Wednesday, February 25, 2009

No More Pollyanna, It's Time to Talk Cash

Okay, enough Pollyanna posts about being positive in a down economy. Enough about turning off and tuning out the media. You can only control a few things. Over the next few weeks we'll talk about those few things you can control in concrete ways.

First, and foremost, is Cash Flow. In retail cash is king. Without it you're dead in the water. With it you're ready to meet the new demands of a new market.

The tricky thing is that cash is directly related to inventory. Too much inventory, not enough cash. Too much cash, not enough inventory. How do you find the balance?

Let's be honest. Most of us don't have too much cash and too little inventory. We're just not that smart:-) So start with this simple thought. If cash is tight, if you're struggling to pay the bills, you probably have too much inventory. More importantly, you probably have too much bad inventory - what we call the dogs. And if these dogs won't hunt, you gotta set 'em loose.

How can you tell if a dog won't hunt? Some dogs are easy to spot. If you haven't even sold half of your inventory over the course of a year, it's woofing big time. Some dogs are harder to spot. A simple, very important mathematical equation called Gross Margin Return On Investment (GMROI) does the trick. GMROI basically is a measurement of how much money you make on the money you invest in your inventory. The formula is this:

GMROI = Gross Profit divided by Average Inventory at Cost

And Gross Profit is simply Sales x Profit Margin.

So you really only need three numbers to figure out your GMROI
1) Gross Sales
2) Profit Margin
3) Average Inventory at Cost.

I use a monthly average inventory and yearly sales, but you can choose to measure however you want. Also, you can use this formula on a single item, on a group of items, on a whole department or even on the whole store. I track GMROI very carefully for the whole store, each department, and each vendor, but I use it on individual items when a product I really like doesn't seem to be pulling it's weight.

Here's a hypothetical situation to put it into numbers:

Gross Sales = $5,000/year
Profit Margin = 40%
Gross Profit = $2,000 ($5,000 x 40%)
Average Inventory = $1,200/month
GMROI = 167% ($2,000/$1,200)

That means for every dollar I invested in this product over the course of a year, I made $1.67. If your GMROI falls below 100% then you are losing money on that product.

Calculate the GMROI for your store, for each department, and then for each product you don't think is selling well. Compare the product GMROI to the department and overall store. You'll have a quick idea of how well that product stacks up and if it's helping or hurting your cash flow.

If your GMROI is below 100% it's a no-brainer. If it's between 100-150%, you've got some serious work to do. Depending on your industry you may need a GMROI well over 200% to be successful. Only you can really know what you need to succeed. Fortunately, there are only three variables to manipulate.
1) Sales - sell more product and your GMROI rises
2) Profit Margin - raise your prices while selling the same dollars and your GMROI rises
3) Average Inventory - keep a smaller, tighter inventory and your GMROI rises.

Take the example above and play with the numbers. One by one, raise the sales, raise the profit margin and lower the inventory. See how a 10% shift in any one of those numbers affects your GMROI. You'll find that a 10% decrease in inventory has the highest impact and thus the best results for your cash flow. And how do you cut the inventory? By getting rid of the dogs. They aren't helping sales anyway.

Just do what I do. Identify them, pull them from the floor, mark them half off and have a big sale once or twice a year (not too often, you don't want to train your customers to wait for the next sale). Invite all your transactional shoppers in for the big event and watch those puppies fly out the door. Turn the dogs into cash and invest that cash in the products that give you the best GMROI.

Yeah, you gotta do some math. But believe me, it's worth it!

-Phil

Friday, February 20, 2009

Optimism in Toyland

The toy industry shrank for the second year in a row. Sales nationally were down over 2% compared to 2007, which was down from 2006. The new Consumer Product Safety Improvement Act (CPSIA) has the whole industry in turmoil trying to figure out how to prove their already safe toys are still safe. Half of the factories in China that make toys have closed, causing toymakers to scramble to find capacity. The housing market, the credit market, the auto market are all in crisis. The media is calling this the worst economy since the Great Depression.

Yet the mood at the International Toy Fair just held in NYC was quietly confident. All of the retailers with whom I spoke had a decent 4th quarter and strong January. There were even a few newbies at Toy Fair with plans to open up new toy stores in this economy. Their friends must think they are nuts!

So what's happening in Toyland that seems to make these businesses immune to the doom and gloom around us?

To a person, it was the knowledge that they control their own destiny. None of these businesses has conceded any control to the whims of Wall Street, to the lords of the layoffs, to the gods of government bailouts. They don't bemoan the banks, throw missives at Mother Nature, or hunker down in a corner waiting for everything to blow over.

Every retailer with whom I spoke talked about how they were working hard to market their business, improve their efficiencies, and thrill their customers. Every retailer spoke about finding the best products, offering the most convenient services, getting the most out of every opportunity.

Yes, each and every toy store owner I saw at Toy Fair was optimistic that 2009 would be profitable - even more profitable than '08, '07 or '06.

Maybe the optimism comes from selling toys for a living. Maybe it's because the stores that didn't feel optimistic didn't go to Toy Fair.

Or maybe, just maybe, it's because the stores who control what they can control and don't worry about what they cannot, always seem to do better, regardless of the economy.

Are you one of those stores?

-Phil

Wednesday, February 11, 2009

Are You Riding the Mommy Tsunami?

There is a tidal wave of babies being born. A group large enough to rival the heralded Baby Boomers. And the moms having these babies are the most educated, wealthiest, most connected group of moms in history.

They have a name for this group - The Mommy Tsunami.

When the Baby Boomers had their kids it was called the Echo Boom. Other names like Gen X and Gen Y have been used to describe the echo boom. Whatever you choose to call them, this group is now having babies.

But with one difference.

This group is waiting until later in life to have kids. This new mom is typically about 30 years old, college educated, and has invested a few years in her career before stepping out to start a family.

She has the power of the Internet in her purse, a camera on her phone, and an account with YouTube.

She grew up in an over-saturated advertising market so she is cynical to all forms of marketing. She ignores the hype. She pooh-poohs the over-the-top claims. She calls out anything that she knows is a fake. She doesn't bite when you say "biggest sale ever!!" because she knows you've got another sale lined up two weeks later. She knows what the fine print says. She knows that no matter what you say, everything has a downside.

And if you cross her, she'll have a video on YouTube within the hour and ten thousand of her closest friends will see it by nightfall. She'll destroy you with the power of a tidal wave.

Yet, the Mommy Tsunami has more dollars to spend than any group of moms in history.

How do you reach this powerful, cynical, knowledgeable consumer?

The answer is quite simple - honesty.

Product knowledge used to be your advantage. But with the Internet at her fingertips she probably knows almost as much as you do about what you sell. You can't trick her into thinking this is the only option out there. She knows what the competitors have. She researched it last night in her pajamas. She knows what features every product in the category offers, and has probably read a half dozen reviews to know which features actually work.

Now she needs someone to put that knowledge into context to show her how each feature fits into her life (or doesn't fit). She needs someone willing to be up front about the downside she knows is inherent in everything. She needs someone to tell her which features will actually benefit her in her lifestyle and which ones the company threw on just to jack up the price. She needs a salesperson to show her the benefits and the shortcomings.

Total, unabashed, show-all-the-blemishes honesty.

She needs someone willing to listen to and fulfill her needs, not shoehorn her into something that suits your needs. She is thrilled when you tell her why not to buy something. She is thrilled when you go out of your way to get what she wants instead of just what you have. She is thrilled when she knows you are looking out for her best interest. She is thrilled, mainly because it happens so rarely.

She knows that businesses lie. Every great offer comes with a fast-talking disclaimer. Everything is "subject to change" and never in her favor. Every great price has a hidden fee. In this ever-increasing self-serve world, everything is a take-it-or-leave-it proposition. And too many times she is leaving it.

Honesty means sometimes saying, "I don't know," followed by, "Let me find out." Honesty means sometimes saying, "I can't help you here," followed by, "But let me call someone who can." Honesty means being transparent in your ads, your products, your sales pitch, and your closing. Honesty means being transparent in all of your business practices, in what you stand for, in what you believe.

The Mommy Tsunami has the power of a Tidal Wave and can crush you just as fast. But just ask one of those crazy big wave surfers in Hawaii. They'll tell you the thrill of riding the wave just once outweighs the risk every time.

Happy Surfing!

-Phil

Saturday, February 7, 2009

Wal-Mart Got it Right

In this dismal economy Wal-Mart keeps racking up sales gains. Many people are quick to point to the slumping economy as the reason Wal-Mart is doing well. Lost your income? Shop at Wal-Mart.

But there's more to it.

In 2007 the economy was already starting to slide, yet Wal-Mart didn't fare so well. In 2007 Wal-Mart rolled out their "high fashion - low prices" campaign. In an effort to compete with Target's "cheap chic", Wal-Mart tried to upscale their offerings. The result? Abject failure. No traction whatsoever.

Why did something that worked so well for Target fail so miserably for Wal-Mart? Core values.

Target's core values from day one have been to offer a step-up from the K-Mart/Wal-Mart fare. They have cultivated the image through store design, product selection and advertising. They have built their reputation and core customers on this premise.

At the same time, Wal-Mart's core values have been to offer really, really cheap stuff. They have cultivated that image and their core customers over many years. Their core customers shop at Wal-Mart for one reason - really, really cheap stuff, not high fashion. So when Wal-Mart deviated from their core values, they alienated their core customers. And at the same time they were unable to shift customers loyal to Target.

But in 2008 they got it right. Wal-Mart went back to their core values and focused on what they do best - really, really cheap stuff. Yes, the economy helped. No, it wasn't the only reason. How do we know? Because some other stores also did well in this economy, and not by offering really, really cheap stuff.

Independent stores have fared far better in this economy than their chain and department store counterparts. And the best performing independent stores did it by being true to their core values. They didn't go after the low price market. They offered great customer service, or expert product knowledge, or high-quality merchandise, or all of the above. They made sure that their core customers' expectations were met or exceeded. They didn't leave their core for a grab at someone else's pie. They stayed true to who they were.

Do you know what are your core values? Do you know who are your core customers and why they shop with you? The best stores know this and are constantly working to make sure every part of their business aligns with these values.

Our values are Fun, Helpfulness, Education, and Nostalgia. It isn't about the products as much as whether those products are consistent with our values. It isn't about the services, but whether those services are consistent with our values.

When you know who you are, the business model gets easier. When you stay true to your core, you create loyalty. And in this economy, when loyalty is most fragile, you need to hold onto as many customers as you can.

Everyone knows the old adage that it is cheaper to keep a customer than find a customer. Now, more than ever, that statement is showing itself to be true. Keep your core customers by sticking to your core values. Finally, a lesson from Wal-Mart we can all put into practice.

-Phil

Sunday, February 1, 2009

Keeping Fit the Triathlon Way

Jeff Beagle talked me into doing a triathlon a few years ago without saying a thing.

Jeff is a personal trainer who had a client larger than me that he was training for the Clarklake Triathlon, a 0.5 mile swim, 14 mile bike, 4 mile run event. I figured if that guy could do it, so could I, even though I hadn't run 4 miles collectively in the past 8 years.

I love to swim. I like biking. But running is my Achilles Heel figuratively and literally.

In the two months prior to the event I swam daily, biked a few times a week and ran when I could. Sure enough, on the day of the event I finished 17th... ...in the swim portion. Overall I came in 396th out of 400 who completed the race. I was dead last in the 4 mile run. Two little old ladies watching the race passed me with their lawn chairs in hand I was so slow.

But I finished.

Talking to Beagle afterwards about training for the following year, he gave me great advice. "Phil, I know swimming is your favorite, but put the swimming away and spend all your energy on running. A 10% improvement in your running will have far greater impact than a 10% improvement on your swim."

How true, how true.

Business owners can learn a lesson from this.

Like a triathlon, we have three elements of our business in which we must perform: Product, Finances, and Marketing. The best businesses are strong in all three. Most businesses are strong in only one or two. And most business owners are only good at one or two, and usually only passionate about one of those three. Thus we spend our time and energy on our passion, improving only slightly, instead of focusing on the weakest, least fun aspect where the most room for improvement lies.

As you make your plans for 2009, do your business a favor. Evaluate which part of your business needs the most help. (Here's a hint. It's probably the part you like the least.) Then put all of your focus on improving that area.

A 10% improvement in my swim would have moved me up to 394th. A 10% improvement in the run gets me to 356th.

If marketing is your weakness, sign up for Roy William's Monday Morning Memo and go to the bookstore and buy his "Wizard of Ads" trilogy. You'll learn more about advertising than you can imagine and a few things that will help your business in other ways, too.

If finances are your weakness, set up an appointment with your accountant (get one if you don't have one already) and start going over the numbers. You can't manage what you don't measure and you can't measure what you don't know. Have your accountant teach you or hire a business financial coach. A good coach will pay for himself or herself many ways over.

Chances are, the product is your passion. That's how most people get into business. You know your products. You know what's selling. But do your employees? Is your training program getting the results you want? Also, do you have a good inventory management system? Do you have a solid Open to Buy program that keeps your inventory in line and cash flow moving?

Think like a triathlete. Work on your weakness. That's where the big results take place.

The following year I moved up to 367th. Time to work on the bike:-)

-Phil