9 NSRA.org
One of the athletic trainers at the gym where I work out is fond of stating that “you can’t out-exercise your fork.” Simply put you can work out all day long but if you are unwilling to change your eating habits and consume fewer calories than you are burning off you are simply not going to lose weight.
I find this analogous to the retail business in that you cannot buy your way out of a problem. Sure you might increase your sales volume a bit but if you are not improving gross margin return on investment (GMROI) what is the point? I see several examples every month from stores that are getting double-digit sales increases in one or two classifications only to end up buying more inventory than the increase justifies. If sales are trending up let’s say 10% and you are not missing business by being understocked what is the justification to buy 20% more inventory? Yet this is what I see happen often.
“Too Aggressive” Can Lose
Just as it is not advisable to chase the price of a stock that is going up chasing a hot item or trend too aggressively can have just as bad an outcome: lost revenue. What typically happens in this scenario is that when the average inventory builds at a rate faster than sales the turnover slows the margins might suffer if excessive markdowns are needed to clear remaining stock and – believe it or not – the operating expenses can also increase. This can become especially dangerous in stores that look only at past sales volume when planning next year’s or next season’s sales forecast. For reasons that escape me the stores in this group always plan for unattainable sales increases which typically leads to more inventory even if that level of inventory is unjustified. This is referred to as the non-profit cycle and it is very difficult to break if the merchandise planning is not approached properly.
One of the tools that I am most fond of
On the Management One Merchandise Plan
One of the tools on the Management One merchandise plan is known simply as “freshness.” What freshness measures is the amount of inflow (receiving @retail) each month for the past 30/60/90 days as a percentage of total retail inventory in the classification department or store.
What I have observed by focusing on this important metric is that the higher the freshness factor is the better chance the store has of profitable sales increases faster turnover and by extension improved cash flow. To the contrary when the freshness is consistently low say below 50% for 90 days we often find shrinking sales and stocks that are bloated with old goods. In this example half the merchandise is over three months old. In a fashion operation this poses a real problem. I doubt many of you have customers that come in asking to see what came in last season or last year. Today’s shoppers demand a constant flow of fresh new merchandise – as well they should.
Freshness Drives Turnover
Another way to look at freshness is by equating it to turnover. Having a consistent 90-day freshness of 100% or greater every month would ensure a minimum stock turn of four times. This would be a reasonable benchmark for most fashion merchants.
One of the many reasons that successful retailers are successful is that they are willing to do what less successful retailers are unwilling to do. Try focusing on the “freshness” in each classification and see how quickly unsuccessful categories become successful ones.
Ritchie Sayner of Advanced Retail Strategies LLC an affiliate of Management One is the author of Retail Revelations: Strategies for Improving Sales Margins and Turnover available from Amazon. He can be reached at www.advancedretailstrategies.com.
If You Are a Retailer Being “Fresh” Is a Good Thing
Ritchie Sayner
The amount of inflow each month for the past 30/60/90 days
as a percentage of total retail inventory in the classification department or store.
Published in the May/June 2019 issue of Shoe Retailing Today Copyright © 2019 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.
Summary
The article emphasizes the importance of managing inventory effectively in retail to achieve profitability drawing parallels to the necessity of balancing diet and exercise for weight loss. It highlights the concept of “freshness” in inventory management which measures the inflow of new merchandise suggesting that higher freshness leads to better sales faster turnover and improved cash flow. Retailers are encouraged to focus on maintaining a high freshness factor to avoid the pitfalls of the “non-profit cycle” caused by overstocking and unrealistic sales forecasts.
“You can’t out-exercise your fork.”
Real-World Examples of Retail Strategies
The concepts discussed in the article such as managing inventory freshness and avoiding overstocking are vital for retail success. Here are some real-world examples illustrating these principles:
- A popular fashion retailer Zara is known for its fast fashion model which emphasizes inventory freshness. By receiving new styles frequently and limiting the quantity of each item Zara ensures that its inventory remains fresh and appealing to customers resulting in high turnover rates and reduced markdowns.
- Grocery stores like Trader Joe’s maintain inventory freshness by regularly rotating stock and introducing new products. This approach not only keeps customers engaged with fresh options but also helps the store manage its inventory efficiently thereby reducing waste and improving profitability.
- A technology retailer Best Buy uses a strategy of controlled inventory to avoid overstocking on rapidly depreciating electronics. By analyzing sales trends and adjusting inventory orders accordingly Best Buy can maintain a balance between supply and demand ensuring that they are not left with outdated stock.
