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.

Telltale Signs that a Store is in Trouble

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I received the following email from Sandy Brown from the New England Jewelers Association:

That’s a great question and I believe all of us have experienced that feeling of walking through a store and just knowing that this store is not going to make it. Let me share the things I look for:

Does the store look full of merchandise?
The first sign of trouble in a business is when the store has only one or two items on a rack or table that could handle 20+. That’s when the customer utters those dreaded words, “They have nothing!” When we shop in a store we want to see merchandise. But the sad part about this one is that it is correctable. Always remember it’s better to have open space on a selling floor than an empty rack. A store should look almost as full on January 20th as it did on November 20th. If you are saying, “But I just can’t take my fixtures off the floor, they are too heavy.”  My response is to get rid of those fixtures–this is just too critical.

Stale merchandise:
This is harder to describe so I will yield to the Supreme Court’s description of pornography: you know it when you see it. The merchandise is stale when it looks like it’s been there forever. And the one thing that’s worse than that is when the merchandise looks old and the store has never taken a markdown on the merchandise. It’s one of the first signs a store is in trouble because it generally means one of two things:

1. They don’t have any money or credit to buy any merchandise.
2. They have lost interest in the business and just don’t care anymore.

Either way the business is doomed.

A Dark Store:
Some retailers try to save money on electricity by shutting off some lights. Why? Lighting represents security and makes a store come alive. Don’t be pennywise and pound foolish. When a store is dark, the next word a customer says is “dingy.” I don’t know exactly what that means but it doesn’t sound good.

No Activity in the store or when there is no one in the store:
We have all been in stores when we get an eerie feeling because we are the only ones in the store. It works in reverse as well. When a store is busy, it tends to do more business. Before you think this is not controllable, think again. The way the store is laid out will determine how busy it looks. No, you can’t make an entire store look busy all of the time but you can focus the traffic in specific areas. I like to call it “planned congestion”.  This is when you use a series of techniques to make a store look busy with the minimum amount of customers. Techniques include placing the cash wrap closer to the front of the store because we know you will always have employees near the desk. Add welcome signage or interactive display or signage. You are trying to distract the shopper from having any negative thoughts. Having worked in a store that grew from 900 square feet, to 1800 square feet, to 3000, then 4500, and eventually 10,000 feet, I found that each move initially created these challenges but they were all overcome. We were able to make a 10,000 square foot store look busy with just a few people.

Dirty Stores:
It’s not so much the dirt but rather what the dirt represents. A dirty store is a sign of weak or lazy management. There is no excuse for this and it is a strong sign that the store is going down. I can live with a little clutter because it’s generally a sign that the store is doing business but dirt screams out you have given up and don’t give a hoot anymore.

Salespeople who could care less if you come into the store or not.
They don’t greet or welcome you; they offer no assistance whatsoever; they check you out like they are the prom queen and you aren’t good enough to shop in the store. Then you have the stores where all of the employees congregate behind the cash register and talk among themselves. Those are the times you have the feeling that you could steal something (not that you ever would), because no one is even watching or caring about you. Again bad management and the days are numbered.

These are just my initial thoughts but I am sure there are many more clues. The sad part about this exercise is that the stores that fall into these categories don’t know that they are there. Hello, it could be you. Enter your store like a customer would and see what kind of impressions you get. Have your store shopped by mystery shoppers and tell them to be as honest and objective as possible. You might be surprised but I hope you’re not.

One last thought. We can all fall into some of these traps. That’s normal. But the really great retailers recognize the problem, respond, and take action.

Defining Off Price Merchandise

Last week I had a number of people write in to have me explain what the term “Off Price Merchandise” meant. Off price merchandise is primarily sale merchandise from a vendor or manufacturer. It is merchandise that can be sold with either a larger mark up or something that can be promoted at a great price but you are making a normal mark-up.

Here is an example: A gift store buys a vase from a vendor at $10 wholesale to be sold at $22.95 retail. The vendor decides to close out the item and sells it for $5. You can continue to sell it at $22.95 giving you great margins or you could promote it out for $14.90 as a great buy, which it is.

Off price just means the price is off from what the regular buying price is.  We should always strive to have the highest possible margins. The operative word is “possible.” Just because we can buy something for 50% off doesn’t mean it’s worth the extra margin. But that’s not the worst thing because you can still promote it and sell it at a reduced price. What off price merchandise does is to give you options.

Is That Vendor Right for You?

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I was thinking about the other types of relationships we must maintain and another place where we perhaps get lied to.  Yes, we have our employees that we maintain relationships with, but this week I want to focus on our relationships with our vendors. Why do we do business with some vendors and not others?

Someone approached me a few weeks ago about creating an assessment that we should have our vendors answer to make sure they are right for us. I have been thinking about it and considering what questions would we want to ask our vendors. These are some of the things I would want to know from a vendor before I did business with them. (One note: When I refer to a vendor, I am limiting the list to only vendors from whom we buy merchandise that we use for resale.)

• What other stores do you and your company sell to?

This is one of the most important questions you can ask because if they don’t mention stores you respect and just mention discount stores, run away as fast as you can. Most reps won’t tell you if they sell discounters but they will brag about the stores with good reputations. Challenge the rep by asking who is the buyer at the store and call them up for a reference. You might just find a great opportunity to network as well.

• Do you offer off-price or higher margin promotional merchandise at the time of purchase?

Every vendor wants to be considered a bottom line resource. A resource that stores make money with. Rarely, if ever, does a line sell out to the piece at regular price. Therefore, you need an edge to cover their losses. Every vendor has or can make off price goods– the question is are you getting some? You don’t need a lot to make it work. But if they say they don’t offer any, start looking for other vendors that will.

• How much of a credit line will your company give me?

So many times we don’t know what a company is giving us for a credit line. It might be $1,000 but you write a $2,000 order. What’s going to happen with the extra $1,000 of the order? If you know your limit with the company, why waste your time writing a bigger order that you might never see?

• Does everything have to be purchased COD?

If you are forced to purchase your merchandise via COD, ask how long before you can establish a small credit line. Also if they are shipping COD, ask for an extra discount. Why not? They have no fear of losing money that way and they are getting their money at least 30 days before a regular account would pay them. It’s worth a try.

• What if the merchandise doesn’t sell? What steps are you going to do to maintain a relationship with me?

If a major department store can ask for this, then why can’t you? After all, the reps all tell you that they want to be a “bottom line resource”.  So let them prove it by offering you some type of allowance, markdown money or offer to swap it for some other merchandise that might sell better. Again, it’s worth a try.

• How much of the order that I place will I receive in the “in-house” completion period?

It better be 100%. If they start to hesitate here that means they have a delivery problem and be cautious. That is unless they are the hottest line on the planet and the merchandise sells out whenever it arrives. (That rare but let’s not forget Beanie Babies.)

• Do you sell direct to the consumer?

This is a biggy. Why buy from someone that you compete with? Makes no sense to me. Customers will look at the merchandise in your store and buy it directly online. There are plenty of good vendors out there for anyone to put up with that.

• How much advertising help, including pages for my website, will you provide?

If they want to sell their goods in your store, then how are they going to help them sell? It’s just good business.

• Do you offer any classes, consulting, fixtures, or signage for my store and how much does it cost?

This is the same as number 8. Again, sales reps preach partnerships. Well then, let them put their money where their mouth is.

These are just some basic questions that can make the difference between a profitable relationship and one that’s “not exactly” profitable.

And now for the results from last week’s question: What Do You Do When the Customer Lies to You…The Results.

I think the response to this survey about what to do about returns and when a customer is lying is going to surprise you. It definitely surprised me and I am not quite sure what it all means. I suppose I expected that 95% of the responders were going to select A, which is to stay within a store’s regular refund policy. Then I thought it would open up the debate about what the right refund policy should be. But it didn’t go that way. A sewing machine store wrote in and said when you are selling expensive items like an expensive sewing machine, you do whatever you have to do to make that machine right. It’s not like a pair of shoes that can easily be replaced.

There is one common denominator that came through on all of the comments and that was whatever your policy is or however you plan to handle the situation, DON’T make it argumentative and be as pleasant and upbeat as possible and do it with a smile. I agree but that is so much easier to say than to do.

I think what we are seeing in the results is the feeling that we, as retailers, are just tired of customers who treat us like doormats. As one person said, “If they are acting like a customer treat them like the best customer you ever had. But if they are acting like a thief then they should be treated like a thief. As for the bad word of mouth, don’t worry about it.”

BUT a few people agreed that these people aren’t worth wasting time or effort on and they are NOT going to ruin their day. Do whatever it takes to just get them out of the store as quickly as possible and focus on the good customers. Or should I say, Real Customers.

Thanks for participating and if you have a question that you would like to have the group comment on, just send it along.