As the new season
begins, small retailers need to plan sales
conservatively and maintain lean inventories to
keep from slashing prices down the road.
Originally published by
By Ted Hurlbut
Hurlbut &
Associates
It's January, the holidays are over, and for many small
retailers the clearance season is in full swing. As some
owners look around their stores they may be pleased that
inventory levels seem to be in line and they're not having
to clear out a significant percentage of their buy at
heavily marked down prices. For other small retailers,
however, those inventories look heavy. For too many, heavy
inventories -- leading to excessive markdowns and reduced
margins -- are a chronic problem.
There's not much that a small retailer can do about
inventory levels at this point beside take their medicine
and move on to the next season. Yet this can become a
vicious cycle and eventually owners need to find a way out.
But how?
Many think that markdowns are something that happens at the
end of a season, when sales anticipated in those final peak
weeks don't materialize. But the truth is that, more often
than not, markdowns result from decisions made and actions
taken much earlier, frequently before the season even
starts.
Here's what typically happens. A small retailer looks for
opportunities to generate sales increases based on current
trends and what happened, or didn't happen, the previous
year. When the plans are rolled up, they frequently add up
to a five or ten percent increase. And when there's a
planned increase, the biggest percentage increases usually
are in the early months of the season, when sales are
lightest. There's a certain logic behind this: The dollar
increase doesn't seem that big, and the later months seem
more fully developed. But the most significant factor is a
merchant's optimism that this season's merchandise will be
better, the weather will break just right, the goods will
arrive on time this year.
Once the sales plans are set, inventory is bought, and it's
usually brought in early in the season to set the store and
support those early season increases. Yet these aggressive
early sales plans frequently don't pan out, because they
were so aggressive and were predicated on everything
breaking just right. The inventory begins to back up right
away. The next round of deliveries come in, but the initial
deliveries haven't sold through yet, and the retailer
quickly becomes overstocked, making it more difficult both
to display merchandise and for customers to shop. Weekly
sell-thru percentages stagnate.
As the inventory backs up, frequent customers -- the
backbone of any successful small retailer -- see the same
assortments two, three, four visits in a row, further
depressing sales and sell-through's, and further backing up
inventory. Still, the merchant usually believes that the
business will come, and everything will work out in the end.
Once mid-season markdowns are taken in an effort to bring
inventory back in line, customers become incentivized to
defer their purchases until levels get further reduced.
Customers are smart; they can sense when a small retailer is
overstocked. They understand that if they wait they can
probably buy it even cheaper. This customer reticence feeds
the cycle even further.
By the time the end of the season arrives, a merchant's
optimism has given way to a fevered hope that the sales will
come in and bring inventory levels back into line before the
clearance markdowns have to be taken. But the sales
increases necessary to accomplish that feat simply aren't
realistic. And when those clearance markdowns are taken, the
impact is pretty significant.
I call this impingement, where early inventories impinge of
the sales of later inventories, leading to inflated
inventories and excessive markdowns. And the way to break
this cycle of impingement is to plan sales conservatively
and maintain lean inventories.
Here are a few ideas for how small retailers can
significantly reduce their inventory levels, and thus their
markdown exposure, at the end of the season:
Plan
the season flat. Unless you're in a strong growth
phase, and have been realizing sales increases of 10
percent or greater for the last four quarters, chances
are your sales over the next six months will be within
five percentage points of last year's sales. Going into
the season, the prudent approach is to plan each
category flat, as well as the season as a whole, unless
there is a specific, compelling reason to plan an
increase. By planning flat, you're less likely to commit
to inventory that you may not be able to sell before
your first markdown.
Plan
the first couple of the months flat. If you really
believe a category is likely to run an increase,
backload those increases into the later months of the
season. As tempting as it might be to think there's
opportunity in the early months of a season, the
potential sales upside is more than offset by the
markdown risk associated with the inventory brought in
to support that planned increase.
Commit
to lean inventories. Markdown risk is minimized when
inventory is brought in as close to the anticipated time
of sale as possible. Any inventory in excess of what is
needed to support near-term sales increases the markdown
risk.
Maintain liquidity. Don't commit up front to the
full sales plans. There's no way of knowing for sure
before a season even begins how close sales are going to
come in to plan, or what items or categories are going
to break out and drive your business. Keep a portion of
your sales plan in your back pocket, in the form of
cash, as long as you can.
Avoid the
last buy. Many retailers are tempted to make that
last buy to capture that last sale. But inevitably, the
last buy comes in right at the end of the season, and a
significant portion is still on hand when markdowns are
taken. The last buy is almost always unprofitable. Avoid
the last buy, and drive your sell-through percentages at
the end of the season to minimize markdowns.
Nothing melts margins and profitability faster than
excessive markdowns. And the key to keeping markdowns in
line is to plan conservatively and maintain lean inventories
throughout the season. Avoid impingement, drive your
sell-through, maintain fresh assortments, and you'll see a
real difference on the bottom line.
