The challenges of retail are particularly difficult in our current economy, especially when the retail establishment is not selling “must have” merchandise. Today I want to share an example of one such merchant and the challenges he faces this year.
I am currently consulting with a retail business that is 20 years old. The owners have earned a nice income from the business and would like to retire in three years. The business has three locations located in upscale malls in a major metropolitan area. The kind of goods my client sales are ones you would use discretionary funds to buy.
This client is particularly sensitive to several forces:
- Forty percent of all year’s sales occur during October, November, and December, corresponding with the Christmas season.
- Nearly every year in January, February, and March, the business has losing months.
- The business has a pretty high fixed cost-of-doing-business because it is located in a mall and rent consumes approximately 20 percent of revenues.
- When mall traffic is down, so are my client’s revenues because this store is not a destination, but rather a store that catches shoppers passing buy.
- The cost of goods sold has increased about 15 percent since the first of the year due primarily to transportation and energy related costs.
- As of today, the owner has not felt he could pass on the increased cost of goods to his customers, so his profit margin has shrunk considerably.
- Although most of the 20 years in business have been profitable for my client, 2007 had a net loss of about 7.0 percent.
2008 started out much slower than most years, but revenues picked up in the spring and so far the summer has been better. The owner is wisely concerned that this Christmas selling season will start slow and will not generate the kind of profits that will allow him to end the year with a profit. My job is to try to help this merchant make the absolute most of the last three months of the year and end the year with the lowest possible inventory he can.
My advice to my merchant client:
- Go through the point-of-sale system and make sure all costs of merchandise reflect the current cost of the same merchandise, even if a lower cost was paid for it.
- Look at all merchandise that hasn’t sold at all, or which sold very poorly during the past year and consider liquidating it on eBay. This merchandise will sell on eBay for at least the merchant’s cost. Since each of the stores is fairly small, this will allow the merchant to fill the store with more of the faster selling merchandise.
- Examine the retail price of each piece of merchandise that accounts for 80% of annual revenues. On an item by item basis, raise prices to pass on all or as much of the increased cost of goods sold as possible. Discounting may be necessary as Christmas gets a little closer, but I believe this merchant needs to raise prices right now to cover increased cost of goods for as long as possible. Prices on some items can’t be raised the full 15%, but they might tolerate an 8-10% increase.
- Go into the buying season very cautiously. Don’t load up the store as early this year. Chances are if other retailers selling the same products aren’t having strong sales, the distributors will be lowering prices to clear their warehouses in mid November though December. It is very possible that by waiting to make larger purchases for Christmas, my client might see a reduction in cost rather than further increases. I believe this will particularly be true if we continue to see the price of oil drop through the remainder of the year.
- Replenish inventory more often and make smaller purchases to insure that December 31 inventory is as low as possible.
- Look at sales by store and if particular items are selling well in one store over the other, move the inventory rather than reorder, especially later in the selling season.
The goal is for this merchant to salvage as much as possible for the rest of the year and end the year with as much cash and as little inventory as possible.
A mid- to long-term strategy is to start negotiating a reduction in rent with the mall now since sales for 2008 throughout the mall have been terrible.
I am crossing my fingers for my client as it is tough to see a 20-year-old family-owned business fail.
I hope some of these ideas we are implementing in my client’s stores will prompt other retailers to think through a strategy to weather the storm.
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