Are you carrying too much retail inventory?

How much inventory does your business need to run effectively to make your sales plan and deliver the appropriate level of profit to the bottom line?        

This question one of the most difficult for retailers to answer- yet the one that holds the most value to the health and well-being of the business. Why not make 2013 the year you get a handle on your inventory once and for all- and stop spending money you don’t have to in order to deliver the sales you want.

Having too much inventory (or the wrong type) during certain periods can slow your cash flow and can reduce your overall profits (by taking too many markdowns in order to liquidate slow moving merchandise.  On the other hand if you don’t buy enough of the right merchandise (that is, the merchandise that your customers really want to buy) you will miss sales opportunities and thus not make the maximum potential profits from your business. One thing can help you get started- an Open to Buy plan.

A retailer can be sure to stock the right amount of the right products at the right time by using a well-planned as well as a continually updated and well executed Open to buy. (OTB)

OTB can be calculated in units or dollars. (Though our recommendation is to do it in dollars so that you can use the tool when going to market and working with your vendors on a daily basis) The calculations are relatively simple. An OTB is essentially the difference between how much inventory is needed and how much is actually available to be sold at any given time during the selling cycle. (OTB’s are most always calculated on a monthly basis then totaled to quarters, seasons and then finally a year total for the business.) This includes inventory on hand, in transit and any outstanding orders.

While the OTB to buy will tell you how much to spend, the key to managing it effectively is to account for trends- both up and down in a given time period and leaving yourself the flexibility to adjust purchase dollars when and if necessary. To do so, it will be best if you plan to hold a percentage of purchases back in order to take advantage of special buys or to add new products. This will also allow you to react to fast-selling items and quickly restock shelves that your store needs to keep sales moving forward.

You should set up your OTB plan with no more than 10-15 classifications that will roll up to total for your business. (We have managed OTB plans for multi-store national chains doing more than $100 million dollars with less than 10 OTB categories- so we know you can plan your business this way to!) Use the annual retail sales as a guide to setting up your OTB classifications/departments – this will help you reduce the number of classifications you need to plan.

In short, there are many ways to manage an OTB plan. The plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain Open-To-Buy programs but the key is to start. Your inventory is the biggest expense you have in your business and managing it on a consistent basis can insure that your business is spending on the right products all the time.

If you need/want more help about how to manage your inventory, contact CBCG today. We can create and manage an annual OTB plan for your business to make sure that 2013 is a year of profit and prosperity.

Your merchandise is NOT like fine wine.......

Like most retailers, you probably have a consistent strategy in place for pricing products when they come in. But do you have the same consistent strategy in place to review and determine the selling performance of those products? In other words, do you have a markdown strategy in place for slow selling products that is consistently executed in your store? If not, the time to talk markdowns is now. Retailers must develop a process for reviewing sales and determine if markdowns should be taken to move products out of stock. Doing this on a consistent basis is a key component to maximizing your inventory turnover and improving cash flow for your business. Let’s discuss some of the reasons that your business might need to lower the ticketed retail price of merchandise in your store. Price reductions typically come in 3 different categories: 1) There are buying related causes. This is where most stores need to address markdowns. Included in this category are reductions due to assortment errors. There are also timing errors that you didn’t catch such as late shipment or ordering too much. Or perhaps you ordered from a new vendor and you misjudged the quality of the merchandise. Another buying related cause could be a supplier error such as late, damaged or incorrect shipments 2) Another category where markdowns would need to be taken is selling related causes. In essence, the product isn’t selling at the ticketed price to an acceptable level on a weekly basis. A good rule of thumb for retailers to use is a minimum sell thru of 5% weekly during regular selling periods. If the merchandise you are reviewing isn’t selling at least 5% a week that should be a basis for determining to take a markdown. 3) And lastly, there are operational related causes that may require you to take a markdown. These include damaged or dirty merchandise, odd lots or consumer shifts for certain products you carry. Depending on the reason that a markdown needs to be taken, retailers must enact a strategy to finish the liquidation of the distressed product. How much of a reduction to take, and when to take the reduction must be decided. This is THE most critical decision after pricing that happens. When products sell, every retailer wins, but having a strategy for dealing with merchandise that isn’t selling, after everything you have tried (correct pricing, marketing activities) is where retailers can either maintain, or give away their ultimate profits. There is no single right answer for when any retailer should reduce prices in their stores. Whether retailers choose to enact a temporary markdown, or a permanent one, retailers must analyze each product as it relates to their overall pricing strategy. Here are some key factors to look at when reviewing when to take markdowns and how much to take them for: a. Type of merchandise b. Store image c. Length of selling season d. Nature of target customer e. Size of initial markup f. Availability of selling and storage space g. Retailer’s sales promo policies - “mini” sales vs. “big-event” sales As mentioned earlier, a general rule of thumb is that products should sell thru at a Minimum of 5-7% per week. When you get to a 60 percent overall sell thru, you should take a first markdown, usually a 25% reduction. This cycle should generally take 10-12 weeks. If you think about how many times you go to market (2 major markets- and perhaps 2 minor markets in between) this makes sense. Each time you go to market, you are purchasing a ‘season’s worth’ of merchandise, so after 12 weeks, if the merchandise sells well, is typically time to get marked down. If you have slower moving merchandise (a sell thru of less than 2-3% per week) you may want to consider taking a markdown with a greater discount- somewhere between 33-40% off. And you may decide not to wait the entire 10 or 12 weeks. Remember this: Merchandise is NOT like fine wine, it does NOT get better with age. If you customers have “spoken” and they don’t like the products you have chosen, no matter how you have priced them, they will not sell. This leads to a serious lack of cash flow and in some cases, can lead to a lack of new products flowing in because there is no money to pay for them! Remember, a good overall pricing strategy and a coordinating markdown strategy is a key component to your stores ultimate success. Take the time to choose a strategy that aligns with your business goals, and then continue to monitor how the strategy is working on a monthly basis. This effort on your part will go a long way to building your brand as a unique and important store in the marketplace, and one that keeps your customers coming back time and time again.

Pricing Right Delivers Profitable Results

As we near the end of our March Madness of Retail tips, today we discuss a topic that is critical to all retailers’ success. Pricing.

While retailers understand that pricing is a necessary component to doing business, many retailers do not fully factor in product pricing as it relates to the store branding, profitability and the long-term success of their business.

When considering how to price products for your business, you need to think about aligning your pricing strategy with your overall business strategy. Choosing the appropriate pricing strategy will insure your business, sales, and profit goals are in alignment.

There are many pricing strategies that retailers employ however; there are three that are typically employed by independent retailers. While some of the methods are simpler to implement than others, there may be unrealized costs associated with using only one for your business.

Keystone Pricing. This is the most common method of internal pricing in retail today. Keystone pricing is simply the doubling of the wholesale cost of any item. (“keystone”)Wholesale ($5) à Retail ($10). Keystone pricing is the simplest method for pricing and one that can be instituted by any and all staff members rather easily based on the invoice costs of any product in the store.

The challenge with employing this as the only method of pricing is that it doesn’t account for all of other costs associated with selling products in your store. (Commonly known as Sales, General and Administrative expenses – SG &A) This can lead to low profit margins and eventually to restricted cash flows as all expenses are not accounted for with this pricing methodology.

Profit Margin Pricing. When using this method for pricing your products, retailers set prices based on helping your business to achieve certain profit margin goals. This method assures that you business will concentrate its pricing efforts around identified profit targets that will help you to meet your business objectives.

While this type of pricing assures that you cover the all the total costs (CGS and all SG & A costs) the argument against with this type of pricing is that many retailers choose products for their store that are widely distributed across numerous selling channels. With prices for any product being readily available on the internet today, retailers cannot randomly determine retail pricing based on their desired profit targets. Doing so may position your store unfavorably in the eyes of the almighty consumer. Customers today are savvier than ever regarding pricing so you can’t over price just to keep your profit margins high without risking losing them to another business nearby.

Discount Pricing. This method of pricing works best for high volume retailers or retailers who sell a high volume on certain products in their stores. This pricing method employs price reductions (temporary or permanent) to stimulate sales activity including incentive pricing such as special introductions, volume discounts, customer loyalty programs, sales affiliate programs.

Note: It is almost impossible to raise your prices on items once you have established low day in day out prices. Customers will expect that your prices remain low. This sets up a lower profit margin for your store on these products which is very difficult to overcome. You also run the risk of positioning your store as lower in quality versus most of your competitors (whether or not it is true).

Remember, a good overall pricing strategy is a key component to your stores ultimate success. Take the time to choose a strategy that aligns with your business goals, and then continue to monitor how the strategy is working on a monthly basis. This effort on your part will go a long way to building your brand as a unique and important store in the marketplace, and one that keeps your customers coming back time and time again.