February 2007 Newsletter

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FEBRUARY 15, 2007
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in this issue . . .

THE DEATHCYCLE IN RETAILING
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The death cycle in retailing is a series of events which if not caught and corrected in time will cause the financial demise of the company as surely as the sun rises in the East. The death cycle usually starts as a result of buying more merchandise than the company can sell profitably.

As a result of this overbuying there are invoices remaining unpaid at the end of the season that must be paid before the vendor will ship for the next season.

The fact that so many vendors use factors to finance their invoices, thereby concentrating the retailer’s credit history makes it difficult on the retailer to manage their cash flow. It is difficult to pick and chose which vendors will be paid without the unpaid vendors being aware they are being treated unequally. Letting an invoice, from a vendor from whom the retailer does not plan to buy again, get delinquent can keep merchandise from being shipped from the retailer's most valued resources.

This then causes the retailer to borrow money from a bank (if they can) to get current with their resources. At some level of borrowing, the bank will want a personal guarantee from the owner. At this point the business is no longer standing on its own two feet.

If this cycle continues, the bank will eventually raise the interest rate since their risk has increased and if there is no improvement, they will discontinue loaning additional funds and at some point call the loan for payment. If the owner is unable to raise cash from personal sources to pay the called loan, the business fails. Usually, at that point, the best that can be done is to call a liquidator, if time permits.

This does not all happen in a vacuum. While all of this is going on several other things are going on:

Key employees get very insecure and may leave.

A whole host of record keeping inefficiencies set in. Among them are tracking the bank balance on a daily basis and keeping up with both checks written and checks mailed and possibly (heaven forbid) post dated checks mailed.

Precious time is wasted by the most valuable personnel, including the owner, talking to factors and credit managers.

The bank will require a higher level of year-end examination by the company's accountants; maybe even an audit (very expensive, especially the first time).

Merchandise shipments slow down while vendors and factors wait for their accounts to get current.

Another key employee just left, lured away by a competitor and increased job security.

Important work falls behind, records can't be found because no one is available to do the filing.

Chaos has set in.

Advertising, one of the few remaining variable expenses, is reduced; special events are eliminated because no one has the time to plan and execute them.

Sales continue to fall.

Management loses confidence and becomes catatonic; important matters go undecided.

One of the features of the death cycle is failure to use an effective retail reporting system. All too often we see an excessive amount of records being kept that cannot be pulled together into an information system. Many times manual records are being kept to generate lists that could be available automatically from the store's computer system. Many times retailers have computer systems that are not integrated, with invoices being entered twice because someone did not take the time to investigate, plan and execute.

Another feature of the death cycle is the deplorable waste of management time and talent. As a result of a lack of training (who has time?) and personnel turnover (often the most productive employees leave first) and the inefficiencies mentioned above the store staff becomes embroiled in unproductive activities that waste their time. To keep necessary activities current (such as record keeping, order entry, receiving and marking goods), management starts to work longer hours and perform these tasks before and after the store closes. Does this lead to management burnout? You bet.

One of the common ingredients to this cycle is a lack of planning and control over buying and expenses due to the lack of a management information system which focuses management's attention on the big picture. Important decisions are made without investigation and thought. There isn't time; shoot from the hip. Store owners like to lament their plight about the advantages the big chains have and how unlevel the playing filed is, yet too often they are not willing to perform the management tasks the big chains consider vital.

This state of affairs reminds me of someone walking while leaning forward forty-five degrees. They are running so fast, their line of vision so short, their mind so preoccupied with insurmountable problems it takes only a small pebble in their path to cause them to fall.

All of this can be corrected, if outside help is called in and time permits. It amounts to pulling the body up to a ninety-degree stance so the line of vision is further out. That's what we do for our clients: help them grasp the big picture, plan ahead, make the right decisions, eliminate stress, enjoy retailing for the rewarding career it can be.

MAINTAINING / INCREASING IMU% IN TODAY'S COMPETITIVE MARKET
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Pricing merchandise is an art whose goal is not to achieve the highest possible markup but to maximize the store’s gross profit (and bottom line). If the initial markup is too high sales volume will decline. If the initial markup is too low the store will not generate enough gross profit to cover its operating expenses. The IMU% goal for each store will be different due to local competition, the type of merchandise carried and the company’s expense structure. However, no matter what the IMU% currently is for your particular store, there are ways that it can be improved.

You can take a higher markup where competition permits to offset the lower markup where competition does not permit. In order to do this you must search the market for unique merchandise that competitors do not carry. When going to market, spend an extra day or half day walking the halls looking for new vendors. If you are carrying all the same merchandise as your competitors you’ll have to have comparable prices. However, if you have desireable merchandise that customers can not get anywhere else locally you can get a higher markup.

Keep yourself “Open-To-Buy” to be able to take advantage of in-season buys. If you are not already using an Open-To-Buy for merchandise budgeting you need to start immediately. If you have an Open-To-Buy but are not using it effectively then that situation needs to be turned around. The goal of the Open-To-Buy is to help the buyer plan the buying and receipt of merchandise so there is a continual flow of new goods coming into the store. If all the open-to-buy dollars are being committed up front at the beginning of the season there will be nothing left for in-season buys of off-price merchandise.

When at market ask your vendors what specials they have available. Then be prepared to take advantage of them by being sure to have Open-To-Buy available. It’s not a good deal if you overbuy to take advantage of it since overbuying just leads to higher markdowns and lower gross profit.

Every classification within the store may have a different IMU%. Also, within each classification there may be a number of different markups, depending on the merchandise and the vendor. By increasing the Initial Markup on special purchases of merchandise or on unique merchandise as the opportunity arises we can increase the overall IMU of that particular class and, all else being equal, we can increase the Gross Profit (and the bottom line). For example, look at the table below showing two different scenarios for a single classification, both of which have purchased $10,000 at retail. Sales and markdown % are the same for both. The only difference is that in scenario B, of the total purchases at retail, $2,000 was brought in at a 62.5% initial markup rather than 50%. You can easily see how this has increased the Gross Profit % and dollars.

Increasing Initial Markup is not easy, but it can be done and is well worth the effort.

TELE-SWAP GROUPS
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Did you ever wish you had someone to talk to about your business? Now you can. Join one of our new retailer teleconference groups.

Starting this year, I have initiated a new teleconference service for independent retailers who would like to meet with their peers but can not afford the travel costs or to be out of the store 2-3 days every 6 months which is a requirement of a regular SWAP (Share With A Peer) Group.

As independent retailers you face unique challenges. One of these challenges is that you have no one to talk to about issues or challenges that come up with your store. Or, you may have a new idea to try and would like some input from other retail experts before you go forward with it.

DON'T STRUGGLE ON YOUR OWN WHEN YOU CAN GET HELP FROM OTHERS WHO HAVE DONE IT BEFORE!
You do not have to struggle alone to solve all your store's problems. All retail stores have similar problems and many have had, and solved, problems you are facing right now. By being part of this discussion group you can save time and money, and increase your bottom line.

What issue or problem do you have RIGHT NOW that you would like some input about? Sales? Employees? Expenses? Buying? NOW is the time to do something about it!

YOUR OWN ADVISORY PANEL
The new service will be a monthly teleconference call that will be a combination of discussion group and coaching. Each month there will be a one hour conference call for the group. The group will have 4-6 members with all members operating similar businesses in non-competing areas. This makes the information more relevant for those in the group since you will be meeting with others with the same or similar merchandise and type of store operation. For example, although menswear retailers and dance retailers both own retail stores, their needs and challenges are very different. Also, a single store operation has different issues than a 5-store chain.

The stores in the group will also be in non-competing areas. That way you do not need to be concerned with being on a call with your competitor and you can be more open with your ideas and opinions. This is critical to the success of the group.

Below is a quote from an article in the Pittsburg Business Times:

Top of page

PROTECT GIFT CARDS FOR YOUR CUSTOMERS
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This article was printed in last month's newsletter but I think it bears repeating due to it's seriousness.

It has come to our attention that there are thieves who are stealing from the legitimate owners of Gift Cards. This is how the thieves operate:

1. When in the store, they copy down the code for the Gift Card.
2. They keep checking either on the phone or through the internet to check the balance.
3. When the card has a balance, they know that someone has purchased it.
4. They go online and order merchandise using the Gift Card number.
5. When the owner of the Gift Card tries to use it they find there is no balance left. They can not do anything about it since Gift Cards are like money and can not be replaced if lost or stolen.

While this is a crime against the purchaser or recipient of the Gift Card, and not the store, I believe it is up to the store owner to help prevent this crime by taking measures to prevent these thieves from gaining access to the card numbers. Some cards now have a scratch-off coating to hide the number. Others I have seen come in a package so the back of the card, and its number, is hidden. If you have Gift Cards that do not have any form of security for the card number, I recommend you keep one out on the counter for display but give the customer a new one from behind the counter when they purchase a card.

INTERNAL CONTROL MANUAL
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Don't let dishonest employees shrink your bottom line!

I have seen it happen again and again. A longtime, trusted employee decides to give themselves a "raise" at the expense of the company and management is shocked and hurt. This is the last person they would have thought would do something like this!

According to survey’s and studies, only 10% of the population will always be honest, AND 48% of all shrinkage is due to internal theft. Can you afford to turn a blind eye to this? Take proactive steps now to do an internal control audit of your store to see where trouble spots may lie so they can be corrected if needed.

Honesty In The General Population:
10% will always be honest
5% will always be dishonest
85% are basically honest; however will be dishonest under the right circumstances:
     1. desperate for money
     2. able to rationalize that it is Ok
     3. risk free opportunity

Causes Of Shrinkage:
48% - Employee Theft
32% - Shoplifting
20% - Vendor Fraud and Paperwork Errors

It is up to you, as the retail store owner, to remove all risk free opportunities and provide the controls to eliminate as much of the theft opportunities and paperwork errors as possible.

Good controls help minimize shrinkage and increase profit. At 5% Net Profit, it takes $2000 in sales to make up for $100 lost to shrinkage.

Our Internal Control Manual helps you find the weak spots in your procedures so you can correct them. It is set up in an easy question / answer format with any NO answer indicating a possible weakness in your controls. For more information, and to order your copy at just $95, including shipping by Priority Mail, please call us today or check us out on the web at: http://www.the-retail-advisor.com/internal_controls.html.

WHAT WE DO . . .
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o Monthly Open-To-Buy Service
o  Open-To-Buy Implementation on Your System (if available)
o  Merchandise Performance Evaluation
o  Shrinkage Control
o  Development of Incentive Plans
o  Development of Job Descriptions
o  Seminars On Retail Subjects
o  Financial Analysis
o  Financial Budgeting and Cash Flow Projections
o  Computer/POS System Evaluation, Selection, Usage
o  Policy and Procedure Development
o  Lead Tele-SWAP Groups (Share With A Peer)