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Here’s Something I’m Watching

Yesterday’s paper had an article about a new strategy Wal-Mart is rolling out. They’ve decide to do… wait for it… price cuts. Yeah, they’re cutting prices again (you’d think with all the price cuts that their prices should be zero about now, right?).

Here’s the interesting part of the article… They are only cutting prices on 20-30 key items – mostly groceries like cases of Coke. Twenty to thirty out of 100,000!?! And that’s gonna change people’s perception and drive traffic to new levels?

Either Wal-Mart thinks the general public is really gullible, or perception truly is reality.

I predict they’ll get a little bit of a traffic bump from people who only want the specials, but with such a small selection of price cuts, I also predict their competitors will have no problem matching them. (In fact, according to the article, Target and Kroger already had.)

But in the long run it won’t move the needle. But if it does…??

Yeah, that’s why I’m watching it.

-Phil

PS Apparently Wal-Mart has run out of ideas. Hopefully you haven’t.

Give ‘Em What They Want

Next week I’m sending out a coupon. $20 off a $100 Purchase. I need to generate some cash flow and get some traffic through the door.

For the past two months we’ve been shut off from the community on two sides by federally funded construction projects (Mr. Obama, I’m not feeling very stimulated). So I’m sending out a coupon – givin’ it away – to generate some sales.

As I’ve said before, sometimes you gotta choose between profits and cash flow. This time I’m choosing cash flow.

The toughest part for my staff (besides ringing up the coupons properly:-) is dealing with the customers who want to skirt the system.

Even though the purpose of the coupon is to stimulate some new business, I’ll have a handful of customers who want to use it on a previous sale they did in the last few weeks.

Some customers will try to use it on sales less than $100 (It’s $95, isn’t that close enough?).

Others might buy $100 worth of stuff and bring $50 back the following week.

So how did I instruct my staff to handle these situations? Simple…

Smile and say, “Okay!” Yep, give it to ’em. Don’t hassle them, don’t belittle them, don’t upset them. Just do it and move on.

You see, the customers who do that are so few and far between – maybe 3% of the totally coupons used – that they aren’t worth the complaints they could generate. And they aren’t worth your energy. At worst, they aren’t profitable customers at all so don’t waste your time. Just give ’em what they want and move on. At best, they might return the kindness you show them later.

It’s not about “playing fair”, it’s about taking care of your customers – all of your customers.

As my good friend and fabulous writer, Becky Blanton said,

“When there are no score cards you’re not tied to a specific game. You’re free then to succeed”

Don’t get sucked into those kinds of games with customers, don’t get caught up in what is fair or not fair. And most certainly don’t keep score.

That’s how you win at customer service.

-Phil

Discounting Question…

I had an interesting debate with the president of a baby product company here at the ABC Spring Conference in Louisville.

His company has a minimum ad price to help protect the integrity of his brand (and keep the low-overhead Internet dealers from discounting so much that the brick & mortar stores drop the product). But lately he has relaxed that policy, because as he puts it, “In this economy we felt we needed to give some relief to the consumers and not have such a high gap between our prices and our competitors’ products.”

So my question to him was, “If you’re so concerned about your prices and giving the customers some relief, why does it have to come out of MY pocket and not yours?”

Still waiting on the answer…

But, at least I’ll give him credit for this. He stood up in front of a room of 300+ brick & mortar retailers of his product and said that the decision was completely his and he wasn’t going to change it until the economy improved. That took some serious guts.

Is there a lesson in this? Stick to your guns and hold your resolve in the face of adversity? Be prepared to answer your critics? It’s not a good gesture unless you share in the pain?

I’ll let you decide.

-Phil

PS We didn’t do the discounting. It’s a premium brand that doesn’t need discounts to sell, just good, smart sales people who know the value of the product. Oh yeah, our sales are up 28% with them ytd.

Profits versus Cash Flow – Which Will You Choose?

Sometimes in retail you are faced with a difficult choice. In a tough economy, one of those choices is Profit vs. Cash Flow.

Sometimes you have to give away your profit to get more dollars streaming through the till. Sometimes you have to give up chasing dollars just to protect your profit margins.

The question is when do you choose Profit or when do you choose Cash Flow?

The answer is when you know exactly where your business stands, where you want to go, and what you need to do to get there.

For instance…

My goal for this past year was to show a profit. The bank gets a little nervous when you don’t show a profit, and to guarantee a renewal of my line of credit in these tough lending times, I knew that showing a profit would give the bank confidence in my stability and ability to succeed.

Last November I made a conscious choice to go after profit instead of cash flow. I chose not to run a direct mail coupon incentive that I had used in previous years. The trade-off was dramatic. Sales were down for November because I gave no incentive to shop early. Profit margin was way up, though, because I didn’t give away the house.

But as I looked at the lost sales in November, the question begged… Did I lose those customers for November or lose them for good? The answer came quickly in that first week of December… I only lost them for November. At the end of the two months my sales were where I expected going into the season, down only slightly. But my profit was up for the same period compared to last year. Had I run the coupon, I would have increased sales (cash flow) but decreased profit.

Because I knew my goals and knew what I needed to do to achieve them, I was able to be successful. Because I knew how my choices would affect my cash flow and profit, I was able to choose the right approach.

So what is the right approach in your business? It depends on your short and long term goals. Do you need to improve cash flow to fund a new project? Or do you need to show a strong financial statement to your investors? Do you need to improve cash flow to pay off your vendors or do you need to grow your profit to pay off yourself?

When times are good, you can do both at the same time. But when times are tight, you sometimes have to choose. Choose wisely, my friends, by knowing your goals and the means by which you will achieve them.

-Phil

PS The choice was made easier because our cash flow had been strong up to that point. What I lost in cash flow was allowable because I had built up cash flow from the previous year (at the expense of profit) Sometimes it is a seesaw between the two.

Inventory Controls That Work

Open-to-Buy is great for businesses with vendors who ship quickly and can pinpoint delivery with consistent terms. It works great for businesses whose monthly/weekly/daily sales are predictable. It is a super system for companies who can give the system full-time attention.

In other words, for the Independent Retailer, Open-to-Buy sucks!

I’ve looked at a half-dozen OTB methods, none that I could ever get to apply to my business. Too many vendors with different terms, different minimums, different seasonal needs, different availabilities. If I tried to run LEGO on an OTB, we’d be OOB (out of business). I sell it all in December, but if I don’t order it to arrive in August, LEGO will be sold out and I’ll get nothing.

Instead of an OTB, we followed these three simple principles this past year that gave us the results we wanted.

Don’t be out-of-stock of the Must-Haves. We define Must-Haves as any product that we sell more than 36 pieces a year. You probably already know intuitively what products you sell on a regular basis that you always have to have in stock. Make sure you have enough of those items at all times. (Note: You can define your must-haves by whatever criteria you want. Just make sure you always have them.) This way, although the rest of your stock might be low, the customer always thinks your stock position is strong. The fewer times you have to say, “No, I’m sorry, we’re out-of-stock,” the better.

Don’t out-buy your Dating Terms. If the vendor gives you 30 days to pay the invoice, don’t buy more than a 60-day supply (assuming keystone or higher mark-up). Sure, sometimes this doesn’t work (see the LEGO example above). Sometimes the minimum order is more than a 60-day supply. Fill your shelves with that first order, but don’t re-order until you can order within the terms. And whenever possible try to get longer terms from your vendor.

Two ways to extend your terms:

  • Ask your vendor – especially if you are ordering new stuff. If you have a strong credit rating or excellent payment history ask for an extra 30 days. Remind them that it will help you to buy/try more. Then be absolutely sure to pay that bill on time.
  • Pay with a Credit Card the day the invoice is due. This give you an extra 20-30 days depending on your credit card agreement. (Make sure you pay that bill on time, too – fees and interest will kill any deals/savings you get.)

Minimum orders are Okay – Don’t buy what you Don’t Want. You don’t always have to increase your order just to get whatever special is available. Discounts, Free Freight and Extended Dating are nice, but not always necessary. Sometimes you find yourself buying stuff you don’t want or need just to qualify for the discount. After paying interest on the money you borrowed to pay the invoice, plus taking a markdown on the products you didn’t want and couldn’t sell, you’ll find that the special wasn’t so special after all.

The best specials your vendors can offer you are:

  • Extended Dating – Net 60 or Net 90 do more for your cash flow than anything else. Always select this option first if given the choice.
  • Free Freight – Depending on where they ship from, this can be as much as a 15% discount – great for the bottom line profit.
  • Deep Discounting – 5% is no incentive. 10% isn’t much either. To be considered Deep you need a 15% or better discount. Don’t ever over-buy your dating terms for less than 15% off (the equivalent of Free Freight). Even then, only buy what you know you will sell.

Dating does the most for your Cash Flow. Discounts & Free Freight really only help the Profit/Loss. Go after the special that meets your needs.

There will always be times when you have to over-buy. But choose them carefully. Do it for your Must-Haves. Do it when the dating terms are favorable. But if you ever find yourself thinking, “I’m not sure I really want to buy that,” then don’t!

We decreased our average inventory by over 10% this past year (while only losing 4% in top line sales). This caused us to have a higher Gross Margin Return on Investment (we made more money on the money we spent) and better Cash Flow. Follow those three principles and you’ll see an improvement in your business, too!

-Phil

Growing the Top Line or the Bottom Line, What’s Your Goal?

I just returned from the American Specialty Toy Retailing Association (ASTRA) Marketplace 2009 in St. Paul, MN. Hundreds of toy retailers and manufacturers gathered to highlight the best toys for 2009 and the best practices for toy store owners.

And over the course of 4 days I must have heard the question, “How’s biz?” at least a hundred times.

It’s a fair question. We’re all concerned with how other retailers are doing in other parts of the country. The issue I have is with the answer.

Most every retailer talked only about their top line sales. Sales were ‘flat’ (flat is the new up), ‘down a little’, ‘holding steady’, ‘tough’ and many other euphemisms for “not what we want but who’s complaining?”

But no one mentioned the bottom line – profit. When you get right down to it, retail is not about top line sales but bottom line profits.

If top line sales were all it takes to make you happy, I have a guaranteed 3-step program to raise your sales 100% over the next three months.

  1. Mark everything at half price.
  2. Quadruple your advertising.
  3. File bankruptcy.

Anyone want to try it?

One of the speakers at ASTRA, Bob Negen, pointed out correctly that there are only three ways to increase top line sales:

  1. Get more (new) customers
  2. Increase average sale
  3. Get existing customers to shop more often

Bob went on to give us great tips for doing all three with the idea that if we grew our business 5% each way we would have 15% top line sales growth. Who wouldn’t want 15% sales growth?

Before you answer, let me rephrase the question… Who wants 15% sales growth with 30% growth in costs? Doesn’t sound so good, now, does it?

One of Bob’s ideas to get customers to shop more often is a Frequent Buyer’s Club. You’ve seen these. Shop a certain number of times, spend a certain amount of money, and get a kick back of some sort. In Bob’s way, the customer shops 6 times and then gets a store credit for 10% of her purchases as an incentive to shop more. In essence, it’s a 10% discount for 6 out of 7 trips to the store. And this idea is supposed to grow your sales by 5% by getting customers to shop more often.

I’m not the brightest mathematician around, but spending 10% to get 5% growth doesn’t add to the bottom line. Probably why I’m not a fan of discounts, coupons or Frequent Buyer Clubs.

On the other hand, Bob gave some great ideas for increasing the average sale.

  1. Raise your prices
  2. Add on to every sale until the customer has everything she needs (what I like to call “completing the sale”)

Both of these ideas will not only increase your top line, but also add to the bottom line.

When you are looking at ideas to grow your business, remember that your goal is to grow your profit, not necessarily your sales. Look at each idea carefully and see how it changes your bottom line, not your top line.

Paying attention to the bottom line is what will keep you in business and make you most happy.

-Phil