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Apr 1, 2007
As a new season begins, small retailers need to plan sales conservatively and maintain lean inventories, to keep from slashing prices down the road. It is heavy inventories that lead to excessive markdowns and reduced margins.
This can become a vicious cycle, and sooner or later, retailers need to find a way out. Typically, a small retailer looks for opportunities to generate sales increases based on current trends and what happened, or didn't happen, the previous year. In general, such planning often adds up to a five to ten percent increase. When there's a planned increase, the biggest percentage increases usually are in the early months of the season, when sales are lightest.
This strategy is based on a certain logic. The dollar increase doesn't seem that big, and the later months seem more fully developed. But the most significant factor is the retailer's optimistic belief that this season's merchandise will be better, that the weather will break in the store's favor, and that goods will arrive on time this year.
Once the sales plans are set, inventory is bought, and it's usually brought in early in the season to set the store and support those early season increases. Yet these aggressive early sales plans frequently don't pan out, because they were so aggressive and were predicated on everything breaking just right.
Under this scenario, inventory begins to back up right away. The next round of deliveries come in, but the initial deliveries haven't sold through yet, and the retailer quickly becomes overstocked, making it more difficult to display merchandise properly and for customers to shop efficiently and effectively. This causes stagnation in the weekly sell through.
As the inventory backs up, frequent customers (the ones who represent the vital backbone of any successful small retailer) see the same merchandise assortments two, three, or even four visits in a row. This further depresses sales and sell through, while it also adds more back up to inventory. Yet ever optimistic, the retailer continues to believe that the business will build and everything will work out in the end.
Finally, about mid season, the retailer does discount merchandise in order to reduce inventories. But customers are smart. They sense that the store is overstocked, and that gives them the incentive to defer their purchases until levels get further reduced. They begin to realize that if they wait, they can probably buy what they want at an even lower price. This attitude feeds the cycle.
By the time the season is nearing its end, the retailer's optimism gives way to a fevered hope that the sales will come in and bring inventory levels back into line, before the clearance markdowns have to be taken. But the sales increases necessary to accomplish that goal aren't realistic. By then, the impact of those clearance discounts can be quite significant. The way to break this cycle is to plan sales conservatively and maintain lean inventories.
Following are ideas for how small retailers can significantly reduce their inventory levels, and their markdown exposure:
Information in this article was edited from a story on Inc.com.
Topic: Business Strategies
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