What do you do when you can't pay your bills?

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OR What do you do when you are paying your bills late most of the time?
As bad as those two scenarios might be, there are even worse conditions. Such as paying your bills with your credit cards and carrying large balances so that you are being charged 18% interest (or even more from some of these money hungry banks that are trying to cover their losses from other areas). Hardly any retailer earns 18% profit out of their business so what makes them think this concept is going to work? I know-it's because the payments are smaller at the beginning but it's just a delayed agony.

I started to write this piece with the title "The Dark Side of The Recession", BUT that would have been the worst thing I could ever do. Why? Because managing your debt is just part of running your business.

Sure that's easy to say until you have received a collection call from a vendor or collection agency who are the subtle masters in intimidation (many times not so subtle.) We can say to ourselves, "It's just business." However, we know it eats us up inside. It ruins our self-esteem, we feel like failures, and try to avoid taking these calls. And when we do take the call, we make promises for payment that are nothing more than wishful thinking.

Many times the financial condition you find yourself in might not be your fault at all. I once owned a very successful (and extremely profitable) apparel store in New Hampshire that had a great team of people running it and a wonderful customer base. It was a 2200 square foot store with sales between $400,000 to $450,000 annually. Everything was going great for 9 years until two things happened. First, a new mall opened up across the street. We knew it was coming so that was no big deal. What I never took into account was the automobile traffic that a new mall can generate. What made matters worse was the roads getting to the mall were just NOT equipped to handle this traffic increase, so bumper to bumper grid lock would occur during busy days making it almost impossible for customers to get into my parking lot.

Our Saturday sales which averaged around $3000 dropped to a staggering $300 to $400 per day. That was only for about 6 months but of course it occurred at Christmas time as well.

Then when you think things can't get worse... they did. My landlord rented out the store beside us to an Eastern Food Mart/convenience store. Shortly after they opened they had delivered 5000 pounds of curry powder. The problem was that we shared the same air conditioning system. Needless to say the odor made it impossible for customers to shop and employees to work. After lots of efforts to correct the problems, I was forced to just close the business. Did I do anything wrong? Not really, but it created late payments and lots of sleepless nights.

So what should a business owner do when unexpected events occur? Where do you turn to? Since October I have received a number of calls and emails seeking advice. So I wrote up a piece about retailer options when events like this occur and I am including these ideas in this article. There is an old Chinese proverb that says, "When the student is ready, the teacher will appear." My teacher has appeared and my eyes were opened wide to a part of an industry I knew very little about.

I work for many associations representing all kinds of industries. There is an association for every job type or type of business you can think of, but I had never heard of The Turnaround Management Association. A group of (here comes another new phrase) Payable Management Specialists. These people are NOT debt consolidators or credit counselors. Some consumer credit consolidators don't have the best of reputations--they go under the guise of a non-profit organization thinking they are there to help you and some do. However, some of these companies are not always the most ethical companies you can work with and their needs are served first.

On January 20th I will be interviewing Mr. Jim Herst, one of the pioneers of the Turnaround Management Association and the Winner of the Turn Around Specialist of the Year in 2008. He is regarded as this country's leading authority in Payable Management.

So what do they do? Why should you know what they do?

First, understand the signs of retailers in need of a turn around specialist:

1. Sales off or less than anticipated
2. Selling, general, and administrative expenses are rising
3. Gross margins declining
4. Decreasing inventories because you can't get credit or don't have the money to replace the sold merchandise
5. You are writing and holding checks
6. Receiving collection calls from Vendors
7. Increase in employee turnover
8. Larger customers not buying

What YOU can do, what are your choices when you start to experience these symptoms:

1. Start extreme cost cutting
2. Refinance all of your debt
3. Seek new money to invest or find new partners (with money)
4. Debt resolution-Settle your debt with vendors
5. Sell the business
6. Liquidate
7. Hire a professional Payable Management company to start your turn around

So what does the professional Payables Management actually do? "It is the process whereby a debtor in financial CRISIS retains the services of an authoritative third party to professionally represent that debtor's relationship with its selected creditors." You turn your problems over to an experienced pro.

They perform the following services:

1. Stop all the calls and demands from vendors, collection firms and attorneys
2. Perform all creditor contact so you can focus on running your business
3. Eliminate court appearances
4. Protects the retailer's assets from lawsuits
5. Satisfies the creditors within your financial need
6. Works to rebuild your credit rating
7. Creates strategies for long term profitability
8. Facilitates profitable sales of inventory

How do Payable Management people get paid? They are paid on performance only. They receive a percentage of the money they save the retailer.

This is more than just about saving a business. It's more than just savings jobs. It's more than just helping to save a community. It's about saving someone's self-respect and takes a horrible burden off the retailer's back.

I believe this is such an important topic that on January 20th I will hosting Jim Herst to discuss this topic in detail and have open lines for you to ask the pro. This will be a FREE teleseminar for everyone. (It is free if you listen in during the live event but we will be charging $19.95 to download the event for people who are not members of The Retailer's Advantage.) We are doing that so that we can have as many of you ask Jim as many questions as you like. It is a rare opportunity--not to be missed!

Actually I am looking forward to hearing about the success stories that this program generates. Have a great week.

What’s Your Business Worth?

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One of the reasons I love The The Retailers Advantage so much is because I get the opportunity to interview some of the brightest and most fascinating people. This week I interviewed Chad Simmons who is the author of the Blue Book of Business Evaluations. One of the things he stressed was knowing how much your business is worth.  Just knowing its worth can start to effect the business decisions you make about your business. There are so many factors that go into an evaluation but Chad did a great job of simplifying the entire process. There were a few points I want to share with you.

There are many ways of looking at the worth of a company but Chad breaks them down into three easy to understand categories:

1. Income, how much positive cash or profits before and after taxes is the business generating? If the business nets $50,000 after all expenses and inventory are paid that would mean that if you bought the business for anything less than $500,000 you would be returning 10% or better on your investment. Of course there are other factors to consider such as how regularly is the business generating that kind of cash flow? How much of a salary does the owner take? Income is just one way of looking at the businesses value. Think about it this way. Some businesses work on very high margins such as software producers or book publishers. Many times people refer to Microsoft as a cash cow because of the exceptionally high margins. Then couple it with high volumes and bingo you have a cash producing machine.
2. Assets, what does your company own that would increase the value? Many plant nurseries and garden centers might not generate a lot of income but the land where they are located is worth a fortune. Years ago, a friend of mine bought a Holiday Inn that was marginally profitable until the state announced that a new highway was going to be built either in front of the property or through the property. Either way that location soared in value. If the highway went in front of the property then the asset went up in value because of the third consideration.
3. Marketing Possibilities,  now because a major highway was going to pass in front of a hotel opens the door for many more customers. When websites such as Face Book or Utube were sold for millions and millions of dollars it wasn’t from their assets because they had very few. It wasn’t from the income they were earning because some of these high tech companies were not showing any profits at all. It was all based on the marketing potential of the business.

Timing is obviously another factor. Here is some bad news. Most retail businesses have been devalued for no other reason than it’s a retail business and we are in a recession. Even if you are doing well, an outside appraiser assumes that business would be off because of the recession.

After two parties agree that one party wants to buy the business and the other party wants to sell it, both parties are within a negotiable range. Now that range can be rather sizable but everything still comes down to the negotiation. So who generally wins? Chad’s response was whichever side provides the most logic that supports their position. Then he went on to repeat that’s why you need to know what your business is worth and how it is figured. There are plenty of rules of thumb but many don’t really apply to all businesses. Some people devalue retail inventory because retailers need to turn their merchandise quickly and only wine gets better in time. However, if you are a jeweler with a big inventory in gold, then your inventory made you money because of the rising cost of gold. Be careful with the rules of thumb.

I hope that was helpful. One other side note– I put Chad on the spot and gave him a scenario close to what happened to my store. I could have sold my retail business 12 years ago but realized that I would only end up with the value of my inventory. That was because buyers were only willing to pay 50 cents on the dollar for my  inventory and the rest for income and marketability which only totaled the full value of the inventory. It was a strong, healthy business but a retail business that is centered around a family that isn’t going to be there and located in a depressed downtown means the value goes down. Chad figured that out and agreed that running a massive closing sale was far more profitable and it was unbelievably profitable.

One more thing, I have to brag a little …

The Second Edition of The Retail Business Kit for Dummies was named last month the #1 Retail Business Book by AboutRetailing.com, retail’s largest website and portal for retail information.

Thank you About Retailing, and congratulations to all of my colleagues and fellow authors who also made it into the top 10. This is an honor that I sincerely appreciate.

How Much Merchandise Do You Need?

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During economic times like these, we are forced to look at every expense we have to be able to find spots where we can save money without hurting sales. As we know, Inventory is not a true expense but rather an asset. However, we spend more money on merchandise for resale than any other area of our business. So the question that retailers have asked for years is how much inventory/merchandise do we need in order to make money? It is a relatively simple question and I have a very direct and simple answer. BUT before I share it, I want to discuss two issues that have always muddied up the waters.

First, is a system referred to as Open to Buy. It is a system that has been around for almost 100 years and it really doesn’t work. (It takes guts to poke shots at a retailing stable.)  Why?

First, it is based on the current inventory levels. If your inventory isn’t accurate, then the system doesn’t work. Rarely will you ever find a retailer who claims their inventory to be accurate within $500. As a matter of fact when I ask an audience in a live seminar if their inventory is accurate within $500, they chuckle or laugh. So right off the bat it’s doomed. Next in an Open To Buy System every markdown must be reported. Sounds good but it’s time consuming and never quite accurate. Next everything must be converted into retail dollars opening up even more opportunity for error.

Lastly, a true open to buy report contains no mention of operating expenses at all. So the system can recommend that you buy $50,000 of merchandise but you don’t have a penny to buy anything.

The other issue is about your Stock to Sales Ration of which I am a proponent. This is how it works. If you want to do $25,000 in sales for a given month, how much inventory (at retail) do you need? If you have a stock to sales ratio of 3 to 1 that means you have $75,000 in stock. If it were a 2 to 1 ratio then you would have an inventory of $50,000. That’s a pretty big savings. Plus customers tend to buy the newer things so having a 2 to 1 ratio keeps your inventory pretty clean. That also means that in theory you would run out of inventory every 2 months and you would be turning your inventory 6 times a year.  Your customers would love it because your inventory would always be fresh and exciting.

Unfortunately, many retailers have a stock to sales ratio of 6 to 1 which means it takes 6 months to get rid of all the merchandise. Not very fresh here.  The other factor is how high are the margins? I often talk about one store that does only $150,000 in sales volume but the owner drew a pay check of $1,000 a week and only visits the store 1 day a month. Why? Because she sells only jewelry from Mexico, buys direct from the craftsmen, and won’t buy anything that she can’t mark up 7 times. If she buys it for $10, she retails it at $69.95. The best part is she is not price gauging at all because there are layers  of distributors that all take their piece of the action. In many cases her price is actually even cheaper than other stores that carry the same product.

Now for the simple answer as to how much to buy. Fifteen years ago I developed a system that is so easy  to understand and use that I have received more compliments from retailers that have struggled for years for a path to profitability. It is so basic but just works. I  affectionately  call it  Open To Thrive  or The Inventory Control System . But neither name really captures the power of the concept. For openers I am not trying to convert anyone into an accountant but business owners need to know 4  numbers that can become their map or path to profitability.

Open to Thrive is based on a formula that I call the 40-55-5% Rule.

• What it says is that 40% of your sales should go or be budgeted for expenses. This is NOT inventory. It is heat, light, rent, packaging etc.
• 55% of your sales should be budgeted or spent on brand new merchandise.
• The 5% left over I call your Positive Cash Flow. We can’t really call it profits but it is what is left over. Now if you have a loan, the interest is considered an expense and is part of the 40% BUT the principle part of the loan comes from the 5%.

It takes about 45 minutes to plan out your entire year and maybe 10 minutes a day to maintain it. The first step is to estimate what your monthly sales would be and then you just apply the percentages. You plan it on a monthly basis but I like to look at on a quarterly basis. Monthly makes it too hard to give a true reading because we can’t always predict when merchandise is going to arrive.

Some industries alter the percentages such as jewelers that have higher expenses and spend less on inventory. So they use 42% for expenses and 53%  for merchandise. The actual numbers you use are secondary to you knowing your path to profitability.  Understand one simple concept: Retailers DON’T get into trouble when they are overbought. They get into trouble when they DON’T know they are overbought.

Here is your challenge. Go back over the last couple of years and see how your numbers fit. One word of caution: when you plug your numbers in, use the amount of purchases not your cost of goods sold. Cost of  Goods Sold will not give you the numbers you need. Trust me this system works 100%.  Let me know what you think and remember sales might be off but no one said your profits have to be down.

Members of The Retailers Advantage can access Open To Thrive Here.

Note: One of the products that I sell is called The Retail Control System: Open to Thrive (http://www.ricksegel.com/store/pc-books-OpenToThrive.htm). If you are interested in using the system to track your sales, you might find this helpful. More information about Open to Thrive is also available in the Retail Business Kit for Dummies.

Tips for the New Normal

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Did you ever have a moment where you felt so good about yourself because of something you accomplished or completed? Usually, feelings like that are associated with graduation or a promotion. I get that euphoric feeling at least once a year when I host the RAMAES Awards, which is Retailers Association of Massachusetts Awards of Excellence.  I started this program 12 years ago and last Thursday we had the 11th Awards Luncheon.

We have given 74 awards over that time period and each retailer that has won has a special story to tell and a lesson to learn. Let me tell you about some of the winners. This year one of the best lighting stores in America, Lucia Lighting of Lynn, Massachusetts shared a quote that defines her business. Lucy said, “Lighting is jewelry for the home.” WOW. Six simple words that define a business and industry. Then she went on to share some of the questions she asks a customer before she suggests anything. She asks the customer to describe a day in their life. Then asks the customer to define their lifestyle and what what’s important to them.  Sure every store should do that, but how many do?  They sell lighting because it enhances the home and the customer’s lifestyle, NOT because it’s on sale. Maybe that’s why 75% of her business comes from interior decorators.

Then we honored Debbie Stark, from Debbie’s Gourmet Health Food. This store has dedicated its existence to the health of the community. That’s why they were such an obvious choice for The Community Service Award. The line between community service, servicing the community, and running a profitable business comes together in perfect harmony here. This store is bursting with tips and helpful hints to make their customer healthier and events that are centered around the well-being of their community or not just for financial gain.

As much as I want to write more about the winners and will probably do so in next week’s article, I must share some insights from Tracy Mullin who was the keynote speaker at the RAMAE Awards. Ms. Mullin is the President of the National Retail Federation and she delivered some powerful remarks about the current condition of retail. The following are the ten key points of her observations and predictions on the state of retailing.

1. The consumer is starting to “Hunker Down” which is the same as Cocooning.  It means because of the uncertainty of the financial markets, people are staying closer to home and not spend like they once did. Just this morning on the news in Boston, the local ski areas reported record sales for season passes. Too bad for Vail or Breckenridge – skiers are staying closer to home this year.

2. It’s cool to be cheap. Just because someone has a lot of money, it’s become cool to negotiate. Think of Donald Trump at his wedding. He negotiated his wife’s dress.

3. Customers are researching and sometimes know more about the products we sell than we do.

4. There is a trend toward more sophisticated business intelligence software. Computer software is going to become better retailers than we are.

5. E-commerce is still strong but we are looking at increases of only 10% to 12%. Increases like that in times like this are remarkable. If you aren’t into it, jump on now.

6. T.L.C.  Customers are willing to pay for the pampering. The population is getting older and these services are appreciated.

7. Free shipping has become the new standard.

8. The Electronic Wallet will finally live up to its potential. We will be able to do everything from our cell phone. Are you prepared for that?

9. There will be a rise of the Social Networks and finally a model to make it a business successful.

10. We are creating the New Normal.

The last point says it all. What once was, was. There is a new normal that we have to get used to. The world is NOT going back to the way things used to be.  Let’s just accept it.

Benchmarking – What is It and Should I Be Involved?

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Sometimes the universe sends you a message or puts you on a path that you hadn’t planned on following. That is what is happening to me — all because of one reader who made a simple request. The owner of the Village Trader, a better gift shop on Cape Cod, asked if I could poll my readers and ask them anonymously about some financial questions regarding their businesses to see how she compared. She was curious about sales per square foot, how much you paid your full and part time help, how much you were spending on advertizing, and a bunch of other questions.

At first I tried to ignored the request because I thought information like that should be gathered by some big research firm or consulting company. Then I realized that the strength in the findings or reports were dependent on the questions asked, the quality of the participants, and size of the group. My reader list is approaching 10,000 retailers and related businesses. The quality of my list couldn’t be any better and the size of my list should generate a strong sampling. As for the questions, they came from you the readers of this column.

Well the first survey we did 3 weeks ago had almost 700 people participate and the findings were eye opening to say the least. I then asked if anyone would be interested in forming some type of Benchmarking Group where we formed smaller groups of like businesses. These groups could share financial data and any other topics the group wanted to discuss, such as marketing, management, or personal issues. Quite a few of you responded and we have categorized every business and have created this master spread sheet of every type of business and size of the business. Obviously, in some areas we have more than others. That creates an interesting challenge.

The issue I am facing now is the actual structure of these groups. There are a few possibilities and I decided to ask everyone which way we should proceed.  So here are the choices that I see, but if you have some better or different ideas, I have created a box for you to write those in. Some industries refer to this initiative as a Management Focus Group. Others call it Mastermind Groups, some refer to it as their Executive Board, while others call it a Benchmarking Group.

Typical Program Formats:

1. THE MASTERMIND MODEL
(This is probably the most common and most expensive format)

It is comprised of 8 to 20 businesses from the same industry but the preferred number is 10 (automobile dealers like 20 members).They will meet twice a year. Generally they meet before a trade show.  Every store must submit their financial statement to the organizer. The organizer employs a Public accounting firm to collect and collate all of the financial statements. Then the CPA generates one combined statement showing every expense and the range in percentages and the medium score. Now you can see where you excel or need some work.

The meeting agenda usually consists of a welcoming and networking dinner the night before. The next day is a full day of meetings that will consist of going through all of the numbers, and then there will be sessions highlighting individual businesses, and finally a sharing of marketing and management ideas.

The organizer’s responsibility is to make sure the agenda is planned and the financial reports collected and analyzed. In short, my job is focused on the process and to facilitate all of the discussions and meetings.

The benefits of these groups are that you will start to create new friendships within your industry and share some great ideas. It is as if you were creating your own board of directors.

Many groups even meet via a conference call monthly or quarterly. Some even create an electronic bulletin board to keep in touch with one another. The fees for membership are usually paid monthly via credit card to avoid any big bills.

This model is a proven model in many industries and you rarely see much turnover within the group. But each group creates their own set of rules to live by and after a 2 year period can even change organizers if they see fit.

2. THE BIG GROUP
This concept is made up of as many stores as possible from an industry (gifts, jewelry, apparel but all from the retail industry). Again the financials are submitted and analyzed. Each store will receive an individual report as to where they stand.

This is where these groups vary:

1. Some just get the reports and it’s their responsibility to analyze them.
2. Some plan an annual meeting to review the numbers and network but these meetings are mostly half day events.
3. Some copy the more involved Mastermind format only it is done with more people.

3. THE ANNUAL SURVEY

This would be an online survey that would ask a series of questions (more detailed than the last survey) and report the detailed report only to those who participate.

Industry average costs for some of these groups start at $2500 depending on the hard costs involved in generating these reports and the frequency and format of meetings. Many of the executives groups that bring business CEOs together from small to mid sized businesses meet monthly and the minimum charge is $1,000 a month. Another company I worked for offered a benchmark report and an optional extra charge meeting for $2,500.  Having said that I am more in favor of a reasonable monthly membership fee depending on the format and frequency appropriate for each group.

The bottom-line is that the value of these groups is unlimited. Learning from your peers is the best form of learning. The more information you have, the better decisions you will make. There are countless stories of business success because of this style of learning and sharing. But it won’t only change your business, it will change your life. You will start this for the information but you will keep coming back because of the friends you will make and the ideas that will make you money.

Please let me know what you think by taking my 1 minute survey at the link below. I will not do this until it’s right for all involved. While taking the survey please take advantage of the option of including your name and email so that I may keep you abreast as the programs develop and not devote my weekly newsletter to this one topic. To all those that have already sent in your numbers and information – thank you, we have it all organized! But also please sign up on the survey so we can keep you informed as well. Here’s the survey link:

The Most Effective Advice

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Last week I had a very interesting job–a type of assignment I had never experienced before and will never forget. I worked for a credit company that makes loans and consults with farms and farm related businesses. I was asked to present because many of these farmers had expanded from temporary farm stands into full blown retail operations and the credit company wanted me to share my retail expertise.

I was speaking to consultants and credit professionals for two days, after which the consultants and credit people were broken down into four teams of  6 or 7. The next activity was a field trip to visit a farmer/retailer. The owners were there to answer questions and the teams were given a 35 page report about the business with facts and figures. The teams then had to prepare a presentation the next day as to the condition of the business and what they could do to expand and become more profitable. (They worked until the wee hours of the morning preparing.)

The next day the four reports were presented to three judges, myself being one of them. The other two judges were interesting as well. One was the VP of Product Development for Timex and the other judge was the VP of Consulting from the hosting company.

These teams really worked painstakingly through every detail of the business. It made me feel good that all of the teams incorporated many of my retail principles in relationship to ecommerce, signage, data base marketing, and visual merchandise. Each presentation was a full color, customized presentation in PowerPoint.  Picking the winner was tough but the deciding factor came down to the smallest of details. Actually, there were really just two areas where they nudged out their colleagues. But it is a bit uncanny that the two areas for a consultant’s presentation are the exact two areas that will determine a retailer’s success as well.

The first was in the quality and attention to detail of the presentation. It just looked good. It looked professional. The basic recommendations were just about the same but the way it was presented made it look better. Does this sound familiar or what?

The second area was in the simplicity of the presentation. They made it simple to understand and easy for the store owners to act upon. They didn’t give them an information dump or a daunting list of things to do. Are we sometimes confusing our customer with too many choices?

There were other lessons to be learned from this exercise that came from the other judges. The VP from Timex, who was a brilliant, soft spoken engineer from Germany, stressed the importance of testing and evaluating. Ideas can sound good but before any business jumps into any new product, initiative, or strategy, it must be tested and evaluated at various stages. We have all seen great ideas that never make it and products that we thought were duds become winners.

Create time tables and expectations for every project. That way you will reduce the risk and be better prepared for the big successes. So many times we make a decision without planning for the stages of testing and evaluating. That would have saved and made me a lot more money over the years!

Having said all of that, there was something said by the VP of Consulting that really stuck with me and was the real motivation for this article. He summed up the competition this way. He said that if the four teams and the judges were to come to his house they would be able to recognize things that needed to be done. The garage needs to be painted, there are some dead shrubs that need to be removed, and yes the leaves needed to be raked. He said, “I know that.” The bigger question for a team of consultants is not just preparing a list of what needs to get done but rather to try to determine why these items haven’t been addressed and to figure out a plan of action that is required.

He proposed that more than three priorities to address would be a too much. Objectives must be broken down into small bite size pieces that are doable with realistic time tables. He was addressing his consultants when he said that most of the businesses that they will consult with know what needs to be done but they don’t understand how to get it done. He suggested that you can have a laundry list of all the things that need to be done but a to-do list of just three things. Focus. Focus. Focus.

How many times do we make out a to-do list that is so intimidating that we get frustrated before we even get started? How many times do we try to look for answers from someone else when we might have the answers ourselves? Trust yourself. My experience tells me that many times you are much better than you think you are.Thanks for reading. Have a great week.

What Advice Would You Give?’ ~ The Results!

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This is the result of last week’s survey question about the store that was trying to decide what to do about her business. If you didn’t read the article you can read it at www.ricksegel.com/blog. Here are the results and I want you to know that my response was not the most popular. So I guess I am going to have to justify why I suggested what I proposed.

But first the results:

a. Close now and face the consequences
received 3%
b. Wait till next summer and close then
(my suggestion) 39%
c. Don’t give up at all and wait till
the end of July to make any decision
like that 46%
d. Try to sell the business, get what
she can get, and even take a small
loss if  she has to 12%

Here are some of your comments:

Here is my defense:

Please understand that I am first looking at this from a financial point of view. I don’t want this store owner burdened with debt for the rest of her life. I have seen many retailers close their doors selling one type of merchandise, then reopen selling something else very successfully. They simply reinvent themselves. Sometimes just a change of locations can invigorate a business.

I was very friendly with a couple who had a business similar to mine, a specialty moderate to better women’s fashion boutique. They altered just about everything they sold. They closed their doors and opened a sportswear store and did very well with half of the expenses.

Where this store is a seasonal store with only 8 to 10 weeks of really strong business potential, the decision to close should be made prior to the summer. Most Going Out of Business Sales last 8 1/2 weeks. The reason I rejected the wait till July option is because you want to plan this type of event long in advance and bring in the type of merchandise that a store can make money on during a sale like this.

The highest margins I ever worked on were during my closing sale. As for selling the business, you can get lucky but from my experience prospective buyers generally offer between 40 to 50% on the wholesale dollar. Then by the time you include fixtures and goodwill, you are selling your business for the cost of your inventory. Most retailers can run a sale that is far more profitable than that.

Let’s address the emotional side of closing a business. It’s tough even if the business is debt free. Sometimes it’s a hard medicine to prescribe but rarely do I ever hear of any regrets. Just keep moving on…

What Advice Would You Give?

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I got a disturbing call this week from a reader who was distraught because her business, a resort area clothing shop, was in serious financial trouble. She owed more money than she owned in inventory. The population of her area goes from approximately 100,000 in the summer months to down to under 10,000 in the off season. Plus the majority of her customers were the summer people. That means if she were to run any major sale event or even a Going Out of Business Sale, she would end up owing a lot of money to the bank.

There was a little bit of good news in the situation. She had just borrowed some new money that would be enough to carry her through the winter. Plus she didn’t owe any money to her vendors because she had paid them with her credit line.

Let me share a little more background information about how she got into this predicament. (This is where we can learn a lesson or two.) The store was rolling along doing fine when 2005 came along and her business just took off. Everything she bought was selling, the weather was perfect for shopping and the economy in her area was booming. So expecting more of the same for 2006, she went on a buying spree. She not only planned to match the increased sales, but she expected the double digit increases to continue.

Guess what? You guessed it. The economy started to slow, new homes in the big developments were no longer selling like they once did, and some of the merchandise she bought wasn’t quite right. She had bought a little haphazardly and some of the buys weren’t selling. Because those items weren’t selling and the general sales conditions had weakened, she didn’t have the money to put back into the items that were selling.

Of course this is when customers started coming into to complain that the store had “nothing” when in reality she had a much bigger inventory than normal but it was made up of the less desirable items. This is the beginning of the Death Spiral down. By the end of the year, she was hurting but not mortally wounded. Then when her season began in 2007 she was more cautious with her buying and really shopped the market carefully before she bought. She had her bad buys marked down to the price they could be sold at when the city started a new main street reconstruction project. It was supposed to be finished by Memorial Day but somehow they ran into delays (surprise) and didn’t finish up till July 10^th. Need I say any more?

The store is in trouble but she made it through the rest of the season without a paycheck and living on borrowed money. What should she do?

First lesson is to always buy as if things were tough. Scrutinize every piece you buy and ask for off price or promotional merchandise that you can sell with larger margins. Buy with fear and look for vendors that can deliver quickly. It is better to pay more money to a vendor that can deliver in a couple of days than to do business with a vendor with lower prices that can’t ship for weeks or months.

Test, test, test! We never know what is going to sell. Sometimes it’s the ones we least expect. Stores have gone out of business with one bad season of merchandise. Look at the Gap. It just took a couple of years of bad buys and confusing the customer to have one of the strongest of retailers fall to their knees and lose millions. Don’t get too confident — the marketplace always has a way of doing what it wants to do, NOT what we want it to do.

Having said that, don’t beat yourself up and blame yourself over the shift in a housing market and misguided urban renewal projects. That’s not your fault. Yes, we are supposed to anticipate slowdowns but sometimes we just can’t see it coming and predict how bad it can get. Remember, there was a time when everybody was refinancing their homes for lower mortgage rates because they were increasing in value and then consolidating their bills. Guess what? Those days are over. There isn’t any extra equity in houses any more. That is not a retailer’s fault.

So what do we do? This store owner is just blaming herself.  Stop that. I always say the difference between a chain and a single store is the success of the first store. This is because I have never worked for a chain that didn’t have a bunch of losers that they were working to turn around. What if those stores were their first store? There wouldn’t be a chain or even a second store.

This store owner hasn’t been taking a paycheck for a while and was considering closing up and running a Going out of Business Sale. My advice was to hang in and wait. She had enough money to make it through the winter. I told her to wait before she ran a GOB Sale because her sale wouldn’t be that successful without her seasonal customers. It would only push her further into debt. The best way to close would be to plan a big sale starting the last week in June and ending at the end of August.

Going out of Business Sales generally generate 3 times a stores normal sales and as much as 7 times in the first 10 days. You do the math. If the owner plans the sale properly and buys into the sale merchandise (which means buying merchandise with extra margins), she can walk away with money in the bank and her loans paid off. To me it was worth the risk. One other bit of background info: She owns the property so rent is not an issue.

So why am I troubled with my advice to her? She is not happy and just wants out. If she closes, she will regret the timing for the rest of her life but I hated being the one to tell her to work there for another 11 months.

What would you have told her to do?

1. Close now and face the consequences
2. Wait till next summer and close then (my suggestion)
3. Don’t give up at all and wait till the end of July to make any decisions like that
4. Try to sell the business, get what she can get, and even take a small loss if you have to

It’s up to you to vote by clicking here. This should be an interesting one.

By the way thank you for all the wonderful comments on last weeks teleconference.

Let’s Talk About the Economy

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It’s time to admit that there is an 800-pound Gorilla in the room and that the economy is starting to slow down and a recession is imminent. That’s NOT necessarily bad news for the independent but can be very costly to the chains.

For all of those pundits and talking heads on the business stations who disagree with the fact that a recession is on the way, let me just remind them that economies have natural ebbs and flows. We have booms and we have slow downs. When business is good, we think it’s never going to end and when it’s bad we keep hoping the end is near. We believe it’s going to get better at the next season or year.

These are the times where age and wisdom start to play a part in your thinking and actions. Yes, I am old enough to have been through this a few times. Let me first explain why I am even writing this piece. In early 2000 the internet bust was just beginning and the economy was cooling and then the horrors of 9/11 catapulted the economy into a free fall. During that time period one of my most popular seminars was called, “What to do when the economy slows”.  That seminar stayed on my website but I haven’t had many requests for that program in the past 3 or 4 years. That is until recently.

The recession has begun and it doesn’t take a genius to figure it out. First, the stock market has been more volatile than ever. We had some huge drops in the market which is always a sign that a recession is coming. The housing market has collapsed nationally. When the country’s biggest builders are having sales, as if they were Macy’s at the end of the season, taking discounts that are as much $100,000, then you know there is too much inventory.

Of course builders built too much, but why not? Mortgages were so cheap and easy to get, so why not build more? Unfortunately, a whole bunch of people bought homes that they really couldn’t afford and now they have lost them as their adjustable rate mortgage payments increased.  Let’s face it, our homes are our biggest investment and lately we have lost a lot of that investment.

So how does this affect the independent retailer? Your customers don’t have as much money as they used to have. People can’t refinance their houses to pay off their debts as they once did. So if you think this is all doom and gloom, it’s not. Why? Because every major retail chain either employs their own economists or subscribe to economic services that are going into far more detail than I ever could. The bottom line is your chains have already started to cut back. They cut back their advertising, their promotions, their help, and their inventories. Their economists will tell them that business will slow down and they cut back so that the prophecy becomes self fulfilling.

That is why my experience has been that smaller businesses traditionally do well when all the economic reports say that business is bad. Yes, people have less money but rich people always have money. Duh, that didn’t take a genius to figure out either. Most specialty stores have traded up to cater to that better customer, as many chains have as well. But most independents have developed closer relationships with their customers and that makes a big difference.

OK, let’s sum this up. The economy has slowed, the place to be is in better goods, chains are cutting back, and especially in payroll. Sometimes, I believe that they are cutting off their noses to spite their faces. Whatever their rational is customer relationships with the store and its employees is an area in which independents tend to shine. A chain can send out an edict saying to cut payroll by 10% and the store manager is required to do it, even if it costs him a key employee. A specialty will never do that.

So take all the doom and gloom with a little smile and DON’T BE SURPRISED that your business is doing just fine as you hear report after report saying that retail sales are off. They never track our sales anyway.  One last word about economics, the reports always follow what happens a few quarters after it happens. That means we will have gone through half of the recession before we even know it got started.

A word of caution: I only received a C in Economics in college and I didn’t stay at a Holiday Inn Express last night either. But I have lived and worked through 5 different recessions and after that you sort of get the hang of what happens every time. I guess sometimes it’s good to be old and have life lessons that have taught you how things really happen. Have a great week.

WARNING: Holiday Retail Sales Reports are ALL MISLEADING & INACCURATE

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I am mad as Hell and I am not going to listen to the misleading trash anymore. We have all heard the reports about Christmas sales. All of the news services and research firms are reporting that 2007 had the smallest gain in retail sales in 5 years of only 3.6%. Then the number is generally followed up with the following verbiage: “showing signs that our economy is weakening and a recession is imminent”.

Give me a break. 3.6% is sensational and it shows signs that despite a very weak real estate market, the general economy is chugging along. And we might just miss the heralded economic slow down.

How can I say that? Easy. What was the #1 gift sold & given this year? No, it wasn’t the video game Wii or a Webkinz stuffed toy, or even High Def flat panel TVs. It was a Gift Card. Every store sells them and if you were really lazy and wanted to truly do one-stop shopping in the middle of the night,  (I know what you are thinking–you think I am going to say go online. WRONG) just go your local CVS Store and you will see a rack near the cash register that sells Gift Cards from every major store. You don’t even have to go to your favorite department store or restaurant. Just pick it up and your shopping can be done in just a couple of minutes.

It gets worse. Do you remember when we would buy a little present for Johnny’s teacher or even a bottle of booze for the delivery people or your car repairman? Well, they are all getting Gift Cards. I even bought $100 worth of Gift Cards from Dunkin’ Donuts for a bunch of people.

So why is that Gift Card scenario so bad? It’s not! But not one penny of all of those Gift Card sales is included in Christmas Sales. Why?

Because from accounting purposes, they are a liability not sales and those sales are only considered as sales when the cards are redeemed. There are billions of dollars of unused Gift Cards that will never be reported as sales. So is the 3.6% truly an indicator? But that’s only one half of the problem.

Where is the biggest growth area in the retail business? Easy again–online sales. Every store has an ecommerce component today. At retail conventions the buzz words are “Seamless Integration” and “multi-channel retailing”. The hottest or at least the number one selling category online today is apparel. I have been able to buy all of my clothes online, from designer suits, to shirts, pants, and even underwear. Some of them are even custom made because the online retailers have my measurements and I am even buying from a great independent men’s store in Louisiana. Heck, they even know me by my first name.

This year my wife purchased almost every gift for our 5 grandchildren and 6 kids (I consider my kid’s spouses as my kids as well. I’m lucky there.) online. I did have to make a trip to a Hunting & Gun Store for my son-in-law but I bought a gift card.
The bottom line is the approximately $2,500 we spent in December (we have 3 birthdays in the month as well) was never counted in the economic reports because online sales are a different category.

What I am saying is that the biggest item and the area with the biggest double-digit increases are not included in holiday sales. My business doesn’t count and thousands of other people’s holiday purchasing doesn’t count either. That’s dumb, well maybe not dumb, but at least misleading.

Now let me ask you if you saw any open spaces to park at the Mall? What would it be like if Gift Cards and the internet didn’t exist? People would be parking 5 miles away and walking.

The fact that retail stores didn’t have a 10 or 20% drop is really the amazing number. We are tracking and reporting sales the way it was done 50 years ago. It’s a brave new world. Don’t get fooled, business is pretty good in general. Individual stores can be hurting because of the increase in competition or because of their own errors but over all this economy is pretty darn resilient.
Keep the faith. It’s going to be GREAT in ’08.