Plan, purchase and profit

Posted September 01, 2015 | By David Brown

In part one of a two-part look at profitable retailing, DAVID BROWN discusses the integral components of planning, purchasing and selling new products.

Those who’ve been around the industry for two decades or more might find it difficult to get excited about new things. They might also find the notion of a retail epiphany fanciful, but that is what happened to me recently, and it’s that experience I want to share with you through a series of stages that I call the Five Stages of Profitable Retailing.

These stages are as follows:

What to do before you buy;
How to buy better;
How to sell what you buy;
What to do if it sells quickly;
What to do if it doesn’t sell.

So where’s the epiphany in that? While everyone’s probably heard of these stages, it is the combination and order of these that caused my ‘a-ha’ moment. A good recipe helps chefs recreate a proven formula for baking perfect muffins but if any part of that recipe is missing, the muffins become a flop. The same notion applies here. Each of the stages mentioned above work best when they are applied in the order displayed here. Shifting the order or removing one of the ‘ingredients’ could bring down the whole plan.

Can you imagine the financial carnage of buying more than you can afford or buying the wrong products for your market or buying from suppliers who can’t replenish stock in time or buying stock you can’t actually sell? Maybe you don’t have to imagine it. Maybe you’re living with the consequences already – poor cash-flow; mounting payables or debt; a low return on investment; aged stock that accumulates costs the longer it sits there.

Does any of this sound familiar?

On the other hand, retailers who follow this retail recipe and give equal and careful attention to each of the five stages will not only buy better, sell better and manage better but will also have a sustainable retail business model and money in the bank.

Stage one: what to do before you buy

Before attending a trade show, sitting down with suppliers or placing orders, retailers need to know what they’re trying to achieve. You need a budget and a plan to achieve it but not just any budget – you need a ‘GAP’ budget.

For many, budgeting and numbers is an area of business that they either don’t understand or don’t enjoy. However, everyone will admit that the budget is a key part of the business that shouldn’t be neglected. No one would dream of building a house without a plan, of taking a trip without a map, and yet there are jewellers who are happy to go along day-by-day without any clear objectives in mind.

Budgets are little more than goals that store owners set themselves to achieve. A study of Harvard graduates in the mid-1950s showed that only 3 per cent of the graduating class had any clear written goals for what they wanted to do when they completed their study. A follow up some 20 years later discovered that the same 3 per cent of students had amassed a level of wealth more than the other 97 per cent of graduates combined!

Sadly, it’s likely to follow that only 3 per cent of jewellery stores have a proper budget, one that details the owner’s short, medium and long-term goals. Another 10 per cent have a general idea of where they want to be – a figure normally based on their position in the previous year plus a percentage increase. Ultimately, this leaves 87 per cent without a budget, without an idea and merely relying on hope as a strategy.

Before setting a budget, it is important to prepare a GAP analysis. This details the gap between the business’ current performance and where the owner needs the business to be by the end of his working life. A business owner with 10 years remaining in his working life and $100,000 in savings will have a lot more work to do if they want to reach $1 million in retirement compared to an owner with $500,000 already saved and 20 years remaining in his working life.

Determining savings and lifestyle needs and working backwards to ascertain what level of profit will be needed to meet those needs – and hence the sales, costs and stock also required – is the most effective way to set any budget.

A GAP analysis should include the following:

The net profit needed to pay all operating expenses, including owner salary, and get an appropriate return on any capital investment;
The gross profit gap – any difference between the required and current gross profits;
The sales gap – any difference between the required and current sales;
The stock gap – any difference between the required and current stock and the stock level required to deliver an acceptable gross margin return on investment (GMROI). Note that anything less than 100 per cent – $100 of gross profit from every $100 of stock – is unacceptable.

Other considerations before buying stock should include the type of business – a fine jewellery store buys different stock to a fashion jewellery store; the business growth strategy – a $2 million store aiming to grow to $5 million needs more stock than a regular $2 million store; and whether the business has an open-to-buy (OTB) budget that includes categories and price points, desired margins, target suppliers and other purchase-specific information.

Considerations should include any market trends or rising brands that can affect purchasing by encouraging a business to invest quickly into a new category or product line; and a list of preferred suppliers – those with terms of trade and support levels that can assist stores to achieve a higher GMROI and those who sell product that won’t sit on the shelf becoming aged stock.

Stage two: how to buy better

Once you have your OTB budget, your new product list, a list of both new and existing suppliers to visit, your aged-stock reports listed by supplier, and a very clear idea of what you want to achieve, you’re ready to shop.

There’s a lot going on at trade shows so it can be hard to stay focused and on track. As a rule, avoid making emotional decisions – if an item is not part of the plan, research it by all means but sleep on it before buying. If you feel the same way at the end of the show, trust your judgement. Retailers should never be hasty to buy. There will be businesses that still own 80 per cent of their show purchases after 12 months and 60 per cent after 24 months. Those are not the sort of odds you need for your retirement.

Trade fairs have several major benefits and purposes – networking with fellow retailers; enhancing relationships with existing suppliers; meeting new suppliers; researching new products and trends.

Assuming one has existing terms in place, trade shows give retailers the opportunity to sit down with existing suppliers and balance their investments. This means purchasing more of the product that has sold and less of the product that hasn’t.

Any relationship with good suppliers is symbiotic in nature – you need each other; it is not a contest where one wins and one loses. To ask suppliers to take back product that is already 12 months old is unfair and unsustainable, especially if you haven’t diligently re-ordered the product that did sell.

Good suppliers don’t want retailers to be sitting on product that isn’t selling because it’s costing everyone money, but they’re more likely to help retailers who pay quickly and re-order often. What supplier wouldn’t want to work
with a retailer who pays quickly and takes responsibility for selling and managing their product?

Talking to other successful retailers, especially those running similar businesses, is a great way to identify suppliers, brands and trends that are either on the way up or on the way out.

Here are some other tips for appointing a new supplier:

Research:

Network at trade shows and ask other retailers about their experiences;
Research trade magazines and organisations;
Ask for referrals or testimonials and actually follow through;
Make sure suppliers are a good fit for your current and future business model. Are they a good personal fit for you? Do you trust and like them? What is their experience, track record and history in this market segment?;
Clearly articulate the expectations of any relationship. This is known as the ‘upfront contract’. What do you expect from them and what can they expect from you?;
Ask for exclusivity in your area, subject to you achieving minimum performance expectations. At the very least, find out which other retailers carry the product or are likely to carry the product in your area;
What ongoing support does a supplier offer? Do they provide displays, training, packaging, brochures, etc?;
Establish the quality of the product – what assurances does the supplier offer and what do other retailers say about it?;
Establish terms, like payment terms and stock balance privileges. If you really want to negotiate better terms, pay as soon as possible – preferably before they even expect to be paid – and re-order every time an item sells until it stops selling;
Establish delivery expectations including lead times for initial orders, re-orders and special orders;
Go with a ‘hit list’ based on your OTB budget and be prepared to research other new product that suppliers recommend;
Think about your exit strategy. Retailers like to think everything they buy is going to sell but the law of averages says only 20 per cent of it will sell quickly. Before you put anything on paper, ask yourself what you will do if a product doesn’t sell within 30 days. Items that sell quickly the first time have an 80 per cent chance of selling quickly again the next time. If you take that same money and speculate with it, it only has a 20 per cent chance of selling. Are you are business entrepreneur or a gambler?

Stage three: how to sell what you buy

The first two stages previously discussed are easy; retailers are great at buying things. Unfortunately, they’re not always as great at selling them. In fact, if retailers put at least as much thought, time and effort into selling stock as they do into buying stock, the chance of selling out increases exponentially; however, a more popular method is to slap a price ticket on an item when it arrives in store, put it in the showcase and hope it sells.

Research:

Network at trade shows and ask other retailers about their experiences;
Research trade magazines and organisations;
Ask for referrals or testimonials and actually follow through;
Make sure suppliers are a good fit for your current and future business model. Are they a good personal fit for you? Do you trust and like them? What is their experience, track record and history in this market segment?;
Clearly articulate the expectations of any relationship. This is known as the ‘upfront contract’. What do you expect from them and what can they expect from you?;
Ask for exclusivity in your area, subject to you achieving minimum performance expectations. At the very least, find out which other retailers carry the product or are likely to carry the product in your area;
What ongoing support does a supplier offer? Do they provide displays, training, packaging, brochures, etc?;
Establish the quality of the product – what assurances does the supplier offer and what do other retailers say about it?;
Establish terms, like payment terms and stock balance privileges. If you really want to negotiate better terms, pay as soon as possible – preferably before they even expect to be paid – and re-order every time an item sells until it stops selling;
Establish delivery expectations including lead times for initial orders, re-orders and special orders;
Go with a ‘hit list’ based on your OTB budget and be prepared to research other new product that suppliers recommend;
Think about your exit strategy. Retailers like to think everything they buy is going to sell but the law of averages says only 20 per cent of it will sell quickly. Before you put anything on paper, ask yourself what you will do if a product doesn’t sell within 30 days. Items that sell quickly the first time have an 80 per cent chance of selling quickly again the next time. If you take that same money and speculate with it, it only has a 20 per cent chance of selling. Are you are business entrepreneur or a gambler?