Many of us remember the many contributions Gerald Smith made to the advancement and education of the retail industry during his lifelong dedication to helping independent retailers make more money. He has always been my most respected retail guru and when Gerald speaks it’s always worth a listen! I asked Gerald to come out of retirement long enough to offer us some advice on surviving if not thriving in today’s economic times. As expected he offers some excellent advice – of course it sounds like the same advice he gives even when the economy is on the upswing!
Guest Writer – Gerald H. Smith, Retired Retail Consultant
I doubt if any retailers in business today remember the Great Depression. The rest of you have heard about and seen photos of bread lines and other hard-times situations. Then, there were no safety nets such as unemployment compensation and food stamps. Times must have been really tough.
Economic cycles have always swung to extremes; they always will. That is the nature of a free market economy. It isn’t perfect; it’s just the best design so far. We will pay heavily for the government involvement in this recovery. Printing money can only bring about inflation. The more money that is printed, the more rampant will be the inflation. $1,500,000,000 and counting. Soon enough interest rates will be dramatically increased in an effort to curtail inflation making the cost of borrowing go up, decreasing the demand for homes and autos and so on it goes. Even controlled economies have their up and down cycles and we most assuredly don’t want to live in a government controlled economy; a government controlled society follows.
To survive these cycles I have consistently advocated a healthy equity-to-debt ratio for retail businesses. Retail businesses are not good debtors. Banks don’t want your inventory – your largest asset – as collateral for loans. They don’t know what to do with it if you default. The equity-to-debt ratio for a retail store should be at the very minimum 2 to 1. For every dollar of debt there must be at the very least two dollars of equity. If the business owes $50,000 the owner’s equity should be at least $100,000. I strongly prefer an equity-to-debt ratio of 2.5. This will provide the business the financial strength to withstand two years without earning a profit.
But we are where we are without regard to where we should be and since we aren’t where we should be what can we do about it to survive? There are three key financial areas to survival in retailing. The first is making profitable sales, the second is controlling inventory and the third is controlling expenses. To a greater or lesser extent all three are linked together.
Making sales. In good times and bad the single best way to make profitable sales is to know your customer. As Jack Mitchell would tell it, “Hug Your Customers” (If you haven’t read the book – available from Amazon.com – it is a must read and it may not be too late). Every specialty store MUST maintain and utilize a computerized customer marketing database. In olden days –when I first entered retailing – this was very difficult or impossible to do. The store had to rely on individual sales people to maintain ‘customer books’. Today the capacity and efficiency of computer hardware and software makes this a slam dunk. This database should have everything you know and can find out about your customer. How neat it is and effective it must be to be able to identify all the customers who bought a particular item from a particular vendor last season or year and be able to email them a photo of the new styles just arrived from the same vendor. Who are your hard-to-fit customers? Which spouses or significant others will respond to a special-event email reminder? Especially if you have the information to pinpoint the items their spouse or significant other favors. And on and on and on it goes. The big box stores and chains must rely on big advertising budgets to hopefully hit their customers. How much more effective it is to go hunting with a high-powered rifle than a shotgun. And the cost of sending email is soooo low.
No one wants to receive a lot of junk mail be it snail mail or email. Just make certain your message is personal, relevant and a benefit to the customer and you won’t get tarred with that brush.
Another sales-impacting strategy might be to lower your price points a tad or two. You can gradually raise them later when the economy starts to recover.
Controlling inventory. Please notice above I said ‘making profitable sales’. That means controlling markdowns and that means buying the right amount of the stuff and that means developing and maintaining an open-to-buy (A consultant could make a living preaching about the effectiveness of an open-to-buy as a means to control inventory and teaching retailers how to use one.) This was a very laborious process before computers and very few retailers did it. Today it is a three-pointer. All that is involved is planning sales by merchandise classification –admittedly, some sales history makes this easier, planning markdowns as a percent of sales and planning an annual stock turn rate. Industry stats used to be available to provide guidance for the latter two ingredients but answering a few questions dealing with product characteristics, market frequency and fashion obsolescence rate can give the guidance needed. Just start with your best judgment and fine tune it as time goes on. And don’t forget an old maxim: ‘the first markdown is the cheapest’. Take your markdowns as soon as the need is recognized. A 20% markdown might move a non-selling style ‘in season’ where it would be passed over at the end of the season. And do not, listen up, do not carry over old inventory. You and your sales staff won’t want to show it to your customers next time around.
Controlling expenses. Most retailers are frugal by nature. The best available tool that helps is to develop a proforma monthly Income Statement a year in advance and stick to it. Then each month compare the results for the month and year-to-date to the budget. The recordkeeping must be accurate and the results must be available timely – I suggest within five business days after the end of the month. If possible try to negotiate a lowered rent – your largest fixed expense – that can be recouped as the economy improves. If necessary, make adjustments to the budget going forward. If the projected bottom line is near breakeven or even a small loss, during this time in the business’ life that’s okay. That’s where the healthy equity to debt ratio kicks in.
The human condition can endure any amount of pain so long as we know that it will end. So the number 1 thing is to know this recession is going to end. We can accept it and we can be prepared. There are no advantages to fear but the correct response to fear is to make sure you’re prepared to deal with the thing you’re afraid of. Preparation is the tonic to fear.
Those retailers who survive this recession will have earned a Masters Degree in Retailing and will enjoy good times ahead. The population of retail stores will be smaller; there will be less competition.
SURVIVE?
YES YOU CAN.
YOU MUST.
