Retailers, Forget the Inventory Metrics for Now
Are your sales suffering because of COVID? Or because you don’t have a compelling product on the floor that is right for today?
Monday mornings can be a real roller coaster for retailers. This is the day in the week where a true accounting of inventory takes place in offices across the world. What is sold, what is receipted, what is on order, where are we to expected trend…. And now what are you going to do to make sure your business stays healthy and selling? You need to have enough inventory… But not too much. Going through this exercise can feel like running a marathon every week. Except this one ends too often with somebody telling you to either push/cancel assortment you love to get your metrics in line, or asks how fast you can re-order your best sellers…. And sometimes both.
As a former merchandiser and financial planner at both Gap, Inc, and Nordstrom, I remember waking up every Monday morning in a cold sweat knowing that today was open to buy reconciliation day. It was never easy.
In the larger companies, you have senior leadership dictating the parameters of your inventory levels allowed, and more recently exact receipt dollars allowed. While in smaller owner-operated companies you may be beholden to the factoring banks and what credit line they will allow for your company at any given time.
Historically, all of these plans and credit lines are based on past performance and current indicating metrics such as turn, stock to sales ratios, sell-through percentages, net margins, and pure sales data. Public companies have the added layer of The Street expecting better and better inventory efficiencies while growing top-line sales and margin. In Pandemic Retailing, you will not be able to use these old rules effectively, and they may hinder your business.
Today’s pandemic retail environment is one that we have never seen, even when compared to the 2009 financial crisis, and 9/11. The rules have changed. Last year is not going to help you much right now. While recovery will take a while.
What will help??? Here are the Top 3 Important Rules of Pandemic Retailing Today:
1. Sales
2. Sales
3. Sales
I know many of you out there are SMH-ing away now (Shaking My Head for the older set). I know that this is a goal you focus on every day you go to work… drive sales. However, after the initial massive sell down of inventory across the country in big box stores coast-to-coast, many are now sitting empty.
Unfortunately, the old rule is very true, “a body in motion, stays in motion.” What I am seeing right now is many store owners/managers are overly worried about inventory efficiency and margin. The thing I believe so many are forgetting is this one simple truth: You Need Inventory to Create a Sale (at least in a brick and mortar store).
Why push aside your receipt plans and start buying inventory? It is all about Market Share right now. Companies to the right and left are going bankrupt, or look like they are going out of business, and the loyal customers from those closed or sleeping retailers are looking for a place to call home. It is time to wow those potential customers.
Even Wall Street has eased its expectations, so showing negative earnings and low margins right now is expected. Take Nordstrom as an example. On the Nordstrom Q2 earnings report, they did a fantastic job lowering their inventory to get in line with their sales plans… maybe the best in the retail set. Margins were at an all-time low, while the analysts seemed happy enough to allow for a low margin result, where did it leave Nordstrom? I will tell you, Nordstrom missed their Q2 sales expectation by close to 30%. Did having their inventory inline help? Not as much as it would have helped to fund the business and make their sales goal would have helped.
A quick look at the stock-to-sales ratio shows Nordstrom ended the quarter with a higher ratio than any of its competitive class, in fact, higher than many junior market class stores (which should turn faster than a mid-luxury chain). Could have a bit more inventory in the right product, even at a lower than usual sales margin have helped get to the sales goals? I believe the answer is yes.
Now the sad part is many of the analysts are saying they think Nordstrom will have a slower recovery because of this last report…. And the credit agencies have lowered their credit rating to what I believe is the lowest rating Nordstrom has ever seen.
President Pete Nordstrom said during the Q2 earnings call they were now going to start adding inventory to maximize sales, however, they chose to pay off part of their credit line early, instead of investing back into sales during Q2, and now they may have to pay more for borrowing (at least in the short term).
Could a calculated risk of adding the right inventory in Q2 save them from this bumpy road?
Again, I think so.
I don’t want anyone to think I am picking on Nordstrom, as I love this company dearly. You can see this same story playing out in many places…. Walking into many stores recently (for me Vineyard Vines and Home Goods are recent examples) and you can see there is a lot less merchandise in the stores, and not all of it is compelling.
So what to do… Here are my suggestions for inventory management in a pandemic:
Step 1: Plan to Fill the Store
The most important thing you need to make a sales plan is inventory. Retailers aren’t going to attract the customers out there without a compelling story and collection.
Figure out how many inventory units and styles it will take to make a compelling collection/store — this is the fun part far too often overlooked or pushed off to figure out AFTER the buyers come back from the market.
In these lean times it is okay for your backroom to be relatively empty, thin out your floor fixtures, and add some books or vases where denim used to be folded. The key is to not look empty and to have customers compelled to buy instead of feeling the store has nothing for them.
Usually, buyers buy what they believe they can sell for a given period, and what you end up seeing is an extremely overfilled store that is hard to shop, OR you see a store that is anemic with only white, blue, and black colored products and you wonder when they are going to go out of business. Pandemic shopping is showing there are far more in this later category of pandemic buying…..
On a recent shopping experience, I wanted to buy something that would lift my spirits but not break the bank. Walking the mall in a nearby town, in store after store, every store just felt colorless, basic, and lacking excitement. I walked out of there with nothing…. And I was ready to buy something. I hear this same experience relayed by many people in my industry as we are all professional shoppers.
DO THIS: You need to act like a brand-new store opening for the first time. All stores need to think back to how it was when they first opened their doors…. And for some stores, those people may be long gone, so this may be a new muscle for them.
History is gone. Everything is different. Time to RESET to what your customer needs now…. Product offering, pricing, service…. All of it needs to change. You are now Brand New…. Let’s move to Step 2.
Step 2: Identify Your Compelling Collection
You know your customer…. You have likely been selling to your customers for years. Now is not the time to abandon them to go after a completely different market…. Now is the time to understand them even more, what has changed in their lives, and create your strategy around not only what is now, but what is likely to happen in the future.
I know you all have heard that workout clothing, beauty products, and underwear have been BIG sellers in the pandemic market. But how many pairs of yoga pants does anyone need? If this is anything like a New Year’s Resolution, everyone now has more workout clothing than they will need for the next 2 years. So what is next for your customers?
While I cannot answer that question for your specific store in this writing, I can give you some things to think about….
Today:
How has your customer’s life evolved? What do they need as some people head to the office and school? Are cafes and restaurants open to get lunch or do they bring it with them now?
What additional protections are they taking? Gloves on the bus? High neck garments or zip-up garments that double as masks? Are they carrying more with them as half their work is done at home?
Originally everyone was worried how their necks looked on Zoom calls, but now all you can see is everyone’s eyes, so what does that mean for eyeglasses, eye creams, hair products, hats,
How much can they afford to spend? Unless your customer is Jeff Bezos, it’s highly likely that your customer has had a salary cut. Heck, unemployment alone just took a $600 salary cut a week. That will make a difference at the register, create your ideal collection with this in mind.
The Next 3–9 Months:
While everyone ran out to get workout gear, studies are saying that many of us gained the “COVID 15.” As people more and more go back to work, do any of those work clothes even fit anymore?
Not to mention, according to the Bureau of Labor Statics, The Employment Situation for July 2020, showed:
o 8.4 Million people are working “Part-Time for Economic Reasons” meaning…. They would rather be fully employed and are just trying to make ends meet (which is double the number of people as of Feb 2020)
o 7.7 Million people who are “not in the labor force but want a job” that are not counted as unemployed
o 16.3 Million people on unemployment which is 2.86x the number of February unemployed people (+186%)
Are these people going to interview for jobs in running shorts and sweatshirts? Not likely, unless it is for a running company, and even then you may want to look like you clean up well.
Competing with 16.3 million people for jobs as companies and buildings begin to open up means you need to make yourself stand out, and look smarter, savvier, and more put together than everyone else…
So, what will the interviewees of the future need? In the next 3 months, perhaps it is only “Above the Waist” wear…. Makes sense. In 6 -9 months, the legs and feet will need to be addressed in a new business casual way. So buy that way.
Do This: Make a 9-month plan for what your ideal collection looks like by month and by product category. Do not rely on last year to do this… party-wear for this holiday may not be the best idea as parties may still be limited. Look at what your customer is doing and plan accordingly.
Step 3: Find the Cash
What do you do with the products that you own that are no longer in your plans? Time to get rid of it, and convert it to cash.
In the pre-COVID days, you may have been able to receive markdown dollars or even return some of these goods to the vendor, however, there are very few vendors that will be able to handle this on top of their slow-selling right now. The net-net of this situation is, you are on your own.
That said, in the old days of 2019, you may have held your store expectation to a 50% net margin… today if you can make even $1 more than cost, you can pay that invoice and free money to invest in the reset your store.
Also, ask for extensions on your current outstanding PO’s…. delayed money is money you can use to make money by re-investing in your business before the PO is due.
Step 4: Buy, Buy, Buy
Time is of the essence…. Do not wait to re-invest…. If you sell $1,000, of product, place an order of the new adjusted product right away…. Even if it is only a $500 order. Place it now. Waiting for a month to place an order will only slow your recovery. Make it a habit to order as you sell in shorter intervals. The store will need to continue to be full of good products that will make the margins you need to stay and thrive…. And add Market Share which will help guarantee future success.
Some of the corporate teams will say, I have to get my inventory down to -30%, how can I possibly buy anything? The answer is: You must buy. The secret here is it is unlikely that you will make a sale plan without it…. And if the goal is to get sales and inventory in line, then your elevated sales will allow you to have more inventory….
Please realize, no selling equals future lower inventory, which creates future lower selling and lower market share, which then equals even lower inventory. This is a death spiral, a self-fulfilling prophecy. You need the inventory.
Also, when you are buying, know that DEALS out there right now… margin grabs while the grabbing is good. You should look for a minimum of 15% off, and it in many cases could be as much as 50% off. Wholesalers are also looking to create cash flow, so help yourself and your customers with tough negotiations.
The older product will have the BEST margins, and some of it may be perfect for your market. Wholesalers were stuck with a minimum of 3 months of supply when stores and dc’s were closed across the country for 3 months… and that was 3 months of supply based on pre-quarantine selling when everyone was working. In today’s world that is 6 months or more of inventory not moving too fast.
Then there is the number of stores in bankruptcy, or going out of business. You could offer to buy those inventories if you feel there is something you need for your store.
Additionally, mills and factories around the world are sitting on raw goods and have empty factory floors. You should be able to book even NEW products at better prices in the past.
Please make sure what you buy is IN THE PLAN you made in Step 2. The overall idea is to move into an adjusted collection that is perfect for the new reality.
Do This: Covert anything not in the ideal collection plan to cash as quickly as possible. Do not wait until the end of the season to clear non-ideal slow sellers. The goal here is to get the store into the ideal assortment as soon as possible so you can return to higher margins, happy customers…., and gained market share. Your new purchases will likely have much more margin than anything currently in your inventory giving you a better chance to make a profit sooner.
Step 5: Sell, Replenish, Markdown, Replenish, Adjust, Repeat.
Buying for a store is a marriage of art and science. Pure science and algorithms do not work, at least not yet. And pure art can create a gorgeous store without making any money at all. It is in the daily review and the constant adjusting where you will make the most of what you have.
If something isn’t working the way you hoped, fix it as fast as possible, so you can re-invest in the future. I’ll write more in the future about markdown strategies and margin management, but for now, make being aware as early as possible of what is working and what isn’t your main goal. This can make all the difference in your business.
Replenishing top sellers fast is just as important, if not more important, to the success of your business.
When I go to my local grocery chain I notice that they don’t review their selling very often, and are slow to replenish fast sellers. How do I know this? My favorite pasta sauce is constantly sold out immediately after it hits the floor (even in pre-pandemic times). Then the shelf sits empty for 2 weeks before somebody realizes that it sold out. An order is placed, and by week 3 the sauce is replenished. Notice…. 3 weeks of an empty shelf of something that is already sold out…. What could the sales have been had they realized this? Here is a rough back of the napkin calculation
Sauce Example 1
Pasta Sauce: 1st-week sales = 100 units
Reorder week 3 = 100 units (reorder arrives a week later but too late to sell more in the month)
Recap: Sold 100 units Reordered 100 units in 1 month
Sauce Example 2
Pasta Sauce: 1st-week sales: 100 units
Reorder within the first week: 100 units, repeat weekly through the month
Recap: Sold 400 units, Reordered 400 units
Sauce Example 3
Pasta Sauce 1st week sales: 100 units (but realized we sold out on Wednesday of the week)
Reordered: 200 units to arrive for 2nd-week selling
2nd weeks sales: 200 (sold out on day 7 this time)
** now I know that we had just enough inventory just in time, so I want to have a little extra to see if there is more opportunity here, so these weeks reorder will be 220 units)
3rd-week sales: 205 (reorder 200 — I still have a little cushion here for increasing sales)
4th-week sales: 205
Recap: 710 units sold, 640 units reordered
What is the difference between these scenarios? How often you are noticing low inventory in faster-selling items. Please notice I did not say BIGGEST selling items, I said FASTEST selling items’. This is how you grow a small item to a BIG seller…. And who doesn’t like those? Do you have any items doing this in your store…? And if you are in a sized business, do you have any SIZES doing this in your store? If the answer is yes, there is an opportunity to make more money with the same product. Adhering to a receipt plan that does not get adjusted during this month will not allow you to maximize the possibilities.
Do This: Review and Adjust selling every couple of days. The quicker you respond to what is working, the quicker it can make you more money and gain more market share.
Step 6: Pray for the Wind
After all of this work, let’s say we want to go sailing. We borrow the perfect boat, have great captain/deckhands, the sun is out, champagne is chilling, and we have all the gear we need to be comfortable, everything planned to perfection…. Yet, we cannot go anywhere without wind.
Sure we have weather apps with wind direction and speeds, high and low tide charts, and have done all the planning we can do. When we hit the water, if the wind is just not there, we will be at a standstill. We can pack it in, or wait for a bit to see if the wind will come back. The wind will return eventually.
This is a lot like the market for us today. All we can do is adjust as the market changes, be ready for what our customers need, understand all of the forecasts, and pray for the wind.
