Let’s face the truth. Forecasting for your busy season is the single hardest decision you make if you are an independent retailer. As much as we all would like our purchasing to be just right, every year we seem to buy either too much or too little.
Since you’re likely to err on one side or the other, you ought to look at those options more closely and base your strategy on which option will work better for you. (For this post we will look at Christmas, but you can extrapolate that to spring and summer-based businesses just as easily.)
BUYING TOO MUCH
Buying too much for December means you have more products but less cash in January.
The Upside: You had plenty of inventory to maximize your holiday sales. Your shelves are still stocked. You don’t look like you’re going out of business. You’re better prepared to capture the post-holiday-have-to-use-my-gift-card crowd and delight them with your merchandise. You’re better prepared to increase average ticket and items per transaction because you have more product to up-sell and add-on.
The Downside: Your cash is sitting on the shelves tied up in the products you couldn’t move. You’re less capable of taking advantage of any post-season deals or early buys. You can potentially get behind on your bills and dig a hole that is really hard to get out of during the slower months of the year, which puts you into a downward cash flow spiral for the rest of the next year.
When to Choose This Strategy: When your cash flow is already strong, you should lean towards over-buying. The potential for maximizing sales (and profits) during your busiest season should be your main focus for this strategy. (A 10% increase in December sales is far more beneficial than a 10% increase in January.) If you have a strong birthday gift business or a strong gift card business, there is a lot to be said for having plenty of products in stock in January, too.
BUYING TOO LITTLE
Buying too little is fraught with peril. But if the cash flow isn’t there, then buyer beware.
The Upside: Cash. Maybe not the maximum cash you hoped to get from holiday sales, but at least there is cash in the bank instead of bills to be paid. Good cash flow will keep you in business far longer than strong profits (see Amazon). One method for improving cash flow is tightening up the inventory. If you can manage expenses to match lower sales, you can maximize your cash. Then you can use that cash to take advantage of any post-holiday deals or early buys to restock your store (potentially with new and fresh merchandise).
The Downside: You miss out on some holiday sales. Your store looks barren post-holiday. People wonder if you’re going out of business. Perception can be damning. If you’re spending most of the holiday season saying, “No, we don’t have that,” you are training customers to go elsewhere. If your store looks empty on January 2nd, you might lose some customers then, too.
When to Choose This Strategy: When your cash flow is extremely tight. The downsides here can be crippling, but so can a lack of cash. If your cash situation is not good, employ this strategy to get to a better place. Then focus on controlling expenses and inventory to improve that cash flow for next year. If you choose this strategy year after year, you could be doing long-term damage to your brand, setting yourself up as the store that doesn’t have it.
A LITTLE OF BOTH
As much as we would like to always buy it just right, that rarely happens. Unforeseen circumstances cause us to miss the mark most every year. If you’re still not sure which way to lean, here are ways to do both…
Too Much: Buy too much of the “Must-Haves” – the items people ask for by name that sell all year long. Buy too much of the best post-season sellers. Identify which items you do best with after the holidays. Look at price-points and categories. You need products for those gift-card holders.
Too Little: Buy too little of seasonal products. Better to run out than be stuck. Yeah you might lose a sale or two, but better to have cash and not product on stuff you know you won’t sell in January. Buy too little of the marginal categories. No one is eating buckets full of caviar every day. But they are buying bread and milk and eggs (French Toast?) all year long. Buy too little of the big-ticket items. Big Splash items are great for Christmas, but rarely sell as well outside of the season. If you need to trim the budget, that’s a good place to start.
You’re going to miss the mark on your buying. That’s the only given. Which direction you err, however, is up to you. Choose wisely.
PS Yes, I use a lot of tools for forecasting including previous sales history, industry trends, data from peers, suggestions from reps, gut feel, etc. Unfortunately, every market is hyper-local and only you will truly know what will be hot in your market. Make your best guess and do as Roy H. Williams says… “Pull the trigger and ride the bullet.”
PPS Get off the weatherman’s back. Chances are you are wrong with your forecasts as often as he or she is. But just like the weatherman, keep updating and adjusting every time you get new data.