Edge Retail Academy Blog

The 5 Stages of Profitable Retailing, Part 2

by David Brown

 This is Part 2 of the 5 Stages of Profitable Retailing. In our first article, we talked about Stage 1 – What to do Before you Buy, Stage 2 – How to Buy Better and Stage 3 – How to Sell what you Buy. We will finish with Stage 4 and 5 in this article.

Stage 4 – What to do if it Sells Quickly

Congratulations! You bought something within budget, that was planned, researched, successfully launched and finally ‘sold’. Now what?

It’s a funny thing, that no matter how easy you find it to buy new, unproven product (and again we can see how easy you find it from your numbers), most of you really struggle with the concept of re-ordering it.

Phew, that piece I bought actually sold. That was lucky … now I’ll take the money from that sale and go and buy something that doesn’t sell. Now I know that is not what you ‘consciously’ think or do, but it is what happens in the majority of cases. So why does that happen? Well, in my experience, it’s just a bad habit … habitual ways of thinking and habitual ways of behaving. And not just yours. Your staff and your customers also have habitual ways of thinking and behaving. For example:

  • Have you ever re-ordered a fast–seller, and when it arrived back in store, your staff reacted less than enthusiastically … “We’ve sold 3 of those already, can’t we try something different.”

    I frankly find that type of behavior extremely arrogant because you are basically telling the next 15 people who may also have loved the opportunity to buy this item, that you have decided, on their behalf, that they don’t want it.

    My advice to you is to take the advice of one of my very first clients. Noel is sadly no longer with us, but back in the day when I was running workshops for our clients at a particular buying group, I would ask everyone present “how many of this Ring (whatever) have you sold?” Some would say that they haven’t sold any because they decided not to stock it; others would say they sold 1 but didn’t re-order it; others would say they sold 5 but then they decided to stop re-ordering it … and when it came to Noel, he would say “David, I’ve sold 37 of them.” He never failed to get a collective gasp from the expectant gathering, and when pressed as to how he achieved that, he would simply say, “If a fast-seller sold that day, I couldn’t sleep at night until I knew a replacement was on its way back before I left the store.”

    Noel’s behavior was simple, highly profitable and sadly, very uncommon.   Pretty much everyone in retail knows that re-ordering your fast-sellers is fundamental to your success, but unfortunately, we see the enormous disconnect betweem knowing what to do (Best Practice) and doing it (Common Practice) which is reflected in their very average GMROI of 70 … or worse.

    Just remember, it’s your staff who get sick of selling it long before your customers get sick of buying it.

  • Or a customer who get’s upset because the Ring they bought for $2,500 last week is back in store again.

    If you told them it was a one-off, then they have every reason to be upset, but there’s a price to pay for ‘exclusivity’ … and $2,500 is not it. Try it for yourself. Go to your local BMW dealer and tell them you’ll order a brand new, top of the range, 3 Series in red with tan leather interior, but only if they promise not to sell another one in the same color. What do you think they would say? Sorry, no can do.

    But jewelry is different right? It’s an emotional purchase whereas a car is, well, just a car right? Wrong. The reason people spend $100K plus on a car is all about looking good and feeling good … emotions in other words. Sound familiar.

    If you do decide not to re-order a fast seller because you don’t want to upset the customer, please make sure you contact your local competitors and tell them not to stock it either. That’s the only way you can guarantee your customer that they won’t see another one in town.

    For those few customers who do ask you if it’s a one-off, tell them that this is a finished product, that you, and other jewelers, buy from a manufacturer, so you can’t guarantee they won’t see other people wearing it … then take the opportunity to sell them an exclusive, custom design piece that you will create just for them … at a price!

It’s a funny thing that many of you will happily re-order cheaper items, but hesitate to re-order more expensive items (imagine if your BMW dealer did that). While I was at a clients store a few years ago, she sold a $4,500 yellow diamond ring and a $3,500 watch to a good customer. Both items had literally been in the store for 1 day (I actually delivered them to her on behalf of the vendor), so before continuing with our management session I told her to re-order them. She looked at me like I was a crazy man …. “I wasn’t going to do that.” I said, well there’s really no point in us continuing with anything else today because this is ‘Retail 101’.   You bought them believing they would sell, you proved yourself spectacularly right and then you hesitate because it was just a lucky sale! Long story short, she re-ordered both items and went on to sell 4 more of the rings and 12 of the watches within 4 months. I even had the watch manufacturer ask me if he could use this story to help educate his other clients.

So how fast is fast? This is one of the most common questions we get asked, and the answer is, it depends. It depends on what the item is, what the price point is and how quickly the vendor can replensih it.

As a rule-of-thumb, you should re-order everything that sells within 3 months. If something sells in 3 months it has the potential of a 4 times stock-turn … significantly higher than the industry average of 0.7 (i.e. takes 17 months to sell). Net re-order almost everything that sells with 6 months, regardless of price, but use some discretion around stock-turn i.e. if you need a 3 times stock-turn for this product and it takes 6 months to sell, the best you will achieve is a 2 times turn.

For some items, I would still re-order them even if took nearly 12 months to sell because it was at a higher price point; it had a great margin; by being in the store it helped sell other items etc.

The key is to use your judgement and entreprenurial skill on an item by item basis, remembering that if it sold quickly once, it has an 80% chance of selling quickly again, and again.

In summary:

  • If it sold quickly, re-order it immediately (before you leave the store) regardless of price
  • Pay quickly and help make yourself important and special to your vendors
  • Keep re-ordering UNTIL your customers stop buying it
  • Keep your staff motivated to repeatedly sell proven, popular items.

 

Stage 5 – What to do if it Doesn’t Sell – your ‘Exit Strategy’

Before you even buy an item for the first time, ask yourself these three questions:

  1. Who am I buying it for? Who is my customer?
  2. What will I do with it if it doesn’t sell?
  3. When does the ‘Exit Strategy’ kick in for this item?

Yes I am suggesting you determine the time it should take to sell each item before you buy it. If you get that niggling doubt when you ask yourself this question, maybe you’re already not convinced it will sell … so are you buying it because you personally like it (just like the 65% plus of aged inventory you still own), or are you buying it to make a profit?

When is old, old? Just as we pondered this question with the fast sellers, we now need to determine when an item is no longer new or a fast seller … in other words, old.

One of the things we do at the Academy, is analyze the data from hundreds of stores, and as a by-product of this, we have identified an interesting statistic … and that is that a new or re-ordered item, has the best chance of selling within the first 39 days. Don’t ask me why, it’s just one of those strange facts.

Likewise, the likelihood of it selling quickly after 39 days goes down dramatically. It’s a fast and slippery slope from 39 days until the item is celebrating it’s first birthday with you.

So am I saying it is old after 39 days? No I’m not. But I am saying it is on it’s way to becoming old, and if you ignore it, chances are it will ‘hide’ and only reappear after a couple of years when it can no longer be ignored.

One of the reasons for this phenominan is that your staff stop showing it. When it was new, they showed it enthusiastically to anyone who would listen, but after 39 days of rejection and negative feedback, they lose confidence in it and start showing the newer item that has just arrived. And boy how quickly that happens.

You know it happens because:

  • You staff have come out to the office and asked if that new stock that has just arrived from the Show you just attended is ready to sell. They just walked past $80,000 of perfectly good Diamond braccelets to get to the new one.
  • Or, have you employed a new salesperson, and in their first month, they sell a bunch of old stock because … they don’t know it’s old! And nor do your customers.

So you have two choices:

  1. Replace your staff every 39 days or
  2. Continue to work with your existing team everyday to keep the new inventory fresh and alive and to train them on showing and selling the aged inventory.

I think you know I’m joking about replacing your staff … unless they really are the problem – but that’s a topic for another day!

To help you get aggressive with inventory that doesn’t sell quickly, let’s examine the cost of ignoring it.

Most industry experts agree that if you still own an item 12 months after you bought it, it has cost you an additional 20%. So that $1,000 item now owes you $1,200. Why?

  • You have to insure it
  • You have to promote it
  • You have to pay staff to clean it and take it in and out of your displays every day
  • You have to put a roof over its head (rent)
  • You have to pay tax on it … yes even if it doesn’t sell
  • You have to finance it … if you have any loans or debt, your aged inventory is costing you, and even if you don’t have debt, you could be earning interest on that money.

But it gets worse. If that $1,000 was invested in stock that sold quickly at a margin, it would earn you at least $1,000 of profit (a 100% return/GMROI).

So now that 1 year old $1,000 item owes you $2,200 … and it compounds with each passing year! Can you still afford to ignore it?

And worse still. The item that now owes you $2,200, is worth, at best, 80% of what you paid for it i.e. $800. How is your ‘investment’ looking now?

A client of mine had the right attitude to aged inventory. She hated it! She said “If my customers don’t want it, nor do I. Get rid of it!”   And it worked. Out of more than $700K in inventory, she had $12,000 in aged inventory. Admitedly that is the best I have seen, but it proves with the right attitude and the right strategies, it can be done.

Okay, now that we know ‘why’ and ‘when’ to get rid of it, let’s finish with ‘how’.

You have several options available to you, and the earlier you trigger them the better:

  • Get into the habit of identifying new items of aged inventory, and revisiting existing ones, at least every week.
  • Decide on a course of action. Your options are:
  • Remake it using the stones and metal into a known fast-seller or ‘special order’
  • Return or Stock Balance it … but only if those are the agreed terms you have negotiated with the vendor and … you have honored your part of the deal i.e. trained your staff; re-ordered all of the items that did sell and paid for them quickly. The benefit of doing this as soon as it shows signs of growing old is that is will still be a current model for the vendor so they can on-sell it.
  • Sell it:
  • Clean it, re-ticket and re-price it to today’s realistic selling price.
  • Make sure it looks new and then treat it as new i.e. enthusiastically. Actively show it to customers.
  • Provide a ‘Spiff’ incentive to you staff before discounting it to your customers.
  • Agree on ‘Discount’ terms with your team and incentivize them for selling it at a lower discount than the agreed discount. I would rather incentivize your staff rather than your customers … because your customers will come to expect a discount next time.
  • Run a ‘Sale’ or ‘Promotion’ after exhausting all previous options. Guard your reputation by not becoming a ‘Discount’ store but also guard your image … no one wants to go into a store full of old merchandise.
    Your website can be a good option for clearing aged inventory and putting some distance between it and the physical store.
  • Scrap it.
  • Donate it and write it off to ‘Advertising’.
  • IMPORTANT: Keeping it and ignoring it is NOT AN OPTION!
  • Constantly enrole your team on the reasons and benefits of doing this.
  • Delegate the process where possible and consider appointing an ‘Aged Inventory Champion’.
  • Make pragmatic, financial decisions not financial ones. You made a mistake, get over it. Don’t make another one by ignoring it.

We hope you have enjoyed both Part 1 and Part 2 of this article, to learn all the strategies of Profitable Retailing. If you would like more customized strategies to bring your business to the next level, please reach out to us so we can speak further.

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