are you offering her that compelling experience? The emotional response can take many forms but you must elicit an emotional response. Emotions make it memorable. And that memory will keep her coming back to your door again and again.

What is that emotional response? It might be a homey, warm-all-over feeling, like the smell of freshly baked apple pie. Or it might be a WOW, like the grand finale of a Fourth of July fireworks display. Or something in between. It's not necessarily a conscious response, more likely it's purely visceral.

There are many ways to create this emotional connection with your customers, but first impressions are critical. What's the first impression when she walks through your door, the feeling? It can be conveyed in the design and build out of the entryway, the color scheme, the dcor. It can be conveyed by the warm and engaging greeting of the sales associate she meets when she comes into the store. It can be conveyed through any of her senses, sight, sound, smell, touch, and it's all the more powerful if it's conveyed through several at the same time.

Is your merchandise assortment consistent with the connection you're trying to create? Is it displayed in a way that allows her to easily take it in at a glance and be intrigued and captivated by what she sees? Your displays and presentations must capture her imagination by offering unexpected treasures that entice her to explore further.

Are your sales associates fully invested in the experience you are trying to create for your customer? Is your customer the most important person to your associates when she's in your store? Associates that are enthusiastic and knowledgeable about your merchandise, the ways that merchandise is used and how they make the customer feel contribute powerfully to the customer experience. Customers are socially oriented like all of us, and will form powerful connections with others who share their passions. If your store is, in fact, an insiders club of passionate, like minded enthusiasts, your associates must be fully-invested members of the club!

It might have once been enough to offer the best stuff at good prices. Those days are gone forever. There are an endless number of places that sell stuff, starting with the Internet. But only stores can create a powerful, compelling experience. A customer will go into any store once, if only out of curiosity, but it's the power of the experience, and the emotional connection they make, which will keep them coming back over and over again.

Having said that, there are many retailers that haven't seen any sign of a rebound yet, and those that feel the recovery will be slow and anemic at best. Business is still likely to be difficult, and retailers large and small are likely to remain under financial pressure for the foreseeable future.

For small and independent retailers, this has certainly been a challenging period. For those in carefully carved out premium niches, offering their customers a compelling shopping experience and outstanding service, things haven't been quite as daunting. For many others, it's been tough to sleep at night.

The key for most small and independent retailers to weathering these turbulent times, and staying liquid until business opens back up, is to adhere to basic retail fundamentals. Yet for many, there's a temptation to try to drive sales through an increase in promotional activity.

Many small and independent retailers are so focused on the top line that it's very tempting to order up a sale and break out the sale banners. But this can be a very counterproductive direction to take. Most customers of small and independent retailers aren't price customers, they are more interested in value -- value that's not necessarily denominated in dollars, but in perceived product quality, personal values or aspirational appeal.

In this environment, it's near impossible to simply sell your way out of the situation. The top line stubbornly doesn't want to turn up. Many of my clients report that the weakness they've experienced has been primarily in traffic counts, and to a lesser extent in units per transaction. Promotional efforts on their part didn't necessarily drive more traffic into their stores, and only had a minor impact on units per transaction, but significantly reduced the sales dollars per transaction, and most critically, cut the legs out from under gross margin dollars per transaction. It left them squeezed having to pay vendor bills with severely discounted gross margin dollars. Their customers, not primarily motivated by price, didn't buy more; they just paid less for what they did buy.

In a downturn margins invariably come under pressure, but maintaining gross margins is critical, both as measured in percentages as well as in actual dollars. Maintaining gross margin percentages assures that there will be enough cash coming from each sale to pay for the goods sold and keep vendor payables from backing up. And gross margin dollars are essential to covering all of the other bills.

The key is to bring inventory levels into line with realistic sales forecasts. Excess inventories in a weak sales environment back up very quickly, creating enormous markdown pressure, far beyond any competitive markdown pressure. For those small and independent retailers whose customers are not motivated primarily by price, it often takes exceptional discounts to begin to move the unit inventory necessary to bring inventories into line. And those markdowns eviscerate gross margins.

Prudent sales plans begin with an honest assessment of the current sales trend. It is simply not prudent, for example, to plan for a 10 percent increase if the current trend has been a decrease, even if the comparables are favorable. It does not matter what kind of an increase the business might need, or how compelling the new assortments might be. What does matter is that customers haven't yet signaled they are ready to spend more. I have been advising my clients not to plan an increase until an increase occurs. To plan otherwise is to unwisely increase markdown risk, and imperil margins.

The frequent response that I hear is if you don't plan for an increase, you won't get an increase. But there are very few categories right now that look like there might be breakout increases on the horizon. More commonly, any potential increases appear to be fairly modest, and in most every case additional inventory simply isn't necessary in the short term to capitalize on that potential. Most small and independent retailers can run an increase of a few percentage points over plan for the several months necessary to increase inventory levels.

Once plans have been developed, I strongly advise my clients not to spend it all upfront. Many small and independent retailers feel they have to commit all of their dollars upfront in order to get the merchandise they want, and even ship it right away so it doesn't get sold out from under them. In a soft market, however, there's much less urgency to do this. It's far better to stay liquid by holding dollars back, and flowing merchandise receipts out through the season as close as possible to the time of expected sale. That way, inventories remain lean, customers are always seeing fresh arrivals, and there's cash to spend on long-margin, opportunity purchases late in the season.

Challenging times like these are fraught with risk. Managing that risk prudently, with a focus on maintaining margins and protecting cash flow, will enable small and independent retailers to come through this period well positioned to increase their business significantly once things improve.

It's finally April and the start of another baseball season. Football may be our most popular game, but baseball is our national pastime, and the start of every new season brings with it essays and odes to the game.

This week, CBS's 60 Minutes ran their own feature to mark the new season, a profile on Bill James. For the uninitiated, James is one of the game's most creative and influential statisticians, and has been credited with changing many long-held beliefs about how to evaluate players and think about the game. He started out over 30 years ago, writing and self-publishing an annual statistical abstract for each coming season. Today he works for the Boston Red Sox, and his approach to statistical analysis has been almost universally accepted and adopted throughout the game.

James' essential insight was that looking at baseball through in-depth analysis of the statistical data could shed new light on old preconceptions, and tell a story of what's happening on the field, and why, far beyond what the eyes of players, managers, executives and fans actually were seeing. He demonstrated, for instance, that slugging percentage and on-base percentage were far more accurate predictors of on-field success than the traditional statistics of batting average, home runs and runs batted in.

This insight -- that the numbers can add nuance, depth and understanding in ways that mere observation cannot -- has direct application for small and independent retailers. For retailers, the playing field is the store, the front door, the merchandise displays, the cash wrap, the backroom. The players are your associates and your customers, and the statistics derive directly from their interaction.

Many small and independent retailers are very astute observers of what's happening in their store, and very much focused on sales and profits, but less familiar and comfortable with more in-depth quantitative analysis. In-store observation is critically important, but in-depth quantitative analysis can open up new lines of thinking and shed new perspective and insight on what's actually being observed.

What are some of the key metrics to analyze? Many of these metrics are comparatives to prior years or seasons, and expressed as percentage changes. Let's start with the front door, and move back into the store.

How is your foot traffic? In the recent business downturn, this is where many retailers have struggled. They simply don't have as many customers coming through the front door.

How is your transaction count? If traffic is off, transactions are likely off as well. But how's your conversion rate, the ratio of transactions to traffic count? Has your transaction count held steady, or has that slipped as well?

How are your average units sold per transaction, and your average sales dollars per transaction? Can you divide these metrics down between destination items and impulse items?

Let's look at things from a merchandising point of view.

What departments and categories are trending up in sales? Which are trending down? How is the sales composition changing, as measured by the percentage contribution of each department and category? Is this due to shifting demand, or other internal factors, such as positioning and display on the sales floor?

What's happening with sales units by department and category? What about average selling price? Are customers trading down from higher priced items for lower priced items, or perhaps vice versa?

What's happening with markdowns by department and category? Is the percentage of your markdown sales to all sales increasing? Is the markdown percentage on your markdown sales increasing? What about the discount percentage, resulting from markdowns, on your total sales? Are markdowns increasing because of inventories backing up, or perhaps a result of you being locked into an ever increasing pattern of promotions?

What's happening to your gross margins by department and category? Are they increasing or decreasing? Is attributable to a shift in the sales mix, a change in your initial markups, or changes in your discount percentage resulting from markdowns? How can you shift your sales mix in your favor? Is it a matter of remerchandising existing programs on the sales floor, or does the assortments that you carry need to be adjusted? What other steps can you take to increase your gross margin percentages and gross margin dollars?

And what about your inventory?

How is your inventory composition by department and category? Is inventory backing up on you, or looking to be coming in light? How is inventory turnover trending for each department and category? What can a close analysis of your gross margin return on inventory investment (GMROI) tell you?

What's the average retail price of your inventory for each department and category? What about the markup of your inventory by department and season? If margins are off, could it be because markups have been eroding? Is it because your invoice costs from vendors have increased more than you've allowed for in your markups, are you locked into pre-priced branded goods, or is competition tying your hands on pricing?

How efficient are you in processing new receipts of inventory? Do you get it to the floor quickly? Is it completely ticketed, and is the ticketing accurate? How well do you deal with exceptions, late shipments, over-shipments, misshipments and unauthorized substitutions? Are you returning goods as expeditiously as possible, and are you diligent about assuring that you are getting full credit.

How is your shrink? Are you cycle counting frequently? What do your results show? Are you able to pinpoint the cause of the shrink, and close the holes in your policies and procedures that are contributing to shrink?

Finally, let's look at that all important metric, your cash.

Do you have a cash flow plan, a budget that details the cash you anticipate bringing in, and the expenditures of cash that you'll need to make. Does it look far enough out into the future so that you can foresee when you might experience a cash crunch (which is extremely important for seasonal retailers)?

Does your plan provide you with the benchmarks to allow you to monitor your performance as you go along, and point out to you the areas where you might need to take immediate, corrective action?

This is just an initial list of metrics that any small or independent retailer should always be watching. For any given retailer, there's other critical metrics appropriate for their specific business. But for any retailer, like any good baseball fan, the key point is to not rely solely on your eyes. You probably won't be seeing the whole picture.

In 1989, Steve Wynn opened the Mirage Hotel and Resort in Las Vegas, the first new resort on the Strip in 16 years. As recounted in a recent PBS documentary, "Las Vegas, An Unconventional History," this represented a critical turning point in the history of Las Vegas. Mr. Wynn was quoted at the time as saying, "They don't need another casino' but they could sure as hell use a major attraction." Or as Brian Greenspun, editor of the Las Vegas Sun, says in the documentary, "Steve came and he realized that if you build it, and you build it better and you create a little demand where maybe there wasn't demand ' everyone will want to get into it."

Give them something they haven't experienced before. Give them an experience that's new, fresh, and exciting. The story of the Mirage in Las Vegas is, at heart, a story about retailing, about differentiating and growing business by creating a unique, compelling shopping experience.

Retailers have long understood that doing business is much more than just selling things to customers. Every cosmetics salesperson understands that they're not selling make-up, they're selling glamour. And retailers have long sought to create compelling presentations and experiences to capture customer's attention.

But there's more to it than merely capturing a customer's attention. You have to involve the customer, get them actively engaged in some large or small way. You have to create more than just an impression, you have to create an experience. Here are a few examples to illustrate what I'm talking about.

Build-A-Bear Workshops was founded in 1997 on the premise of creating a fun, interactive experience for their customers. Retailers had been selling stuffed animals for years, but Build-A-Bear is about so much more than merely buying a stuffed animal. Their target market is ten to twelve year old girls, so after they've selected the animal they want to 'build', they get to play dress-up and select the clothes and accessories for their new friend. They get to put the heart in their friend before its stuffed, brush out its fur afterward, and create a birth certificate for it. Build-A-Bear took the stuffed animal business to the next level by creating a compelling, destination experience for their customers.

But it's not just large retailers who can do this. Build-A-Bear, after all, started out as an independent retailer with a single store in St. Louis. Smaller independent retailers can create compelling experiences as well.

Kimball Farm in Westford Massachusetts for years sold the best ice cream in the area. They were legend for the crowds they drew in the summertime. But times change and in the late 1980's they began to evolve. Today, Kimball's is still the place to go for the best ice cream, but there's also a captivating country store and caf, a nine hole pitch-and-putt golf course, a driving range, two 18-hole mini golf courses, and a bumper boat pond. In other words, it's not just about the ice cream anymore. Kimball's is a place for the whole family to go for the afternoon or evening, and of course nobody leaves without stopping for a heaping cone on the way out.

Leonards New England creates a far different experience for a far different customer. Leonards is a retailer of antique furniture based in Seekonk Massachusetts. Their specialty is antique beds. They buy antique rope beds, primarily from the 19th century, with turned and carved bedposts, and in their own on-site workshops, resize them for today's standard mattress sizes, and refinish them exquisitely. This is not an inexpensive process and their beds command anywhere from $4,000 to $20,000. But for the customer who doesn't see exactly what they're looking for on the floor, Leonards maintains a large inventory of original, antique bedposts that a customer can choose from, and Leonards will build a bed to their specifications. Customers can select the bed size and height, the headboard style, and any other details they desire, and Leonards will create a unique, heirloom quality bed for them.

There are any number of ways that you can actively engage your customers and create a compelling retail experience that make you far more than a place where they go to buy things. Every independent retailer has unique opportunities to create a retail experience that sets them apart and transforms them into a true retail destination, and transforms their business.

The holiday selling season is behind us, and as small and independent retailers work through their customer returns and gift cards and clearance sales, it's not too early to be thinking ahead to next year. For many, this was an unsettling season, as customers waited longer and longer to shop, and established selling patterns seemed to shift.

National retail sales between Thanksgiving and Christmas this year were projected to be up just 3.6% over the prior year, compared to 6.6 percent in 2006 and 8.7 percent in 2005. Many experts have attributed the softness to a weakening economy. But there was something different about this year, far more different than just weaker sales.

A week after Black Friday, I came upon the Kohl's circular for the week. They were promoting their 50 percent off sale, and as I paged through it, I was struck by how category after category was included in the sale. Not just items, but whole categories. The week after Thanksgiving, Kohl's was transitioning into full clearance mode.

What's different this year is that in the mad scramble to make sales numbers and protect market share, the entire retail industry seemed to lose its mind. The traditional post-Thanksgiving sales broke just after Halloween, and entire stores were on clearance by early December. All in an effort to be able to report comp-store increases. As if customers weren't smart enough to understand that all of that early discounting would only lead to even deeper discounting if they waited. When the industry starts reporting quarterly results in the next month or so, there may be comp-store sales gains reported, but earnings are very likely to be quit ugly.

What we saw this holiday selling season is a dramatic jump in the pace of commoditization of general merchandise, across almost every category, from electronics to apparel and beyond. What we are experiencing is the permanent erosion of margin, as the Internet empowers consumers with an expanded ability to compare prices on identifiable, branded items, as EBay enables buyers to find an ever expanding array of niche products, and as Big Box retailers race to the bottom to protect market share.

This has significant implications for smaller and independent retailers. Competing on price at any level is simply no longer sustainable for these retailers. They absolutely must be able to protect price integrity. Those that have succumbed to an ever-increasing promotional posture find themselves on a slippery slope they are desperate to scramble off of. Price integrity is critical to maintaining margins, and maintaining margins is critical to basic financial survival.

There have always been, and always will be, customers who are less price sensitive, who base their shopping and purchasing decisions on other factors. These are the customers that the most successful small and independent retailers have long built their strategies around. Like every consumer, however, these customers are also becoming increasingly savvy and demanding.

What can small and independent retailers do? Here are several thoughts:

Small and independent retailers have long understood that they needed to carve out carefully defined niches for themselves, niches where they could establish themselves as the destination retailer of choice with their narrowly target customer base. What's becoming evermore clear is that a niche cannot merely be defined by unique products or assortments, but must be defined by a lifestyle, an attitude, a passion. The niche must now be defined, and the retailer must build its name to represent, a clearly identified emotional appeal to its target customer.

The Internet is a great provider of product information, but it can never replicate the value of a customer's interaction with a highly knowledgeable salesperson. Enthusiastic, state-of-the-art product knowledge is absolutely indispensable in this information age. Customers go to Big Box retailers to buy things, but they turn to small and independent retailers to solve problems. The ability to help customers solve these problems is a critical point of differentiation for small and independent retailers.

Consumers will never be fully content to sit in their homes in front of their computers and click away, no matter how convenient it might be. They crave compelling presentations and captivating experiences. Stores that amuse, educate or entertain, stores that invite customers to explore and discover, stores that stimulate the senses and trigger a visceral response are the stores that customers will respond to. Those retailers who constantly strive to reinvent themselves and present a new, intriguing face to their customers will be rewarded with a more loyal customer base and priceless viral marketing

The Internet, nevertheless, has dramatically increased the importance of convenience to customers. As much as customers still want to shop in stores, they are increasingly impatient with stores that don't make it easy. They are increasingly unwilling to put up with inaccessible parking, cluttered, confusing stores, hard to find destination items, in-your-face salespeople, invisible salespeople when they do want help or have a question, long lines at checkout, and restrictive, retailer-centric returns policies, to name just a few highlights. One of the most notable recent marketing campaigns has come from Staples, with their Easy Button. Customers increasingly want it to be easy.

The retail landscape is changing rapidly, driven by profitability pressures on the major corporate retailers, on the one hand, and the decentralizing effects of the internet on the other. The pace of these changes can be very unsettling to small and independent retailers, but opportunities to differentiate, prosper and thrive are still there to be seized.

In his bestselling book "The Long Tail," Chris Anderson explored the emerging economic phenomenon observed in the on-line book, DVD, and music businesses. As the costs of production, distribution, and inventory have declined, while the assortment of available titles expanded almost exponentially, consumers embraced the choices available to them. The subtitle of his book, "Why the Future of Business is Selling Less of More," is a call to independent retailers that the future is to be found in capitalizing on consumers developing desire for an ever-expanding assortment of specialized, niche products.

The economic insight in "The Long Tail" is derived from studying a business such as Amazon.com. As Amazon was able dramatically expand the assortment it offered its customers in categories such as books, DVDs and music, the total volume of the business done by the thousands of titles that sold relatively few units rivaled the business done by the relatively few hits. When given near-complete choice, customers demand was not concentrated around the few hits, but extended to almost every title offered. The same sales pattern was found in such online businesses as Netflix and Rhapsody.

Consumers are increasingly able to self select the music they listen to, the movies and other programs they watch, the news they read and watch, and the trend will only accelerate as technological innovation advances and the cost of delivering fuller assortments declines. Customers already can find a cornucopia of niche products on eBay and Amazon's Marketplace. The Big Box retailers will still predominate in high volume, commodity items due to their enormous economies of scale, but mass marketed products are no longer enough.

The concept of the Long Tail is not confined to commerce. The emergence of the Internet as a critical means of obtaining information, for instance, and the plunging cost of providing that information, has had a dramatic impact on the way we get our news. We now can turn to many different sources, read websites and blogs, or watch YouTube, that target our interests and perspectives, Increasingly, we've gone from a world where we all watched the same news on television or read the same newspapers, selected by others, to a world where we watch and read the news that interests us, selected by us.

All of this has served to train the consumer to think in terms of expanded selection and choices that fit their specific, individual interests. They are now more aware than ever of the abundance of choices that are actually available, far beyond books, DVDs and music. They are more able to explore their favorite niches than ever before. And because customers are social animals like the rest of us, they will continue to want to shop for fresh discoveries in stores with salespeople with like interests among other customers of like interests.

The key insight here for independent retailers is that expanded offerings and selection can reveal demand that was otherwise not known to exist. An eclectic mix of products that customers expect to find, and related but unexpected treasures can create a compelling assortment that increases the units and dollars per sales transaction. High impulse, unplanned purchases that tap into the intrinsic joy of discovering something new and unique can be captured by the highly focused independent retailer to drive sales increases.

This represents an enormous opportunity for independent retailers to specialize in a niche, communicate the essence of their store through core items customers expect to find, then expand expectations with captivating discoveries and irresistible enticements.

There is an important caveat that independent retailers must remember, however. In the on-line market of books, DVDs and music, selection is enormous, because the costs of offering that degree of selection continue to go down dramatically. In the retail world, the cost of carrying inventory is real and significant.

No retailer can carry everything in any niche. They are unavoidably constrained by shelf space, hanging racks and peg hooks, by the fixed square footage of their stores, by capital and cash flow. By definition, they must limit selection, choosing to carry some things, rejecting others, in other words, cutting off The Long Tail at some point or another.

The Long Tail is not an argument merely to carry broader assortments. It is not an argument to expand into unrelated categories that stretch customer's expectations and the retailer's core expertise. It is not just about capturing the add-on or plus sale. It is rather a demonstration that there is business to be done in carefully selected items that deepen assortments in a retailer's niche that appeal specifically to the customer's imagination.

Customers will continue to shop at Big Box stores for mass marketed basics, but will increasingly look to their niche of choice to satisfy their passions. Unexpected treasures, captivating discoveries and irresistible enticements. Therein lies the opportunity of the Long Tail for independent retailers.

I admit it. I'm absolutely no fun to go shopping with.

The reason is simple. I'm not like other shoppers. I'm not like the mother out looking for the bargain for her family, or the kids looking for something exciting to catch their attention, or the dad on a mission to bring home the perfect gift. When I go shopping, I tend to see things a little differently than other shoppers. I tend to stop and linger on things, and make comments about things, that make little sense to whomever I'm with.

I'm a retailer, a retail consultant specifically, a student of retailing. I simply can't walk by a store, much less into a store, without trying to figure out what makes that store tick, how customers perceive the store, what that store does well, and what I can learn from them.

I love to stop and admire a particularly effective merchandise presentation, or watch a really talented sales associate work with a customer, or take in a really well thought-out cash wrap. I notice things, like how corners are lit, and how many units of an item are on display, and whether customers are happy to be there, or eager to complete their business and be on their way.

When I work with clients, I frequently ask them about who they consider their competitors, and how frequently they shop them. And the responses are usually pretty consistent. Most independent retailers have a clear sense of who their key competition is (though they may construe who their competition is far too narrowly), and they shop them frequently. But when you ask what they saw the last time they shopped the competition, too often I hear about problems, weaknesses, and how uncompetitive they are. It usually takes my prompting to get them to talk about what their competition does particularly well, and what can be learned from them.

The key to understanding your competition is to understand why their customers -- your potential customers -- view them as a preferable source for the products and services they offer. And it's not just your competition that you can learn from, it's every retailer that you encounter. Here are a few things that I look for when I visit a store:

* Who is their target customer, by gender, age, and income level? How do they entice their target customer to come into the store and shop?
* When you walk in the store, have they constructed a compelling visual presentation? What's the critical message they seek to communicate with that initial impression? How have they built out and appointed the store to reinforce that impression?
* What's the product/service niche they are trying to occupy? How clearly are they communicating their core competency? What level of customer service and product knowledge would customers require and/or expect based upon this niche? How do they lead their customers through their stores? What can their physical layout tell you about their traffic pattern, their merchandising strategy, and their dedication to customer service?
* What are their most important products or category of products? Where do they put them in the store? Do they view these items as destination items or impulse items? (Some of the most successful retailers are built around an ever-changing assortment of high impulse items.) What's the balance between highly identifiable branded goods, and unique, distinctive goods?
* What is their pricing strategy? Are they a price leader, commanding a premium price based on quality, cache, customer service and shopping experience? Or are they matching price, competing on location, availability and ease of shopping? Or are they competing directly on price, on being the lowest price?
* How are they staffed? Are there enough associates? Too many? Are their associates order-takers/register-ringers, or do they possess specialized knowledge and expertise? Are they focused on helping customers, or on other things?
* Is this a place just to buy things, or is it a place that exudes a personality, that's a fun place to be, where buying something is part of an overall experience? Are customers in and out quickly, or do they tend to linger?
* How well do they execute? Is the store neat and clean? How well are the displays maintained? Is the cash-wrap organized and clutter-free? Is the merchandise clearly signed and priced?
* How effective is their signage? What are they trying to accomplish with their signage, to reinforce the feeling of the store, or convey critical information? Is the signage particularly distinctive? What other methods are they using to reinforce the customers experience in the store?
* What merchandise displays are particularly compelling? Innovative? Why? How are they using lighting and other techniques to draw their customer's attention, and highlight specific presentations?
* How fast do they turn their inventory? Does the merchandise look fresh, or like it's been there a while? How well do they balance between building compelling merchandise displays and carrying more than they might reasonably expect to sell? What might this suggest about their vendor and supply chain structure?
* How clean are their assortments? Are they in pristine, never-shopped order? (I'm known to do a quick count of inventory on a table, shelf or rack, to see how much has sold down.) Is there a sea of markdowns? What's the balance between full-priced and markdown merchandise, and is that balance seasonally appropriate?
* What are customers buying? From observing customers at the cash-wrap, what can you learn about their likely units-per-transaction?
* What's the one idea I can take from this store and apply to my own business?

You may have a whole series of additional things that you look for when you walk in a store. No list can ever be complete. There's a reason why your competitor is your competitor, and it's critical that you understand what that reason is. But the skills of competitive shopping shouldn't just be applied to your direct competition. Rather, the key is to be a student of retailing, constantly looking for new ideas that you can apply, in your own way, to keep your store fresh and dynamic.